9 ms·
Ask HN: Why do all payment processors charge 2.9% + $0.30 per transaction?
I have been looking into multiple payment processors and it seems everyone charges the same thing. Why is that?
- xfactor973 13y agoDwolla doesn't charge that but I have no idea who uses them
- trebor 13y agoDwolla 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.
- philrykoff 13y agoYou are right. From my POV their problem is that you cannot use them for international projects (non US customers cannot use ACH; non us businesses cannot get their money out of Dwolla)
- jsonne 13y agoThat'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 13y agoNot anymore: http://www.coindesk.com/dwolla-bitcoin-companies-virtual-currency-exchanges/ http://www.coindesk.com/dwolla-bitcoin-companies-virtual-cur...
- Yaggo 13y agoBitcoin doesn't (practically) charge that but I have no idea who uses them (except few crypto geeks/criminals/speculators)
- antidaily 13y agoIt's ACH, which is great for fees but has numerous drawbacks as well.
- casca 13y agoProcessors 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 13y agoAre 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 :).
- savetz 13y agoPayPal has a micropayments account option that it doesn't publicize very well. If you set up a new account with their special micropayments link (google it) they charge 5 cents + 5%. Which makes it cheaper for transactions under $11.
- _eggs 13y agoI've wondered this for a while – could it simply be competition? Nobody wants to drop below that mark?
- crisnoble 13y agoWouldn't dropping below the mark let you beat the pants off the competition?
- abruzzi 13y agoOf course it can drop below that mark, but that is usually a negotiation between a vendor and the payment processor. If you are small and unlikely to drive much business, you will have a hard time getting a lower number. Where I work, we get 2.3% and do several million dollars a year in transactions. We are also a government institution, so it's likely that the processor sees us as a lower risk (though most of the risk comes from the card holder) hence we get the lower rate. I'd bet that WalMart pays significantly lower fees due to volume.
- michaelt 13y agoPresumably on a Visa transaction the payment provider takes a cut and Visa takes a cut. There's competition between payment providers to keep their cut down, but you can't charge Visa cards without Visa's help, meaning there's no competition on their cut. Unless a merchant is bold/foolhardy enough to decline Visa. In the UK a lot of stores don't accept American Express due to their higher processing fees [1]. [1] http://www.theguardian.com/money/2009/nov/29/american-express-charge-retailers http://www.theguardian.com/money/2009/nov/29/american-expres...
- plantedd 13y agoIt 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 13y agoWhat is your experience with GoCardless? How do they handle chargebacks?
- alexchamberlain 13y agoDo charge backs exost in a direct debit world?
- PeterisP 13y agoYes, 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 13y ago> 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.
- ams6110 13y agoWePay also charge lower fees for direct bank account debit than credit or debit cards. Not sure Stripe offers this.
- nonchalance 13y agoNYT had a discussion a few years ago: http://www.nytimes.com/2010/01/05/your-money/credit-and-debit-cards/05visa.html http://www.nytimes.com/2010/01/05/your-money/credit-and-debi... > 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.
- arcdigital 13y agoIt 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.
- blahpro 13y agoThis 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.
- clueless 13y agoInterestingly, Plastiq charges the consumer instead of the merchant and they only charge 1.99% (to as high as 2.49%)
- drelihan 13y agoPlastiq 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.
- uptown 13y agoCredit card processing fees. Dwolla gets around it by using ACH which has negligible fees.
- Osiris 13y agoThe 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 13y agoThey'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/
- pbreit 13y agoEveryone 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 13y agoFor 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).
- tocomment 13y agoI've always wondered what kind of rate a high volume company like McDonalds or Walmart could negotiate? Could they be paying pennies per transaction?
- wheelerwj 13y agoalmost certainly cheaper, but i doubt they ever make it to pennies per transaction. the best rates I have heard about are 1.6% + 20-30c
- dangrossman 13y agoAFAIK, 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 13y agoBoth of these companies process through First Data.
- PeterisP 13y agoEven they don't get lower rates than interchange, because issuing banks get that no matter what. But they can get a very low margin above that.
- turtlebits 13y agoYou 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.
- DanBlake 13y agoEveryone 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 13y agoIt 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 13y agoVISA 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 13y agoMinimum 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-charged-extra-for-using-a-credit-card/ http://www.interest.com/credit-cards/news/you-soon-could-be-... 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 13y agoah, 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...
- billclerico 13y agoIt'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.
- abalone 13y agoIt'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.
- interstitial 13y agoIn government entities such as the ACA, IRS, NSA, TSA, fraud and abuse is prohibited by magic fairies. Why can't the banks hire the same magic fairies?
- jeffasinger 13y agoThere 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.
- ethanazir 13y agoWhy 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 13y agoWhat merchant would sign up for that?
- asah 13y ago+1 -- if anything, the trend has been for quicker payouts and fewer holdbacks.
- deanly 13y agoExactly. In an ideal world: Merchants want zero fees, and instant payout (like cash), but "wait a minute" you might say. Don't businesses pay taxes, and how do you think those tax dollars are spent (in a non-gov't shutdown state)? Partially keeping the dollar bill presses running. Herein lies the problem. Cash is a government-run operation, and credit card networks are privately owned. We forget that our cash system doesn't run itself and isn't free to operate, so we take cash for granted, and undervalue or ignore the "interchange" fees. By changing their perspective, merchants might see that zero fees is unrealistic. It's an unfortunate(?) consequence of leaving the bartering days behind, and joining a money economy.
- patmcc 13y agoPeople also forget that cash isn't free - you have to protect it (with a safe/locks/doors/armoured cars), count it, process it, watch for counterfeits, have change on hand, deposit it, and so on. And it's flammable. Given a choice, there are lots of (big) businesses who would switch to debit/credit exclusively if that was an option, especially with the existence of branded credit cards. Home Depot would love nothing more than having all its customers using the HD credit card.
- codex 13y agoFor 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.
- jpmattia 13y agoMost 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 13y agoTechnically, 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 13y agoLarge 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.
- PeterisP 13y agoThe brand on your card is heavily influenced by what your bank is offering; your bank (card issuer) is offering products that benefit themselves; and they benefit from higher interchange, not lower interchange. If Visa or Mastercard would say '0% interchange' then that would make them not competitive - banks wouldn't market those cards much and wouldn't offer any rewards/points on them; merchants would benefit but customers wouldn't, since merchants wouldn't be allowed to give discounts to the 'cheap card' anyway - the rule is 'same price or you can't take our cards at all and you'll get less customers'.
- asah 13y agoSparkPay.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.
- fogonthedowns 13y agoGood question +1
- cenhyperion 13y agoPlease avoid posting comments like "+1" They don't add anything to the discussion and it's redundant after you upvote. Thanks! :)
- tzs 13y agoYou 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.
- AhtiK 13y agoBraintreepayments 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.
- scwchoi 13y agoThere 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.
- scwchoi 13y agoThere 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.
- fredsanford 13y agoJust 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.
- pravda 13y agoShort Answer: Nash equilibrium. But it is not really true that all payment processors charge that.
- Avalaxy 13y agoNot 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.
- anishkothari 13y agolink to your company's website?
- anishkothari 13y agolink to your company's website?