This article will explain the fees involved with setting up and maintaining your merchant account.
Merchant Account OverviewA merchant account is a bank account that helps you process payments. An account is usually set up between a merchant services provider or a PSP (payment service provider).
They are essential for any business or commercial organisation looking to accept credit and debit card payments either online, over the counter or by telephone or post.
Check out a more detailed breakdown of the costs below.
Comparing Merchant Account Fees
Frustratingly, it can be difficult to compare merchant account costs unless you know what to look out for. One merchant account price may look totally different to another - and this is because different providers include different factors in their quote. Some of the most common reasons for variation in fees are outlined below.
What factors may affect merchant account fees?
- Your business type - the 'riskier' your business, the higher the rates on your merchant account
- Add-ons - extra services like a credit card terminal, payment gateway or full EPOS system can bump up the price
- Amount of money processed - the more money you process via credit or debit cards, the more chance you have of negotiating a better deal
- The type of payment you accept - contactless and chip and pin are the most considered secure, swipe and online (card holder not present) transactions less so.
- The length of your contract - check your contract for early termination fees as these can easily catch business owners out
- Range of cards accepted - want to accept American Express, premium cards or international cards? Your fees will rise as you increase the range of credit or debit cards you take
- Merchant account provider - of course, different providers charge a different markup for their services. We recommend you get a range of quotes to make sure you get the best deal.
Types of Merchant Account Fees
The fees charged by your merchant account provider might seem overwhelming at first, but it doesn't have to be! We've broken down the most common fees that you might see on a quote or invoice.
Incidental fees are fees charged as and when a certain scenario occurs. For example, when you open or close your account, or when a customer disputes a charge. Crucially, incidental fees are not recurring and are therefore more difficult to predict. These include:
As expected, these fees are charged when you open a contract with a merchant account provider. Costs here can range from anything as low as £50 for low-risk businesses, to around £300 for higher risk businesses.
Also called an early termination fee. These fees can really sting you if you are not aware of them, so make sure you check this section of your contract carefully before signing. Fees here can be anything from £100 to £1000+.
Chargeback fees are one of the most common gripes among merchants. It can occur when a customer disputes a transaction, normally because they don't recognise the charge on their statement. Sometimes the transaction may be genuinely fraudulent or other times it can be when the customer is dissatisfied with the service or product they received, and have been unable to solve this directly with you (the merchant). In all of the above scenarios, the charge will be deducted from your bank account and held in limbo for potentially many months until the dispute is resolved. Even if the merchant is not found to be at fault, merchant account providers will almost always charge a 'fee' for the admin involved with this process, usually around £5 - £20 per transaction.
Or scheduled fees - these are the costs that are easier for you to predict. As the merchant, you know that you will be charged daily, monthly or annually for these fees and their rates will remain the same throughout the length of your contract. These include:
Transaction fees are the biggest expense for merchants. They generally make up between 1.7% and 4% of your card payment sales.
A transaction fee means that every time a card payment is processed, you will be charged a percentage of the sale plus a fixed small fixed fee. The majority of this cost will go to Visa or Mastercard, the financial institutions that make payment processing possible. What's left of the transaction fee is paid to the merchant account provider as their mark-up (i.e. their revenue).
A typical transaction fee might look similar to this:
2.10% + £0.20 - which means that every for every card transaction processed you will pay 2.1% of that transaction plus 20p to your merchant services provider.
To help cover fees, some businesses limit payments by card to over a certain value or even add an additional card processing fee to help reclaim your costs. The is becoming less and less common though as the UK becomes increasingly cash-phobic.
Some of the most popular merchant account providers, like Worldpay, offer flexible pricing options that range from Pay As You Go, where you are not tied to a contract and works just like a PAYG mobile phone, to Pay Monthly. With a fixed monthly package you always pay the same price each month - very helpful for businesses wanting to keep an eye on their budgets!
Often, merchant account providers will charge a monthly or annual fee that is set at a flat rate, regardless of card payment volumes. With Worldpay's Pay Monthly package for example, you will pay £19.95 a month plus a reduced transaction fee (2.75% for credit and 0.75% for debit cards). Typical monthly fees for merchant services start from £0 and can increase to around £99 amonth.
Monthly Minimum Fees
This fee is to ensure your merchant account provider can guarantee a reliable revenue stream from you (the merchant). If you don't meet a minimum quota of card sales for that month, you will have to pay the rest as a monthly minimum fee. Check your contract or ask your provider for clarification on this one.
Businesses that accept payments in person will probably require a physical EPOS system to help with this. This can range from something as simple as a single PDQ machine or credit card terminal, to a more complicated EPOS software package that tracks stock and helps with reporting. You can buy or lease an EPOS package or card terminal - ask your provider for more details.
Do I Need a Merchant Account or a PSP?
Payment service providers, like Paypal and Stripe, usually deal specifically with online transactions and offer a stripped down service to your traditional merchant account. Often, the fees are lower with PSPs because they don't charge monthly recurring fees.
Costs for a traditional merchant account, on the other hand, are typically higher than with a PSP - but for your money you are guaranteed a much more robust and secure payment system.
As a general rule of thumb to help you decide, look at your monthly turnover. For businesses processing less than £5,000 worth of card payments a month - a PSP will be satisfactory. Anything above that, we strongly recommend investing in a traditional merchant account provider, like Worldpay, to help you secure your payments.
Still confused? Let us take the hassle out of working out pricing with free, no obligation quotes straight from the suppliers themselves! Complete the form at the top of this page if you wish to receive quotes for merchant accounts.