It's not quite true that <i>all</i> 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.<p>There are two main reasons "no hassle / developer-friendly" ecommerce processors charge so much more:<p>1. Value-added features, like easy-to-use APIs and friendly customer service<p>2. Higher rates of fraud<p>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.<p>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.<p>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.<p>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.<p>Footnote 2: Other commenters have noted the role of interchange. But this in itself does not explain why no-hassle ecommerce processors charge <i>more</i> 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 <i>more</i> is quite simply higher fraud risk.
You are probably only looking at high level solutions, like Braintree.<p>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.<p>For example, for Visa there are these:<p>• "Acquirer Processing Fee", $0.0195/transaction.<p>• AVS fee, $0.01/transaction, only applies to transactions that make use of the address verification service.<p>• 0.097% if the card is a commercial rewards card. (10% of the cards)<p>• 0.45% "international acquiring fee" if the card is international, and 0.40% "international service assessment" on top of that.<p>• 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.<p>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.<p>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.<p>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.<p>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.
NYT had a discussion a few years ago: <a href="http://www.nytimes.com/2010/01/05/your-money/credit-and-debit-cards/05visa.html" rel="nofollow">http://www.nytimes.com/2010/01/05/your-money/credit-and-debi...</a><p>> 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.
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.
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.
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.
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.
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).<p>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.<p>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.<p>There's benefits in both models, but as always, companies should see what makes sense for them.
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?
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.<p>It seems to be partially down to the underlying costs of processing credit cards and partially down to competition.
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.
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.<p>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.
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.<p>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.
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.
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.<p>Debit cards are another matter.
Just an FYI...<p>I was recently asked to fix some code for a website that was using paypal so it could use litle.com.<p>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.<p>Also, the Litle dev people were way more helpful and friendly than what I've seen from paypal in the distant past.
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.<p>I hope they fix up the EU pricing so it's less confusing and with no monthly minimum as they have with the US.
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.
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.
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.
Most of the answers will be variants of: Payment processors have to pay interchange, and then will mark it up.<p>The question arises: Why are the interchange fees immune to competition?