Ask HN: Why do all payment processors charge 2.9% + $0.30 per transaction?

https://news.ycombinator.com/item?id=6533653

by boldpanda • 13 years ago

77 84 13 years ago

news.ycombinator.com

I have been looking into multiple payment processors and it seems everyone charges the same thing. Why is that?

xfactor973• 13 years ago

Dwolla doesn't charge that but I have no idea who uses them

trebor• 13 years ago

Dwolla doesn't charge that way because they're not billing credit cards. You give them your bank details and they do an ACH transfer with them, IIRC.

I've heard both good and bad about them, but they don't have large use yet.

philrykoff• 13 years ago

You are right. From my POV their problem is that you cannot use them for international projects (non US customers cannot use ACH; non us businesses cannot get their money out of Dwolla)

jsonne• 13 years ago

That's correct on the ACH bit.

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.

Yaggo• 13 years ago

Bitcoin doesn't (practically) charge that but I have no idea who uses them (except few crypto geeks/criminals/speculators)

antidaily• 13 years ago

It's ACH, which is great for fees but has numerous drawbacks as well.

casca• 13 years ago

Processors have upstream costs to Visa/Mastercard/etc that are charged in similar ways. The idea behind them using a percentage is that it relates to the risk. The more you spend, the more could be fraud and might need to be written off. The $0.30 is effectively a lower bound to stop micropayments. Otherwise people could do a $0.10 transaction and only pay $0.003. This could be to avoid system load.

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.

arcdigital2• 13 years ago

Are you from the US? If so, that stuff about merchant accounts isn't true. While they're backed by a bank (acquiring bank), you don't have to go to a consumer bank to get one. You can go through any company called an ISO. In my opinion banks are the worst place to get one. We do merchant accounts with a monthly fee of $5/mo and instant setup (you can start processing in less than 2 minutes from when you complete the form). All backed by our friendly customer service team in Ohio.

Now if you're in the UK...things are very different :).

savetz• 13 years ago

PayPal has a micropayments account option that it doesn't publicize very well. If you set up a new account with their special micropayments link (google it) they charge 5 cents + 5%. Which makes it cheaper for transactions under $11.

_eggs• 13 years ago

I've wondered this for a while – could it simply be competition? Nobody wants to drop below that mark?

crisnoble• 13 years ago

Wouldn't dropping below the mark let you beat the pants off the competition?

NegativeK• 13 years ago

Not if costs are prohibitive.

blueblob• 13 years ago

Depends on what margin of this is profit. If they're not making money through nonpayment then they would be losing money each transaction.

abruzzi• 13 years ago

Of course it can drop below that mark, but that is usually a negotiation between a vendor and the payment processor. If you are small and unlikely to drive much business, you will have a hard time getting a lower number. Where I work, we get 2.3% and do several million dollars a year in transactions. We are also a government institution, so it's likely that the processor sees us as a lower risk (though most of the risk comes from the card holder) hence we get the lower rate.

I'd bet that WalMart pays significantly lower fees due to volume.

michaelt• 13 years ago

Presumably on a Visa transaction the payment provider takes a cut and Visa takes a cut. There's competition between payment providers to keep their cut down, but you can't charge Visa cards without Visa's help, meaning there's no competition on their cut. Unless a merchant is bold/foolhardy enough to decline Visa.

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...

plantedd• 13 years ago

It doesn't quite answer the question, but we use GoCardless to handle payments from our sellers on our marketplace and that's 1% per transaction - the difference is that it's processing direct debit payments (withdrawals direct from one bank account to another) instead of credit cards.

It seems to be partially down to the underlying costs of processing credit cards and partially down to competition.

NonEUCitizen• 13 years ago

What is your experience with GoCardless? How do they handle chargebacks?

alexchamberlain• 13 years ago

Do charge backs exost in a direct debit world?

ams6110• 13 years ago

WePay also charge lower fees for direct bank account debit than credit or debit cards. Not sure Stripe offers this.

nonchalance• 13 years ago

NYT had a discussion a few years ago: http://www.nytimes.com/2010/01/05/your-money/credit-and-debi...

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.

arcdigital2• 13 years ago

It has to do with the fact that the processors you are talking about are called "PSPs" or Payment Service Providers. 2.9% + $0.30 is a standard rate that incorporates risk, operations, interchange (visa/mc), etc... while still making a profit. That's why PayPal, Stripe, etc... price accordingly.

blahpro• 13 years ago

This is what PayPal have charged for as long as I can remember. I always assumed that later entrants (Stripe etc) adopted that price point to be competitive with PayPal.

clueless• 13 years ago

Interestingly, Plastiq charges the consumer instead of the merchant and they only charge 1.99% (to as high as 2.49%)

drelihan• 13 years ago

Plastiq opens up a lot more borrowers and lending opportunities for the processing networks ( e.g. people use their Visa on items they previously could not --- tuition, rent, etc. ), so Plastiq is able to negotiate some of the lowest rates in the business.

uptown2• 13 years ago

Credit card processing fees. Dwolla gets around it by using ACH which has negligible fees.

Osiris• 13 years ago

The problem there is you have to have the money in your account. If they could find a way to do instant withdrawl/hold of funds, then people could use Dwolla to make a purchase direct from their account.

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.

uptown2• 13 years ago

They've got something in development that may be exactly that. I'm not sure though because it's not out yet:

https://realtime.dwolla.com/

pbreit• 13 years ago

Everyone is basically following PayPal's lead. To make price a compelling differentiator, you'd have to go to a place where it'd be very difficult to make money. 2.99% looks kinda lame. 3% is perceived as much higher. PayPal's choice was spot-on.

megrimlock• 13 years ago

For some reason this resembles the issues you get with numerical precision when doing things like ray tracing with shadow maps, or Z-figthing in depth buffers, or guessing prices on Price Is Right.

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).

tocomment• 13 years ago

I've always wondered what kind of rate a high volume company like McDonalds or Walmart could negotiate? Could they be paying pennies per transaction?

wheelerwj• 13 years ago

almost certainly cheaper, but i doubt they ever make it to pennies per transaction. the best rates I have heard about are 1.6% + 20-30c

dangrossman2• 13 years ago

AFAIK, Wal-Mart is the only retail store that negotiates directly with Visa and MasterCard, and that only really happened after it sued both card networks a decade ago over being forced to accept cards with higher fees if it wanted to accept debit in its stores. They're still not happy with what they're paying; they urged a rejection of the settlement offer in the latest class action suits over processing fees because it still left Visa/MC's ability to raise those fees when they want intact.

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.

amavisca• 13 years ago

Both of these companies process through First Data.

PeterisP6• 13 years ago

Even they don't get lower rates than interchange, because issuing banks get that no matter what. But they can get a very low margin above that.

turtlebits• 13 years ago

You can get lower rates depending on volume if you contact gateway resellers. Also this is for online transactions which have more risk. I have gotten quoted 1.2% for physical card swipes.

DanBlake• 13 years ago

Everyone forgets points/cashback. That visa card you just got that gives you 2% cashback? That doesnt come from thin air. It comes from the merchants pockets paying their transaction fee.

cma2• 13 years ago

It was VISA et al's way of taxing people purchasing with cash. They had contract terms that wouldn't let you sell at a discount when the customer paid in cash; under Obama the federal government finally banned them, and several states had already done so, but I think usually only for gas purchases.

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.

deanly4• 13 years ago

VISA et al can still take away a merchant's ability to charge customers' credit cards if they catch you asking for minimum payments on cards or offering discounts for cash. It doesn't happen all the time, and usually consumers don't report establishments that practice this behavior.

aklemm• 13 years ago

I always wondered where that came from, but I assumed it was on the backs of people paying interest on their balances.

pjg• 13 years ago

That 2% is received more form the Consumers directly. Banks make 80% of income from Consumers in terms of late fees, interest charges, annual fees and various other charges they slap on consumers. Part of this goes to pay for the rewards i.e. not all rewards are paid from Merchant acquisition fees.

billclerico• 13 years ago

It's mostly driven by competition. Because all processors have to pay interchange (about 2-2.2%) at scale, and also cover fraud losses - there isn't much room to slash prices and still make a profit.

abalone4• 13 years ago

It's not quite true that all payment processors charge 2.9% + $0.30. In the real world you'll find rates almost half that for brick and mortar merchants, more like 1.8% + $0.15, which is very close to a processor's wholesale cost (called "interchange"). It's specifically ecommerce processors that are easy for anyone to sign up with.

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.

interstitial• 13 years ago

In government entities such as the ACA, IRS, NSA, TSA, fraud and abuse is prohibited by magic fairies. Why can't the banks hire the same magic fairies?

deanly4• 13 years ago

It's worth mentioning a specific term here, too: "card not present" That covers all ecommerce, and even some card scanning technology, too, EVEN if the card is present. As you pointed out, it's all about fraud/risk. It's easier to circumvent the credit card companies' "security" features (magnetic strip, hologram, signature on the backside of the card, the actual card itself, a chip if your card has one, etc.) when the card is not present during a transaction. A good analogy would be paying with counterfeit $100 bills. There are security features built into cash that allow merchants to verify their authenticity. It's difficult to prove that the person on the other side of the internet is who he says he is when paying with a card. Is the card stolen? So as you pointed out, card not present transactions are riskier, thus require a higher interchange fee, etc.

abalone4• 13 years ago

That's not really the main reason. Ecommerce interchange is higher than card present but only by maybe 15-30 basis points (0.15-0.30%).

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-...

iamkoby• 13 years ago

great read, thank you

jeffasinger• 13 years ago

There are interchange fees that Visa and MasterCard charge every on every transaction range from 0.05% + $0.21 to 2.40% + $0.10. The processor that you're dealing with has to mark this up, and is taking a little bit of a risk that you won't charge lots of cards all at once and run away with all the money.

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.

ethanazir6• 13 years ago

Why can't the merchant's funds simply be quarantined for say 2-3 months? ... Victims of a fraudulent merchant would have 30 days to 1) get their bill and an extra 30 days notice of the fraud charge on their bill to cancel/dispute. If the customer did not pay bill; the 'visa' could avoid crediting the merchant. A 2.9% transaction fee is like a 1 year quarantine. quite long me thinks.

jlarocco• 13 years ago

What merchant would sign up for that?

asah2• 13 years ago

+1 -- if anything, the trend has been for quicker payouts and fewer holdbacks.

ethanazir6• 13 years ago

A one year CD goes for about 1% now ergo 3% is a long time horizon on value. 2-3 months is ~equivalent to a 0.1% fee per CD rates.

abalone4• 13 years ago

Because most merchants would then need to borrow money to pay their suppliers and expenses while awaiting payment, which would end up costing them a lot more than an extra 1%.

ethanazir6• 13 years ago

"extra 1%" on month > 12% APR.

PeterisP6• 13 years ago

Cash flow is the major priority for most merchants. You wouldn't get 0 rates anyway, and the majority would rather pay 2.9% instead of 2% + 3 month extra delay; especially growing businesses - for a stable business you can plan for $x being frozen; but with quick growth if you're getting 'old&small' revenue while having 'new&increased' expenses for the goods; you'd run out of cash in no time.

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.

ethanazir6• 13 years ago

return politics('expected ROI for VC') == war;

drone2• 13 years ago

Depending on your history, and how your merchant account is backed, you may in fact also be required to hold a cash reserve with the merchant bank. Holding all, or a percentage of transaction funds is called a "rolling reserve," and it's one of the worst things that can happen in these deals if you have substantial turn-over in cash. My experience has been that direct merchant banks like to ask for specific reserve amounts based on your activity/risk profile, and places like paypal like rolling reserves. (This is not an exhaustive analysis, simply my experience.)

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.

codex• 13 years ago

For credit cards, some of the cost is prepaid interest. If a consumer pays their card on time, they don't get charged interest--however the bank loaned them money from the day of the transaction until they either get paid with the same billing cycle, or they start officially charging the consumer interest (which can take up to 60 days). The merchant pays this interest, which is high.

Debit cards are another matter.

jpmattia• 13 years ago

Most of the answers will be variants of: Payment processors have to pay interchange, and then will mark it up.

The question arises: Why are the interchange fees immune to competition?

ebiester• 13 years ago

Technically, they aren't. If you're willing to start a new credit card company, and get enough people on board, you could compete on interchange fees. However, how are you going to convince the consumer that they want a credit card issued by you?

PeterisP6• 13 years ago

Large associations of merchants (who'd benefit from lower interchanges) can do that, IIRC there are some examples of successful country-local cards. Making any of it an international network comparable to Visa/MC would anyway take decades and billions.

PeterisP6• 13 years ago

The brand on your card is heavily influenced by what your bank is offering; your bank (card issuer) is offering products that benefit themselves; and they benefit from higher interchange, not lower interchange.

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'.

asah2• 13 years ago

SparkPay.com (capital one) is 1.95% with no swipe fees, but they're a card-present competitor to Square, with no API. They've been great for us, awesome customer service.

fogonthedowns• 13 years ago

Good question +1

cenhyperion• 13 years ago

Please avoid posting comments like "+1"

They don't add anything to the discussion and it's redundant after you upvote.

Thanks! :)

tzs• 13 years ago

You are probably only looking at high level solutions, like Braintree.

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.

AhtiK• 13 years ago

Braintreepayments is somewhat strange in this case by fixing price to 2.9% + $0.30 but only for US accounts. For EU it's less clear "Interchange+.9% + 10c" while also having a 100 EUR minimum monthly payment on 10c commissions.

I hope they fix up the EU pricing so it's less confusing and with no monthly minimum as they have with the US.

scwchoi• 13 years ago

There are some great answers here.. I'll take a higher-level perspective of looking at having your own merchant account versus using a payment processor's merchant account (e.g. Stripe, Braintree).

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.

fredsanford• 13 years ago

Just an FYI...

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.

pravda• 13 years ago

Short Answer: Nash equilibrium.

But it is not really true that all payment processors charge that.

Avalaxy• 13 years ago

Not an answer to the question, but does anyone have experience with PayLane? I'm met them at the next web conference and their rates seem pretty fair. Since I will be processing small transactions, I'm looking for a payment provider that has a low fixed amount to integrate in my startup product. $0.30 is quite a sum of money if you only process $10 and you make about $0.50 margin on top of that.

anishkothari• 13 years ago

link to your company's website?

Ask HN: Why do all payment processors charge 2.9% + $0.30 per transaction?

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