Processing Fees, Not Interchange, Are the Cost Merchants Should Combat, Some Say

Merchants’ disdain for interchange is well documented, but one aspect of card-acceptance costs that gets drowned out by the outcry over interchange is that rising processing fees are hitting merchants harder than interchange hikes, according to some observers.

Processors’ rate hikes have been running between 0.25% and 1.5% in recent years, whereas a few years ago they were typically a few basis points, says Eric Cohen, chief executive and founder of Merchant Advocate, a Colts Neck, New Jersey-based consultancy that works to help merchants reduce their card-processing costs.

The cost to merchants from these hikes can be substantial. Cohen cites the example of a non-profit organization his company worked with that underwent five rate increases from its processor in a two-year span. Those increases ended up boosting the non-profit’s processing costs by $300,000 annually, Cohen says.

“There has been a lot of merchant push-back against interchange rate increases, especially among larger merchants, but in recent years we’ve seen processor-fee increases that are higher than any interchange hike,” says Cohen.

Compounding the problem is that processors don’t always provide justifications for their increases, such as inflation or the costs of new technology. “Processors are profit-driven and they raise rates because they can,” Cohen adds.

One reason many small and mid-size merchants don’t complain about increasing processing costs, Cohen says, is that statements tend to be complicated and confusing, making it hard for sellers without dedicated personnel to understand the fees they are being charged. In addition, interchange is baked into merchant-processing fees, which can obscure the cost of processing.

“If merchants, especially mom-and-pop merchants, understand how to read their statement and optimize their merchant account, they would see the [financial] impact of interchange hikes is not as great [as processing fees],” Cohen says. “There are a lot of hidden fees [charged by processors].”

Cohen’s argument comes at a time when some processors have come under fire from merchants for charging so-called junk fees, which can include PCI-compliance fees, as well as batch-processing, customer service, and statement fees. PCI refers to the Payment Card Industry data-security standard, which is meant to combat fraud.

Shift4 Payments Inc. recently said it will pay restaurants a dollar for every online order they receive across the first three months that they use Shift4’s  SkyTab point-of-sale system. The move was a response to junk fees charged by competitors, such as additional charges for accepting online orders. Toast Inc., a Shift4 rival, began levying a fee on restaurants for processing online orders over $10. Toast backed off on the fee in the face of adverse reactions from clients.

But not all proponents for merchants in their battle against card-acceptance costs accept Cohen’s claims that rising processing fees can be more costly than interchange hikes.

“Card-acceptance costs can be abusive in some cases, and complicated for merchants to understand, but that’s not the same systematic failure that we see with interchange,” argues Doug Kantor, an executive committee member for the Merchants Payments Coalition and general counsel for the National Association of Convenience Stores.

Merchants can switch to a lower-cost provider if processing fees become too high, but are stuck with the interchange costs set by the card networks, Kantor adds.

The Electronic Payments Coalition, which represents financial institutions on interchange matters, declined to comment on processing fees.