April 28th, 2006 by Jamie Estep
Do you pay for refunding customers?
Filed in: Merchant Accounts | 3 comments
Having a good payment processor is a paramount requirement to having your merchant account run efficiently and as low cost as possible.
The reason I say this, is that there are a number of payment processing companies that charge businesses for processing a transaction and for refunding a transaction. To me this sounds absolutely absurd. A business has to pay to process a credit card. Lets just say it costs 2% to process that card. Sometimes customers make returns. Its just a simple fact of business. Now, when you go and refund your customer’s card, its bad enough that the original 2% is not refunded to you, but to pay an additional 2% to send the money back to the customer is insane.
I’m not referring to a transaction fee for this. A transaction fee has to be charged on transactions in either direction. Transaction fees are fees for accessing processing networks, they are charged both directions because the processing networks are queried on charges and returns. I’m referring to processing fees, that % per transaction being charged both directions.
This is bad service plain and simple.
We refer to these plans as Net, Gross and Gross Plus.
Net – Fees for interchange assessments are returned when the merchant issues a refund. As stated, this does not include the transaction fees but only interchange rates.
Gross – Interchange fees not returned.
Gross Plus – Interchange fees charged on credit transactions.
The issuing bank and associations return all fees related to refunded transactions to the merchant processor. Merchants should choose to work with a merchant that passes on these credits. Always assure you are priced on net revenue!
The Gross Plus is what I’m referring to for being charged both directions.
I think the majority of providers use the Gross type plan. I have rarely seen a Net plan for the average small business.
Gross or Gross Plus pricing is theft – plain and simple.
Keep in mind that a merchant processor only receives 10% to 20% of what a merchant pays for bankcard processing. The majority goes directly to MasterCard and Visa who have exact standard rates that they charge uniformly to every merchant processor. The only differences a merchant will ever see is in the merchant processor’s rate structure.
With Gross pricing, the merchant processor receives and keeps the full amount that was paid for on a refunded transaction. If they usually receive 10% to 20% of fees per transaction, they will receive 5X to 10X more than that for a refunded transaction. With Gross Plus they will receive double that amount because they are charging for a phantom transaction – 10X to 20X!
Take a look at this (very) simple comparison using a simple interchange rate without other factors.
Merchant Monthly Volume: $10,000.00
Merchant Average Ticket: $100.00
Refunded Transactions: $300.00
Net Pricing Rate: 2.00%
Fees: $194.00
Gross Pricing Rate: 2.00%
Fees: $200.00
Gross Plus Pricing Rate: 2.00%
Fees: $206.00
There are many other factors to consider like transaction fees, monthly fees, other fees, what the actual competitive rate would be, etc., but the bottom line is that most business owners will just jump on the lowest rate even though it may cost them more. The more refunds there are the wider this difference will be.
I am in merchant processing sales and I would say that 10% of merchant processors charge net, 10% charge gross plus and the remainder charge plain gross. I discuss our net pricing structure regularly and you’d be surprised how hard it is to explain this to merchants who are more interested in the “discount” rate than anything else.