3. Tacking-on Fixed Transaction Fees and Their Relationship to Sale Price
According to the eminent physicist, Stephen Hawking, “Black holes ain’t so black.” Bundled percentage discount arrangements share this irony in the sense that they frequently include a fixed per-item fee assessed by the payment processor on each sale transaction. These fees can range from just pennies to amounts exceeding $0.25 per transaction!
This type of fee should not be confused with the per-item portion of the Interchange, which is cloaked by bundled discount rate itself. In the case depicted in Figure 1 (page 1), the processor might tack-on an additional per-item charge resulting in a total fee to the merchant of 3.0% + $0.15. This looks like an Interchange rate, but the real Interchange – which also contains both a percentage and per-item fee – is already included in the 3.0% bundled rate! The $0.15 per-item fee goes directly to the processor as an additional fee. If you feel this is confusing, you are probably not alone. This type of pricing hegemony is prevalent throughout the processing industry, and is one of the leading reasons why merchants seek independent payment operations audits.
The true cost of this per-item fee is indirectly proportional to the price of the product being sold. In other words, the lower the average sale value, the greater the real cost in terms of a pure percentage. This may not be an issue for most merchants. According to Visa’s SEC Registration statement, the average sale price of the four major card brands weighted for market share is approximately $80 (3). If you happen to be a merchant with a low Average Ticket Value (ATV), however, this per item fee can add-up quickly. For instance, the $0.15 per-item fee described directly above would increase the fee on a $15.00 product by one full percentage point resulting in an overall fee of 4%. This represents an overall increase of 33% over the base 3% bundled rate. Of course, this low-ATV merchant enjoys an advantage over the average-ATV merchant in terms of the absolute cost associated with the base 3% bundled rate. The $15 merchant will pay $0.45 in base discount, while the $80 merchant will pay $2.40.
Merchants also have to be wary of other per-item fees like authorization charges, as they also tend to jack-up the overall cost of processing a transaction. So, what savvy merchants have learned is that discounts, fixed per-item fees, and Interchange have a profound relationship with ATV. Understanding these elements often contributes to better pricing and marketing decisions.
A comprehensive discussion of this and other related subjects is covered in The Merchant’s Guide publication, Understanding Merchant Account Fees. This informative training manual includes detailed mathematical examples complete with a companion spreadsheet.
(3) Securities and Exchange Commission, Form S1 Registration Statement, Visa Inc., Filed 11/09/07. p. 2