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Hidden fees: Why you're paying more for payment processing than you think

99% of ecommerce merchants pay more for payment processing than they actually need to. The secret? Most of them don’t know they are.

Understanding payment processing fees is a resume-worthy skill. It takes detective work to comb through a 30 page invoice and understand what your payment processing contract is really costing you.

The U.S. payments industry makes $280 billion dollars annually from fees and interest income [McKinsey]. A smattering of payments companies compete heavily for access to merchants, vying for the 2% charged on each transaction. A Google search for payment processing yields a dizzying number of ads. Well-known, legacy players to unheard-of companies are paying a sum in the billions to advertise to ecommerce sellers, with taglines advertising flat fees, industry-leading rates, and affordable processing.

The secret behind the ad campaigns and headline rates of the payments industry is: What you see is rarely what you get.

Enter hidden fees

Online payments is crowded with competitors, who fight for razor-thin margins on processing payments. These companies have responded to competitive pressure with innovation – just not technical innovation.

Instead, they’ve innovated how they market and sell. Payment companies use a combination of deceptive headline rates, tiered contracts, and confusing invoices to mislead ecommerce merchants. These tactics — and the tons of needless jargon they’ve introduced — sell customers on contracts that disguise the real price they’re paying.

Many of the merchants Bolt works with were paying tens or even hundreds of basis points more than they believed they were (100 basis points = 1% of sales).

From tons of different types of hidden processing fees — like non-qualified transaction downgrades and monthly statement fees disguised in legal fineprint — we’ve identified the 3 most common techniques we’ve seen used to mislead merchants, with tips for how to identify them and calculate the rate you’re really paying on your payment processing.

Calculating your payment processing rate: Three pitfalls to avoid

When calculating how much you’re actually paying for payment processing, watch out for these three ways in which your payment processor’s invoice might be misleading you.

Billing in the arrears

Here, the invoice cover sheet states a total volume and total fees. However, the fees listed are actually for the previous month.

This is especially confusing for merchants that are growing quickly. If you’re growing quickly, last month’s fees were for a smaller volume than this month’s volume, since your sales are growing. So, the effective rate will look smaller than it actually is.

To get an accurate fee total for that month, the merchant must read through the statement to find fees that pertain to that month’s transactions. The easiest way to do so is to look at the date each fee was charged. If fees were billed at or near the beginning of the month, they are likely charges for the previous month’s volume. You may be able to find charges for the current month by digging deeper into the invoice. Then, dividing those by the month’s volume will give you the effective rate.

Payment processing invoice with fees listed from the previous month

The “daily discount”

On the first page or summary page of an invoice, a merchant will see their total volume and a line representing labeled, “Total Fees Charged.”

These statements are particularly deceptive: The “Total Fees Charged” line actually refers to the total of all surcharges (or service fees) incurred that month.

Dig deeper into the statement and you’ll notice that you’ve been billed a fee every day for that day’s transactions (labeled a “passthrough” or interchange fee). Then, at the end of the statement period, the processor totals up any surcharges (service fees), and bills for that as a separate line on the summary page.

To calculate your effective rate, you’ll need to total up the “Total Fees Charged” surcharges plus the daily fees charged. Then, divide that by your total volume to get the effective rate.

Payment processing invoice with American Express fees omitted to make fee look smaller.

Tiered fees over a “preferred rate”

Often, payments companies will quote an attractive rate, but when you actually go live with them, there are new or tiered charges that increase the overall processing rate.

This attractive, “preferred rate” might be quoted verbally, or may even be listed in the payment processing contract. But, it ends up only applying to a very limited number of card types. For the majority of credit cards that come through your website, you actually end up paying much more than that preferred rate.

We’ve seen glaring differences in the rates merchants think they are paying vs. their effective rate, due to this “preferred rate” quoting.

One merchant had a contract with their payment processor that listed a “preferred rate” of 1.75%. Their past three months of invoices showed an effective rate of 3% – over 70% higher.

Payment processing invoice with a number of different rates averaging 50+ basis points more than the headline rate

In the end, payment processing rates tend to be competitive across providers. This is because processors all have the same “buy rates” (or interchange fees) from credit and debit card issuers like Visa, Mastercard, and American Express.

Shopping for a better rate might allow you to shave off a few basis points of fees (read: 0.02%). More often, it costs time and resources to search through a forest of marketing collateral that leaves you more confused than when you started searching in the first place. And in the end, even merchants who negotiate for the best deal might be blindsided by the fees that actually end up on their statements.

That’s not even the worst part. The race to the bottom in payments – as well as the misleading tactics to disguise its pricing – overshadows an important fact:

The most glaring price that merchants pay for payments isn’t a payment processing fee.

Cut the bull: How Bolt reinvents the payments stack

The true price of payments includes what your current checkout, payment, and fraud stack is costing you. That includes the price of lost customers deterred by choppy checkout experiences, revenues left on the table from customers declined due to sub-par fraud tools (and the cost of those fraud tools themselves), and the price of having your teams in-house build checkout sites and manually review orders.

A savvy CFO shops around for payment processing rates, leveraging multiple offers to shave cents off the dollar. A far savvier CFO drives double-digit revenue growth for her business by re-engineering the payments stack.

At Bolt, we focus on growth, not cost

We’ve perfected checkout, and use our unparalleled access to data on checkout behavior and payment outcomes to power our precision fraud detection. The result is an end-to-end payments engine that converts, processes, and approves more customers.

Rather than hide our fees, we put our fees – and the results we deliver – front and center. Our Money Made Overview is a real-time tracker of merchants’ ROI from using Bolt.

The end of hidden fees

Bolt is the end of deceptive pricing and misleading invoices. It’s the end of endless shopping to reclaim a tenth of a percentage point for your business.

Payments companies have created a frenzy around slightly lower headline rates, distracting merchants from the real opportunity: using their payments stack to lower overhead and power growth.

Welcome to the ecommerce engine that pays. Seamless checkout, zero fraud. The future of the payments stack.