
Ask HN: Why do all payment processors charge 2.9% + $0.30 per transaction? - boldpanda
I have been looking into multiple payment processors and it seems everyone charges the same thing. Why is that?
======
abalone
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.

~~~
deanly
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.

~~~
abalone
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-...](http://usa.visa.com/download/merchants/visa-usa-interchange-
reimbursement-fees-april2013.pdf)

------
tzs
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.

------
nonchalance
NYT had a discussion a few years ago: [http://www.nytimes.com/2010/01/05/your-
money/credit-and-debi...](http://www.nytimes.com/2010/01/05/your-money/credit-
and-debit-cards/05visa.html)

> 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.

------
DanBlake
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.

~~~
cma
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.

~~~
deanly
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.

~~~
cma
Minimum payments maybe. But you have the right by law to give a cash discount
(and apparently the right to charge a credit card fee):

[http://www.interest.com/credit-cards/news/you-soon-could-
be-...](http://www.interest.com/credit-cards/news/you-soon-could-be-charged-
extra-for-using-a-credit-card/)

From that article it sounds like it was part of a lawsuit that was settled. I
had thought it was through one of the consumer financial protection bills that
happened after the housing bubble pop.

~~~
deanly
ah, yes, that particular angle could probably use some more research. I
haven't read the consumer financial protection bills, but then again most
legislators probably haven't either, and there certainly could be some
loopholes that someone is trying to exploit right now.

Also important to note that most merchants opted NOT to switch to charging
extra because it would have upset their customers, so really, by allowing that
in the past, it primed consumers to expect the same price for both. Tricky
devils...

------
ethanazir
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
What merchant would sign up for that?

~~~
ethanazir
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.

~~~
jmduke
I think the vast majority of merchants would find more utility in the
expedited payout & resulting liquidity than the extra 2-3%.

~~~
ethanazir
Retail merchants have capital tied up in product; what difference does it make
if its on the shelf or already in customer's hands? ... sure cash strapped
people always pay more. But the reason the rate is so high; 3% on month > 36%
APR b/c of network leverage and government regulations.

~~~
drone
> what difference does it make if its on the shelf or already in customer's
> hands?

Actually, it makes a huge difference:

1) I pay property taxes on all inventory held on the shelf at the beginning of
the year

2) I can offer a discount to move product off of the shelf now at a lower rate
(equivalent to paying a higher transaction rate) to achieve actually present
cash-flows

3) I can write-off inventory that sits on the shelf too long and depending on
my accounting method, I may have to claim income on a sale today, even though
I haven't been paid yet.

> % on month > 36% APR b/c of network leverage and government regulations.

No, it's 3%. Period. Not 3*12, just 3%. Don't conflate accrual of interest
with acquisition costs. That'd be like saying that since labor on production
is 2% of COGS, firing everyone increases my yearly margin by 24% (at best, it
would be 2%, if you could still produce). Consider that any method of
capturing payment, whether cash or credit card, has an acquisition cost (time,
money, labor, etc.). Paying a 3% fee on CC optimizes time and labor in
exchange for money.

------
pbreit
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
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).

------
billclerico
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.

------
scwchoi
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.

------
tocomment
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?

~~~
dangrossman
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
Both of these companies process through First Data.

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

~~~
alexchamberlain
Do charge backs exost in a direct debit world?

~~~
PeterisP
Yes, and I'd say they are even harsher than for creditcards - i.e., return
cash first and ask questions later.

The DD system doesn't do dispute resolution - you can make DD's easily, but
the customer can revert anything he 'didn't agree to' and that's it; and the
EU rules allow doing that for at least 13 months (UK says unlimited, I'm not
sure on that).

~~~
dangrossman
> Yes, and I'd say they are even harsher than for creditcards - i.e., return
> cash first and ask questions later.

That's how it works with credit cards as well. You're always debited before
you're even notified of the chargeback.

------
arcdigital
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.

------
xfactor973
Dwolla doesn't charge that but I have no idea who uses them

~~~
trebor
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.

~~~
jsonne
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.

~~~
gustoffen
Not anymore: [http://www.coindesk.com/dwolla-bitcoin-companies-virtual-
cur...](http://www.coindesk.com/dwolla-bitcoin-companies-virtual-currency-
exchanges/)

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

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

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

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

~~~
Osiris
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.

~~~
uptown
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/](https://realtime.dwolla.com/)

------
casca
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.

~~~
arcdigital
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 :).

------
jeffasinger
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.

------
Avalaxy
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.

------
codex
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.

------
fredsanford
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.

------
AhtiK
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.

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

~~~
drelihan
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.

------
turtlebits
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.

------
asah
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.

------
blahpro
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.

------
jpmattia
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
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?

~~~
PeterisP
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.

------
pravda
Short Answer: Nash equilibrium.

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

------
anishkothari
link to your company's website?

------
fogonthedowns
Good question +1

~~~
cenhyperion
Please avoid posting comments like "+1"

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

Thanks! :)

