If you’re a small business owner, managing your expenses is one of the most important aspects of running your business. One of the most significant expenses that you’ll have is the cost of accepting credit card payments. As is the case with most small business owners, you probably have a merchant service company that you work with to process credit card payments. Unfortunately, merchant service companies are known to raise rates from time to time, leaving business owners wondering why their credit card processor raised their rates. It can be a daunting problem for small businesses trying to keep their expenses under control, especially during times of great economic uncertainty and a relatively high inflationary period.
In this article, we look at some of the reasons why a merchant service company would raise a business’s rates. We will explore a breakdown of the rates that merchant service companies charge, some reasons why they raise rates, if it’s really the payment processor raising rates or the card network, and some areas that may be specific to the merchant’s business. We’ll also look at particular industry dynamics, such as how merchant services providers price their services, how they are offered to merchants, and what options businesses have when credit card processing rates increase.
What is the breakdown of rates that merchant service companies charge?
Before we get to the answer the question of my your credit card processor might raise your rates, merchants need to understand what payment processor rates consist of. Merchant service companies charge several different fees for processing credit card payments. The most common price structure for payment processing services are:
- Interchange fees: These are the fees charged by the credit card companies (Visa, MasterCard, etc.) for each transaction. These fees are typically a percentage of the transaction amount and can vary depending on the card type used, i.e., fleet card, corporate card, airline miles card, etc.
- Assessment fees: These are fees that the credit card companies charge for each transaction. They are typically a fixed amount per transaction.
- Markup fees: These are the fees that the merchant service company charges for processing the transaction. These can include fees for account setup, statements, and monthly fees.
Some reasons why credit card processors raise rates
There are several reasons why credit card processors may raise their rates. Below we list some of the most common causes and offer a more nuanced explanation of these factors.
- Increased fraud: If the merchant service company is experiencing a high level of fraud with a merchant, they may raise their rates to offset the cost of fraud prevention and mitigate the risk associated with the high risk nature of the merchant’s business.
- Changes in the market: If the demand for merchant services changes, the merchant service company may raise its rates to stay competitive.
- Increased costs: Given the decade-high inflation experienced, it is no surprise that merchant service providers may increase their rates to offset the increased costs they are experiencing. They can include the higher interchange fees from the credit card networks, thereby passing those higher costs on to merchants.
What is a High Risk Merchant?
A high-risk merchant is a business that is considered to have a higher chance of financial loss or chargebacks due to the type of products or services they offer, their industry, or their history of credit card processing. These merchants are considered to be a higher risk for merchant service providers, and as a result, they may be charged higher rates or have more restrictions on their credit card processing.
Merchants with a high rate of chargebacks, a history of fraudulent activity, or poor credit may also be considered high-risk. High-risk merchants may have a more challenging time finding a merchant services provider, as most providers are reluctant to take on high risk merchants because of the higher potential for chargebacks and fraud. They may also be charged higher rates and fees and have more restrictions placed on their accounts.
High risk merchants need to understand that being labeled as high-risk does not mean they cannot process credit card payments. They will have to look for merchant services providers willing to work with high-risk businesses and be prepared to pay a higher rate.
Finally, several factors can contribute to a merchant being categorized as high risk, including:
- The type of products or services sold: Certain products or services, such as adult content or gambling, are considered higher risk than others.
- The merchant’s industry or business model: Some industries, such as travel or timeshares, have a higher risk of chargebacks and fraud.
- The merchant’s history: A merchant with a history of chargebacks or fraud can be considered high risk.
- The merchant’s location: Merchants in certain countries or regions may be considered high risk due to a higher risk of fraud or chargebacks.
- The merchant’s creditworthiness: A merchant with poor credit history may be considered high risk.
- The merchant’s processing volume: High processing volume may indicate a high risk of chargebacks or fraud.
- The merchant’s expected transaction size: High-value transactions are often considered higher risk than lower-value transactions.
- The merchant’s compliance with regulatory and industry standards: failure to comply with industry standards and regulations may contribute to a merchant being considered high risk.
It’s worth noting that these factors can contribute to a merchant being considered high risk, and the criteria can vary depending on the payment processor or acquiring bank.
Is it the merchant service company or the card network that raised rates?
To identify the source of an increase in credit card processing rates, merchants need to determine whether the rate increase is due to actions taken by their processor or the card networks, such as Visa and Mastercard. Visa and Mastercard may raise their interchange rates or assessment fees, which your processor cannot control. The payment processor may tack on additional charges to these fees in tandem, resulting in an even more significant increase. To confirm that you are receiving these increases at cost, compare your interchange rates from a monthly statement to the published rates of Visa and Mastercard. Keep in mind that interchange categories may be listed differently on statements.
Tiered pricing vs. Interchange plus
Merchants should also identify what a larger bill may be stemming from. A good starting point is asking if the merchant service company raises my rates specifically or changed the tiers of transactions that I process most to a higher tier. Payment processors can do that with tiered pricing without notice or explanation. What is sold for its simplicity comes with very costly side effects.
Tiered pricing is a simplified pricing structure where transactions are grouped into different tiers based on certain criteria, such as the type of card used, and a set rate is applied to each tier. This can include different rates for debit card transactions, credit card transactions, and rewards card transactions. The problem with tiered pricing is that it can be challenging to predict the costs associated with each transaction, as the rates and fees can vary depending on the tier.
On the other hand, Interchange plus pricing is a more transparent pricing model. It involves a base rate (the interchange rate) that the card issuer sets, plus an additional markup added by the processor. This means that merchants can see the exact costs of each transaction and make more informed decisions about which types of cards to accept. The downside is that it can be more complex to understand and manage.
Tiered pricing can be more straightforward for merchants to understand, but the decision for payment processing pricing is much more nuanced. This pricing structure can lead to higher costs, while Interchange plus pricing can be more transparent, but it can also be more complex to understand and manage.
Should you switch to a new credit card processor if they raise your rates?
That depends on the specific circumstances of the merchant. Factors to consider include the cost of switching to a new processor, the long-term savings from lower rates, and the level of service and support the new processor provides. If the switching cost is low and the long-term savings from lower rates are significant, it may make sense for the business to switch. However, this decision isn’t straightforward and must be evaluated considering many factors.
Often merchants are tied into long-term contracts that carry hefty early termination fees. Other times, those contract terms can be even more egregious, containing language related to liquidated damages.
Payment processing contract liquidated damages are a specific type of damages specified in a contract for payment processing services. These damages are intended to compensate payment processors for any financial losses they may incur due to a breach of contract by the merchant. The amount of liquidated damages is typically agreed upon by both parties in advance and included in the contract and is often the average monthly fee assessed on the number of months remaining in the contract. They are intended to provide a pre-determined and agreed-upon remedy in case of a contract breach rather than leaving the party seeking damages to prove actual damages.
Some considerations to pay attention to when switching to a different merchant service provider
When switching merchant service providers, there are several considerations beyond pricing and early termination fees. These include:
- Fees: Compare the fees of the new provider with those of the current provider, including transaction fees, monthly fees, and any other fees that may apply.
- Contract terms: Review the contract terms of the new provider, including the length of the contract, the early termination fee, and any automatic renewal provisions.
- Payment processing options: Make sure the new provider offers the payment processing options that the merchant needs, such as support for different types of credit cards and online and mobile payments.
- Security and compliance: Ensure that the new provider complies with all relevant industry standards, such as PCI-DSS, and that they have robust security measures to protect against fraud and data breaches.
- Integration: Consider the ease of integration with existing systems and software, such as the merchant’s point-of-sale system and accounting software.
- Support and customer service: Evaluate the quality of customer service and support offered by the new provider, including the availability of technical support and assistance with chargebacks and disputes.
- Reputation and reliability: Research the reputation and reliability of the new provider, including checking for any negative reviews or complaints online.
- Scalability: Make sure that the new provider can accommodate the merchant’s current and future business needs, including the ability to handle increasing sales volume or adding new payment methods.
- Payment gateway: Review the payment gateways options and features, such as recurring payments, subscriptions, and fraud detection features
- Termination process: Understand the process and timeline of terminating the contract with the current provider, including any penalties or fees that may apply.
It’s essential to evaluate all these factors and compare them to the merchant’s current provider to ensure that the new provider is the best fit for their business needs.
The rate may have been an introductory teaser rate
To avoid falling victim to false marketing or even legitimate marketing of rates offered only for a limited introductory period. It’s essential that merchants carefully research payment processors before signing a contract. An excellent place to start for online reviews is the Better Business Bureau (BBB) website, along with many online forums rating the services of the merchant service provider. While some review sites may be sponsored or have removed negative reviews, a BBB rating can provide an accurate assessment of a company’s credibility and trustworthiness and can reveal if a company is engaged in any deceptive practices such as bait-and-switch tactics and the consistency of their pricing schemes, along with a host of other service benchmarks.
Change of Control
A company’s merger or acquisition can be a significant event for any business. If you notice a sudden shift higher in credit card processing rates, and your provider cites an acquisition as the reason, your provider has likely been bought out by another company. In such cases, it may be challenging to negotiate a lower rate as the new parent company may need to be more familiar with your business. However, you can still ask about the additional services they will be provided in exchange for the rate increase to get the most value for your money.
It is essential for the merchants to carefully review their contract for any clauses related to change of control and what options the merchant has, both in terms of pricing and for the termination of their contract.
What are your options if your merchant service company raises rates?
The credit card processing industry is highly competitive, with providers often vying for your business. However, many providers have early termination fees that make it costly to switch plans once you’ve signed a contract. Sometimes, paying the early termination fee to switch providers may be the best decision, particularly if your current provider cannot justify a rate increase. Before committing to a provider who has lost your trust, evaluate the overall picture and consider if the competition offers more cost-saving opportunities. It may be worth paying the early termination fee to switch to a more merchant-friendly provider. Additionally, consider how much-added fees will accumulate by the end of the contract, as it can save you thousands in credit card processing fees in the long run. It’s essential to align your business with a credit card processing company that you can trust and is transparent about rate increases and their reasons.
If your merchant service company raises its rates, merchants have several options, including:
- Negotiate: If you have a good relationship with your merchant service company, you may be able to negotiate a lower rate.
- Shop around: If you’re unsatisfied with the rates your current merchant service company charges, you can shop for a new one. Host Merchant Services offers rates set in stone, and we guarantee they won’t be increased over time.
- Switching to an alternative payment method is also an option. If you’re unhappy with the rates your merchant service company charges, you can consider switching to another payment method (such as ACH or eCheck).
If your credit card processor raises your rates, it can be a significant problem for your small business. However, you can minimize the impact on your business by understanding the breakdown of rates merchant service providers charge, why they raise rates, and your options when they do. You can try to negotiate with your current merchant service company, shop for a new one, or consider switching to a different payment method. With a bit of research and some smart decisions, you can control your credit card processing costs and ensure that your business remains profitable.