Consultant: Internet Credit Card Fees Lower Than Expected

Internet retailers using payment gateways typically pay discounts of more than 3% to companies that handle credit card transactions, a survey of 30 such vendors has found. A merchant with a $75 sale could expect to pay an effective discount rate-the discount rate plus per-transaction fees-of 3.12%, according payment industry consulting firm First Annapolis, Baltimore. Although that rate seems relatively high, the survey found that such charges were less than expected, considering the risk Internet transactions pose to gateway firms, banks and merchant acquirers. "We expected them to be higher because we heard a lot about high discount rates, fraud experience and risks of those types of merchants," says Paul A. Grill, a senior consultant at First Annapolis.

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     Grill says the rate stems in part from higher interchange rates that merchant acquirers charge retailers for card-not-present transactions. Those rates are about 40 basis points higher than card-present transactions. "There is an opportunity for pricing to drop over time as risk becomes better managed," adds Grill.

     For a payment gateway setup, merchants pay $207 on average. Other fees include a gateway fee averaging $89, transaction fees running about 21 cents, bank applications fees of $118, bank statement fees totaling about $9, bank transaction fees of 72 cents and discount rates of 2.48% on average.

     Yet Grill says virtual merchants are not paying much more than physical merchants for these services. Non-transactions fees that virtual merchants pay-about $1,497 in the first year-are similar to the $500 to $700 assessed to physical merchants in the first year for application, terminal and other fees. Grill says smaller merchants should expect to pay higher rates due their lower transaction volumes and possibly lower ticket sales. For example, the survey found one site posting a discount rate of more than 6% for an average ticket sale of less than $10 and notes that many providers charged monthly discount minimums of about $25.