Ask HN: Why do all payment processors charge 2.9% + $0.30 per transaction?
I have been looking into multiple payment processors and it seems everyone charges the same thing. Why is that?
There are two main reasons "no hassle / developer-friendly" ecommerce processors charge so much more:
1. Value-added features, like easy-to-use APIs and friendly customer service
2. Higher rates of fraud
Fraud is a big issue. You see, processors essentially "vouch" for the businesses they add to card networks. If a fraudulent business starts up, runs tens of thousands in fraudulent card payments, and takes the money and runs, and then all those victims issue chargebacks to recover their money, the processor is left holding the bag.
This is why signing up for accepting credit cards at lower rates has traditionally been a pain in the butt. It was like applying for a loan. The processor wanted to do some due diligence on you.
So the easy-to-use processors are not only offering nice software, they're also taking on more risk by letting anybody sign up and get paid quickly with minimal due diligence hurdles. There's a lot more work and investment they have to make on the backend to mitigate this risk.
Footnote 1: Amazon's new payments service is a good example of how to do a more competitive rate without sacrificing ease of use. They start at 2.9% + $0.30, but then scale it down to as little as 1.9% once you have established three months of high-volume activity. That's a pretty good protection against fly-by-night fraudulent businesses.
Footnote 2: Other commenters have noted the role of interchange. But this in itself does not explain why no-hassle ecommerce processors charge more than other processors. Interchange is really not such a mysterious thing: it's the wholesale cost that processors pay to card networks, which in turn mostly gets passed to the bank that issued the card. Competitive banks will in turn pass this on to their customers via reward programs and benefits. It gets press because merchants resent having to pay out an extra 1-2% or so that mostly gets funneled back into their customer's pocket (long interesting story about how Visa used this to drive adoption of their network). But the main reason that "friendly" ecommerce processors charge more is quite simply higher fraud risk.
There are online processors that offer much lower rates than 2.9% + $0.30 if you meet certain qualifications as a merchant. Amazon goes as low as 1.9%.
The main reason that certain processors have such a high rate is the lax signup requirements. It allows higher-risk and outright fraudulent merchants to use them. So yes, card-not-present has a slightly higher fraud baseline, but the key factor here in the rate is the merchant qualification.
Source: http://usa.visa.com/download/merchants/visa-usa-interchange-...
Take a look at the more do-it-yourself solutions, and you'll see different numbers. For instance, we have a merchant account with Merchant e-Solutions. The base rate is 2.19% + $.20/transaction. I say "base rate" because there are other costs that depend on the particular card.
For example, for Visa there are these:
• "Acquirer Processing Fee", $0.0195/transaction.
• AVS fee, $0.01/transaction, only applies to transactions that make use of the address verification service.
• 0.097% if the card is a commercial rewards card. (10% of the cards)
• 0.45% "international acquiring fee" if the card is international, and 0.40% "international service assessment" on top of that.
• 2.39% labeled as "VISA NON-QUAL". I have no idea what the criteria for this is, but it gets applied to about 5% of the cards.
So, the actual cost of a transaction for a particular Visa card can be as low as 2.19% + $0.2195, and as high as 6.4% + $0.2295.
Last time I ran the numbers, it worked out that for Visa cards it averaged out to 2.62% + $0.23/transaction, and for MasterCard 2.80% + $0.23/transaction.
The downside to this is that providers that offer this kind of fine grained pricing tend to be targeted toward merchants who are looking for low level solutions--merchants handling their own credit card storage, doing their own recurring billing, and so on.
That is probably not a road you want to go down, especially if you are small and just starting out, and doubly especially if your servers are not servers you own. Doing PCI complaint credit card handling in the cloud on something like AWS is difficult and not something you want to deal with while dealing with the other aspects of a young business, like developing and promoting and supporting your product.
> While there is little controversy about the fees that Visa collects, some merchants are infuriated by a separate, larger fee, called interchange, that Visa makes them pay each time a debit or credit card is swiped. The fees, roughly 1 to 3 percent of each purchase, are forwarded to the cardholder’s bank to cover costs and promote the issuance of more Visa cards.
I think the contracts (or consumer inertia) still make stores advertise at the credit-card price, and the different price for cash has to be advertised as a discount.
http://www.interest.com/credit-cards/news/you-soon-could-be-...
From that article it sounds like it was part of a lawsuit that was settled. I had thought it was through one of the consumer financial protection bills that happened after the housing bubble pop.
Also important to note that most merchants opted NOT to switch to charging extra because it would have upset their customers, so really, by allowing that in the past, it primed consumers to expect the same price for both. Tricky devils...
Merchants want zero fees, and instant payout (like cash), but "wait a minute" you might say. Don't businesses pay taxes, and how do you think those tax dollars are spent (in a non-gov't shutdown state)? Partially keeping the dollar bill presses running.
Herein lies the problem. Cash is a government-run operation, and credit card networks are privately owned. We forget that our cash system doesn't run itself and isn't free to operate, so we take cash for granted, and undervalue or ignore the "interchange" fees.
By changing their perspective, merchants might see that zero fees is unrealistic. It's an unfortunate(?) consequence of leaving the bartering days behind, and joining a money economy.
Given a choice, there are lots of (big) businesses who would switch to debit/credit exclusively if that was an option, especially with the existence of branded credit cards. Home Depot would love nothing more than having all its customers using the HD credit card.
Actually, it makes a huge difference:
1) I pay property taxes on all inventory held on the shelf at the beginning of the year
2) I can offer a discount to move product off of the shelf now at a lower rate (equivalent to paying a higher transaction rate) to achieve actually present cash-flows
3) I can write-off inventory that sits on the shelf too long and depending on my accounting method, I may have to claim income on a sale today, even though I haven't been paid yet.
> % on month > 36% APR b/c of network leverage and government regulations.
No, it's 3%. Period. Not 3*12, just 3%. Don't conflate accrual of interest with acquisition costs. That'd be like saying that since labor on production is 2% of COGS, firing everyone increases my yearly margin by 24% (at best, it would be 2%, if you could still produce). Consider that any method of capturing payment, whether cash or credit card, has an acquisition cost (time, money, labor, etc.). Paying a 3% fee on CC optimizes time and labor in exchange for money.
[edit] the thinking is, if your revenue is $100/year, then in (A) scenario with higher rate you pay $1/year more in fees; in (B) scenario with delayed funds you need a permanent loan of ~$25 which will cost you more than that unless you can get an APR of lower than 4%.
Don't compare the cost of money with a CD rate, but with the expected ROI for VC investors - you won't get cheap funding in the amount you need; intentionally shortening your runway by 3 full months will bite a noticeably hole right in your equity.
The problem with cash reserves is that they hold cash for product you have already delivered, a 90-day 100% rolling reserve means that you are effectively extending net-90 terms for all of your customers. You're issuing credit, but not collecting any interest on it, while you have to pay your own vendors and other service fees/employees in the mean-time.
Another side-effect of this is running negative cash flows when your business surges. Say your business booms around the holidays, to meet the demands, you place larger orders with your vendors, and thereby incur larger costs - but have to pay them out of reserves from a slower period in the year. You cash flow for that ninety days around the holidays would be substantially negative (you've paid out a lot more than you've paid in), and the interest you may have to accrue from your vendors to float until disbursement may greatly exceed the nominal transaction fees you'd pay if you didn't have a 100% rolling reserve.
Generally speaking, I've always found higher fees (up and to a point) to be better than higher reserves. If you can combine just-in-time manufacturing (or purchase) with credit terms from vendors, you can "play the float" wherein you're paid today for something you don't have to pay for until a month (or, in reality, as much as 59 days later on a net-30 account) down the road. This is very effective at the beginning of the year for LLCs where members need to distribute all profits at the end of the year to members due to taxes being due, and minimizing the re-capitalization of the business to get through the 1st quarter.
Here each processor is trying to achieve a market position relative to their competitors almost as an epsilon. They want to be seen as cheaper but no cheaper than necessary, and they want to retain simple terms. That drives them to tweak the 1st and 2nd order terms (constant + a scale factor).
By establishing your own merchant account with the processor, you'll have lower rates but signing up will require a lengthier process of providing your business info and having that reviewed. Basically this mean that you're taking on the risk of fraud or chargebacks directly. The benefit of course is that you'll have lower net costs esp. at higher transaction volumes with the variable pricing aspects that has been mentioned here already. It also allows you to add more value-added services that align to your business needs, such as subscription billing or other servicing layers.
On the other side, signing up under a payment processor's merchant account (e.g. Stripe, Braintree) can get you up and running instantly with a simple pricing structure. This often make sense for businesses who need to get up and running quickly without having to go through a merchant account review process. Also, the risk is actually taken on by the processor since it's their merchant account with the processor. Of course the processor in this case monitors fraud on your activity in order to protect themselves. What you'll find though is that as your volumes grow, there will be an inflection point where it'll be more cost effective to switch to the first option.
There's benefits in both models, but as always, companies should see what makes sense for them.
So it's likely even large chains like McDonalds still pay the 1-2% interchange rates everyone else pays, just with a lower markup than average. They do pre-negotiate rates on behalf of their franchisees, which own the merchant accounts for their individual stores.
It seems to be partially down to the underlying costs of processing credit cards and partially down to competition.
The DD system doesn't do dispute resolution - you can make DD's easily, but the customer can revert anything he 'didn't agree to' and that's it; and the EU rules allow doing that for at least 13 months (UK says unlimited, I'm not sure on that).
That's how it works with credit cards as well. You're always debited before you're even notified of the chargeback.
I've heard both good and bad about them, but they don't have large use yet.
In so far as large use cases, they have some really good traction in the bitcoin market. I believe that they are the go to for transferring USD in and out of MT. Gox.
I'd bet that WalMart pays significantly lower fees due to volume.
In the UK a lot of stores don't accept American Express due to their higher processing fees [1].
[1] http://www.theguardian.com/money/2009/nov/29/american-expres...
As it is, you have to put money into your Dwolla account and let it sit there until you're going to spend it, making impulse shopping a lot harder to do.
While it might seem expensive, until a few years ago, taking card payments required getting a merchant account at a bank with high monthly fees which could take months. Now you can pay similar rates but without the misery of dealing with the banks.
Now if you're in the UK...things are very different :).
Basically, it's hard to make money on lower amounts if all transaction types are lumped together into one category. Some people such as Groupon Payments and Square can charge less on card present transactions, because the interchange fees are lower on those.
Debit cards are another matter.
I was recently asked to fix some code for a website that was using paypal so it could use litle.com.
I was told that litle.com was almost half the cost of paypal and without a lot of the things that make paypal obnoxious to merchants, like holding your money on a whim.
Also, the Litle dev people were way more helpful and friendly than what I've seen from paypal in the distant past.
I hope they fix up the EU pricing so it's less confusing and with no monthly minimum as they have with the US.
The question arises: Why are the interchange fees immune to competition?
If Visa or Mastercard would say '0% interchange' then that would make them not competitive - banks wouldn't market those cards much and wouldn't offer any rewards/points on them; merchants would benefit but customers wouldn't, since merchants wouldn't be allowed to give discounts to the 'cheap card' anyway - the rule is 'same price or you can't take our cards at all and you'll get less customers'.
But it is not really true that all payment processors charge that.
They don't add anything to the discussion and it's redundant after you upvote.
Thanks! :)