In general, fees
fall into two categories-those that are charged to the end customer or the consumer and those that are charged to an
organisation or merchant, when it
wants to allow payment services to its customers.
Direct Customer fees
Transactional fees
categories typically apply only to the customers of a given bank (as the bank
has no direct relationship with other consumers) and even then, only when a
customer has gone beyond what is deemed to be the core commercial relationship that the bank is prepared to offer at
no direct cost. Hence, fees are typically charged to customers when they have
overdrawn an account, written a cheque in circumstances where they are
insufficient funds to cover it, or perhaps used an Automated teller machine or
ATM in another banks’s network.. However, even here, a bank will allow many
transactions without fees, if a customer maintains a positive balance (sometimes
with a minimum threshold) or commits to regular income being paid in or saved every
month. This is because banks worry a lot about customer “churn” and know that
fees can often be a “switching factor” if they become too much of an irritant
to an account holder (especially now that opening another bank account can be
done online very easily in many cases).
The simple logic here is that it is more cost effective and profitable
to keep good customers who transact regularly with a bank (and for the most part
in the black) for what might be many years, than to risk losing them completely
over a fair but nonetheless irritating fee that “pushes them over the
edge”. Even though this results in what
might be seen as a better deal for the end consumer, banks still have to find
ways to recover their internal transactional costs in some way. For some
transactions, such as bank cheques, wire
transfers and transactions involving foreign exchange a customer will be
relatively happy to pay (as these are often one off instances). However, these
fees will not always cover the costs involved completely and it therefore often
falls to the other major category to provide other fees that can cover costs
and the bank’s overhead-the merchant.
Merchant fees
Although every
individual commercial merchant relationship will be different, depending on a
given organisation’s size, type of business, types of services offered etc,
banks will typically charge a very wide variety of fees to most merchants.
The most obvious
fees charged to merchants (because they have been around for a long time) are
for cash and cheque handling. In both cases, these payment transactions are
expensive for any financial institution because they involve human intervention
and data entry (sometimes carried out multiple times). As with an end consumer,
a merchant may be able to bring about lower fees by maintaining a positive
balance or “float”. However, it is rare for any merchant these days to be able
to operate without an overdraft at least some of the time, so fees in this area
need to be monitored carefully.
Outside cash and
cheque payments, the majority of fees that are charged by a bank a credit and
debit card use fees. Cards are typically issued to a consumer without charge,
and with no transaction fees when they are paid off regularly. However, the
merchant will be charged for every transaction that a customer makes with a
credit and/pr debit card and this may be a very complex affair. In some cases,
the fee charged will be a single “aggregate rate” for say credit card use, such
as 2.5% of the transaction size. Hence for a £100 consumer purchase, a charge
of £2.50 will be made. However, this rate may vary from one transaction to
another and this is because the aggregate rate is made up of many sub fees that
every merchant needs to know about. Here are just some of the fee types that
are typically charged:
The Discount Fee Rate
Credit and debit
card companies (Visa and MasterCard being by far the largest of these) have
what is called “interchange” rates. They range in price- so in order to make it
easier, the merchant providers created three categories.
Qualified Discount Rate – a pre-set or agreed percentage is paid for each pound
charged.
Non-Qualified Rate – a fee added to the qualified discount rate in
certain transactions. For example, if a merchant does not use an address
verification service (AVS) when they manually enter or take a transaction.
Transaction Fees
This is a
specific, flat rate that is paid on every sale processed through the credit
card processor. (Sometimes the transaction fee is called the interchange fee,
authorization fee, or per inquiry fee).
Address Verification Service (AVS)
Merchant banks
charge a small fee for the validation service to ensure that the billing address
provided in the online checkout process matches the issuing bank’s records. Not
using this service will result in hefty charges on the processing of the card
for that sale.
Batch Fees
Merchant banks require
that customers close out their transactions a minimum of one time each day. The
batch fee pays for expenses for the gateway or software that accesses the
credit card processing network. If you don’t have transactions to process,
there is no batch fee to pay.
Monthly Statement or Customer Service Fee
Most merchant
banks charge a monthly fee in order to cover their monthly costs of operation
(paying their customer service team for example).
Monthly Minimum Fee
Many merchant
banks providers require a given organisation to process a minimum amounts of
sales per month, or they pay a monthly minimum. Monthly minimums tend to range
between £15 and £50 per month.
Gateway Fees
There are fees for
internet and mail order merchants to use an internet gateway service such as
Authorize.net, although some merchant providers will cover this fee on their
customer’s behalf as part of the package deal. If you are solely an internet
business, you’ll want to look for an internet merchant account that includes
the gateway service as part of the package.
Annual Fees
These are often
charged by Merchant banks when free
terminal equipment to take payment is offered. There are numerous merchant
account providers that do not charge an annual fee, so you may want to shop
around if the first few you look at require an annual fee. Sometimes it would
be cheaper to purchase the equipment than to pay an ongoing annual fee.
Cancellation/Termination Fees
Most merchant
accounts require a contract agreement of one or two years and if you cancel
early, you are likely to be charged a termination fee.
Chargeback/Retrieval Fees
When a customer
requests a refund (or the customer’s credit card issuer requests a refund),
merchant account providers typically charge a “chargeback” fee.
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