Understanding Your Electronic Payment Processing

Whether you are a web-store or a ‘brick and mortar’ merchant, you are going to need to be able to accept electronic payments for your goods and services. Credit card processing fees can be confusing and misleading. The following is a breakdown of payment processing fees associated with merchant accounts. Every electronic payment provider is different and may break out the fees differently on the monthly statement. You may see all or only some of these fees on your statement, but either way, you are paying them.

Before I break out the different costs, if you are looking to begin accepting credit cards, or if you already do accept electronic payment but are window shopping for a better plan, here are a few things to consider first:

  • Flexibility – Every business is different. Your business may provide high volume, low-cost products, or you may provide long-term, high quality services to customers. Whatever the case, It’s best to go with a provider that can give you flexibility and different options tailored to your specific needs.
  • Rate Break-out – The most important aspect I feel. Below, I will define all the different rates, but the more options associated, the better.
  • Service – When looking for a reputable service, I prefer real customer service. Whether online or a ‘brick and mortar’ retailer, it is important to have the human factor. Having an assigned account representative, close to you is invaluable. I also look for solid online customer service to include, online chat, email, forums, etc.
  • Financial Institution – An electronic payment processing merchant account serviced by a large and reputable bank is important. For example, choose a provider affiliated with Wells Fargo before going with one that services accounts for Bank-o-Save-alot.

Maintenance Fees

Application Fee – The first fee you will pay when setting up a merchant account for electronic payment processing. This fee can range from $0 to $300.00. This is a one-time fee associated with running a credit report check on new applicants, and setting up the account. Often, account executives will be flexible on the application fee depending on your business.

Statement Fee – This is a monthly fee associated with providing you this hard-to-understand statement that outlines all your costs associated with electronic payment processing. Statement fees usually range from $5 to $20 a month.

Monthly Fee – A flat rate fee associated with maintaining your payment processing account. This fee is uncommon. More common is a monthly minimum fee.

Monthly Minimum Fee – A fee assessed if your electronic payment processing rate fees do not reach a minimum dollar amount for each month. For example, your monthly minimum is $30.00, but your sales for the month only result in a total of $20.00. You will be assessed an additional $10.00 to reach your monthly minimum. Ranges vary, but are often between $20-$50 a month. With a good payment processing account, these fees may be flexible as well.

Yearly Fees – Like a credit card with a good APR, payment processing servicers may assess an annual fee associated with maintaining the account.

Per Transaction Fees – This is a dollar amount fee assessed for each transaction made. This is different from and IN ADDITION to, the Discount Rate percent outlined below. Rates vary between providers and depending on the type of electronic payment made. Typical transaction fees range from $.20 to $.50 per transaction. Typically, this rate will be lower for qualified credit card transactions, and higher for non-qualified or MOTO transactions (Explained more below)

Verification Fees – Or AVS (Address Verification Service). This is a separate per transaction fee assessed for each transaction that requires credit card verification. This service is a must for most online or telephone sales. This is a service that verifies a credit card transaction with the billing address of the credit card holder. This is REQUIRED BY LAW in some states, and is important to prevent electronic fraud. Some providers, such as PayPal, include this in their standard per transaction fees and rates. Some merchants use a different AVS than their payment processing service. I prefer to use one provider, but allow for the break-out of this fee for each transaction. For example, you are a retail shop that also has an online store. It is more cost efficient to only pay this fee for online orders, but not pay this fee in-store where the verification can be handled in person (with the person’s ID for example).

Charge Back or Reversal Fees – A fee assessed to the merchant if a transaction is charged back to the customer.

Early Termination Fee – Just like with a wireless phone provider, a merchant may be assessed a fee for early contract termination. Some fees are fixed or pro-rated. If planning to switch providers, it is a good idea to let a professional e-commerce consultant review your contract to see if it is cost-effective to switch providers now or later.

Discount Rates

The discount rate or transaction rate is a fee assessed in % for each type of electronic payment transaction processed. Again, this is where flexibility is important. An e-commerce consultant can help you determine which type of transactions you process the most and tailor a flexible processing plan to save you money. Discount rates vary based on one factor and one factor only: RISK. The higher the charge back or fraud risk, the higher the percentage rate. Again, this is also where finding a provider that breaks out these rates more, is going to be more cost-effective than one who only offers one or two processing rate plans. From the lowest risk to highest risk, the break out is as follows:

Pinned Debit or Check Card Rate – This is a payment processing rate applied if a customer makes a purchase using his/her debit card, and enters the 4-digit pin. This is considered the most secure form of payment because it is done in person, requires a security code and the funds are secured against the individual’s bank account. As mentioned, some providers only offer qualified and non-qualified rates. If you are a retail merchant, and a large proportion of transactions are processed in this method, it is important to have this fee broken out because it will always save you money. This rate is the lowest possible, yet is often NOT broken out from qualified rates as it should be.

Debit/Check Card Rate – This is the rate applied for transactions where someone uses their credit card associated with their bank account. Basically, if someone uses their debit card as a credit card. It is secured by the individual, and their bank account. This is the next lowest rate. This rate is often NOT broken out by electronic payment processing providers, as it should be.

Qualified Rate – This is the transaction rate applied to qualified credit cards. These are purchases made by the individual, in-person, and is secured by the financial institution ‘loaning’ the account holder the money for purchases. This is the most common rate applied and is more than pinned debit and check card transactions. A standard VISA or MasterCard account.

Mid-Qualified Rate – This is a rate assessed on transactions using mid-level risk cards. This rate is assessed IN ADDITION to the Qualified Rate. Again, this is often NOT broken-out by providers, but should be. An example of a Mid-Qualified card is a Rewards card. Why is it more? The rewards cards, such as Air-mile or award point offers pass the costs associated with the plans, to you the merchant, and to the card holders in the form of higher interest rates.

Non-Qualified Transactions – A rate applied to electronic payment transactions IN ADDITION to the Qualified Rate. This is the second highest risk transaction and is applied to transactions of high risk. For example, when the card is run without the person being there, (keyed entry), or Corporate Credit Cards. For example, automated monthly fees, or transactions where the card holder is not there when the card is processed. Corporate cards are higher risk because they may often default; imagine an employee who is laid-off or fired. He/She is more likely to run up charges on the card before the account is terminated.

MOTO and Internet Rate – Manual, telephone, or online transaction rates. This is the highest risk transaction and so is also the highest cost to the merchant. This includes online purchases, or over the phone transactions where the individual card holder cannot be verified in-person. This rate is often assessed with an AVS fee as well. Again, flexibility is important, depending on volume and type of business.

Summary: No matter what your business, it is in your best interest to find an electronic payment processing plan that is customized to meet your needs.

Ecuador’s Exclusive Electronic Payment System: To De-Dollarization?

After 15 years of taking a move in improving its monetary system, Ecuador is again changing its payment transactions, now with the help of digital currencies.

The South American country’s new monetary system, which fully kicked-off last February, was the first-ever state-run electronic payment system. Last December, Ecuador’s Sistema de Dinero Electrico allowed qualifying users to set-up their accounts.

The Ecuadorean government took this action to address its stumbling currency for the US dollar. The system is also designed to support the country’s dollar-based monetary system.

Among the advantages that this new monetary system offers is that it serves as the cost-saving mechanism for the government. Moreover, economist Diego Martinez, a delegate of the President of the Republic to the Board of Regulation and Monetary and Financial Policy said that aside from helping the poor, mobile payments will reduce the amount that the government will spend for exchanging old notes to US dollars.

One of the few first steps that Ecuador took is trying digital currency in paying taxi fares. The Central Bank of Ecuador signed a deal last February, involving 60,000 members of taxi organizations to accept electronic money. After this initiative, users will be able to select services and pay through mobile transactions. They can also send money between individuals. Later this year, the third phase of the electronic money system will allow users to pay for public services through mobile payment.

Ecuador’s new payment system does not require internet connection to be able to have successful transactions. Also it can be redeemed as physical money, and users will be able to make payment using their mobile phones and stored value on their accounts.

On the other hand, even the government cleared that digital currency does not aim to replace the existing payment system in their country, some professionals inside and outside Ecuador speculate that this step was taken by the government because of other motives. One of them is Mr. Lawrence White, Economics Professor at George Mason University. According to him, he found it reasonable for Ecuador to provide an exclusive medium for mobile payments. He sees this step as Ecuador’s maneuver to de-dollarization. He further explained that the government’s prohibition of Bitcoin last July is a proof that they have bigger plans, and sees it as potential move to exit US currency.

At the moment, the government still denies speculations that digital currency will allow Ecuador’s central bank to issue new money that isn’t straightly taut its U.S. dollar reserves.

Whether this step aims for de-dollarization or not, Ecuador took a major step in recognizing the advantages that digital currency is offering. This will surely have a large impact with Ecuador’s economy, positively or negatively.

Making the Switch From Paper Cheques to Electronic Payment

Paper cheques’ days are numbered!

As anyone doing business in Europe will know, cheques are no longer used as a method of payment in most European countries. Rather, it is standard practice for companies to publish their bank details on invoices, so that payment can be made directly to their bank account.

Within North America, cheque usage is on the decline. We believe that the tipping point is fast approaching where cheques will become the exception, rather than the rule, in business-to-business (B2B) payments. A significant number of corporations are planning to migrate the majority of their B2B payments to electronic payments.

There are numerous advantages to using electronic payment methods such as electronic funds transfer (EFT) to pay your suppliers and employees:

  1. Security and internal control is significantly strengthened, reducing chance of fraud and theft. EFT payment approvals utilize strong on-line banking security, instead of much weaker paper-based signature approvals
  2. Paper cheque stock no longer needs to be stored and secured
  3. Clerical work and errors are reduced through automated efficiency
  4. Ability to manage and forecast cash flow is improved. Payments can be set up with various due dates, and post-dated for up to 35 days
  5. Stale-dated cheques are no longer a possibility
  6. Bank reconciliations are simplified, as there will be no outstanding cheques to account for
  7. Cheque printing, mailing and handling costs are eliminated
  8. Payment approval process is streamlined. Payments are ready for approval immediately upon entry into the EFT system. Payments can be approved from anywhere, at anytime, by authorized signing authorities
  9. EFT is environmentally friendly. Paper & ink used in producing cheques and envelopes is eliminated, as is the carbon footprint resulting from the physical distribution of cheques.

There are also a number of benefits to vendors and employees of implementing EFT payables. These include:

  1. Assurance of prompt payment directly to vendor’s bank account
  2. Vendors have improved ability to manage and forecast their company’s cash flow
  3. Time and cost of handling and depositing cheques is eliminated
  4. Risk of lost, stolen or damaged cheques is eliminated

The process to convert to EFT payables is relatively straightforward. Begin by gathering written authorizations from your suppliers to pay them electronically. This information can be collected on a single page form and includes your supplier’s banking information, along with their agreement that payments will be made to the specified bank account. The supplier also agrees to notify you if they wish to change the account to which payment is to be made. These forms should be kept on file in the event of any dispute concerning where funds have been deposited.

Each bank has their own web portal and systems to enable their customers to process EFT transactions via the internet. Security tokens or USB keys, along with a user ID and password, are given to each person requiring access.

Multiple signing authorities can be easily accommodated, as each signing authority is given their own security token and access credentials. Before a payment transaction can be released for payment, all necessary approval authorities must first have signed on and approved the transaction. This is one reason why EFT is considered to be a far more secure method of payment than paper cheques.

Does your organization still pay its suppliers using paper cheques? If so, you may wish to consider joining the growing number of organizations that have converted their payment method from cheques to electronic payment, in the process realizing significant benefits.