September 2023 Update: While interest rates are not expected to increase when the Federal Reserve meets this month, the Fed has already raised them four times in 2023. Interest rates remain at a 22-year high of 5.25-5.5%. These high rates add to the costs of credit card processors that use short term loans to pay interchange to the card brands on behalf of their merchant customers. As a result, merchants are likely to see more added fees hitting their credit card processing statements.
Original article follows below.
In brief: The continued hikes in interest rates by the Federal Reserve raises the cost structure of payment processors. In turn, these cost increases are often passed along to their merchant customers in the form of added fees or rate increases. The purpose of this article is to: 1) make merchants aware of these increases, 2) that these increases vary greatly from processor to processor, and 3) how to tell if your increases are excessive.
It’s hard to imagine, but federal interest rates were close to zero at the start of 2022. In response to inflation, the Federal Reserve hiked interest rates by 25 basis points in March. And they have been steadily rising ever since. After seven Federal Reserve interest rate increases for the year, 2022 closed at 4.25-4.5 percent. That’s quite a change from zero.
If you Google “What happens when the Feds raise interest rates,” the results likely will reference the impact on interest earned on specific types of accounts and interest charged for things like mortgages and other loans. It is the increase in loan interest that has a ripple-effect on merchants and their costs for payment processing.
In general, merchants receive deposits for their credit and debit card sales within a couple of days of the transaction. However, interchange and merchant processing fees are not collected until after month-end. In the meantime, the payment processor pays the interchange fees to the credit card companies on behalf of the merchant. This makes the merchant’s back end reconciliation much easier.
The practice of depositing the sales shortly after they occur and not collecting interchange and processing fees until later essentially loans the merchant their processing fees. Often, the payment processor uses short term bank loans to fund this action. When the Federal Reserve hikes interest rates, the cost of those short term loans goes up – costing the payment processor more money.
Processors can either choose to absorb that additional cost or pass it along to their merchants. The latter is the more common approach. After all, rises in manufacturing costs, distribution costs, and labor costs result in higher wholesale prices. Higher wholesale prices result in higher consumer prices. It’s just how business works. It’s a justifiable practice. Justifiable, only within reason, though.
There are no rules for recouping the outlay of additional funds resulting from interest rate hikes. These added costs can be passed to merchants reasonably or at a significant mark-up.
It’s one thing for a processor to share the burden of added costs with its merchant customers. It’s a whole other thing to use interest rate increases as an excuse for fleecing customers and padding profit margin.
So how can you tell if you are being taken advantage of with excessive fees? A good starting point is to look at your relationship with your payment processor.
Do you feel your processor is transparent with costs today? If their prices go up, do they communicate that to you or do they try to sneak them in? It comes down to trust. Do you trust your relationship with your payment provider?
Related article: Why Trust is the Top Must-Have
The second place to look is on your monthly processing statement. Processors may be recouping the additional expense by adding a simple line item to your statement. Something to the effect of “monthly interest.” Or it may be an increase in basis points on your processing fees. Or it could be both.
We always recommend reviewing your processing statement every month to check for any kind of statement message about interest rate hikes or line items you don’t recognize. A good payment partner will alert you prior to introducing a new fee. They will also tell you why it’s being imposed.
I realize reviewing your statement may be difficult as many processing statements are hard to understand. If you can’t decipher yours, feel free to reach out to me directly. I can arrange a complimentary objective review of your statement to check for added fees, clarify what they mean, and let you know if they’re reasonable or excessive.
Lastly, if your processor is adding or increasing fees, pay close attention to the frequency. This can determine whether your processor is covering costs or adding to their bottom line. As previously mentioned, fee increases in this economic landscape may be necessary, but that doesn’t mean they need to be often. Rate creeping, or slowly and consistently increasing merchant costs over a long period of time, is one method processors use to significantly increase costs with a gradual impact to merchants.
In all transparency, while Wind River has not adjusted our fees to offset the higher interest we are paying on behalf of our customers, it is something we continue to monitor. We pride ourselves on complete price transparency and always notify merchants when adjustments are necessary. We are here to be a partner, not a predator with fees.
Many businesses take purchases from customers in advance of delivering goods or services. Travel, hospitality, entertainment tickets, and subscription-based products are just a few examples of advance sales. As the economy tightens, these sales are deemed riskier by the credit card industry. Therefore, many processors are starting to add special fees to help cover the added risk.
While these fees are not directly related to the Federal Reserve interest rate hikes, they are related to the economy, and you should be aware of them.
Related topic: View our latest EnLightning Round webinar – How to Cut Your Credit Card Processing Interchange Fees
As noted earlier, fees vary greatly among payment processors. If you feel yours are excessive, give your processor a call and ask them to walk you through the math. If you still don’t like what you’re hearing, it may be time to consider other processor options. When talking to other processors though, make sure they are fully transparent about their fees.
In summary, while you likely can’t avoid the impact of the current economy and interest rate hikes, you can make sure the related fees are reasonable. Check your statements regularly to keep an eye on those added costs. If they’re consistently changing or increasing, it may be time for a change. The bottom line of your business is too important to pad someone else’s profit margin.