In brief: Risk Assessment fees are appearing on merchant credit card processing statements more regularly these days. In fact, charging a risk assessment fee has become a routine practice of many large credit card processing companies. Depending on your business, these fees may not be warranted, and by paying them, you are simply adding profit to your credit card processor. In this article, we’ll discuss what these fees are and whether your business should have to pay them.
Take a look at your most recent credit card processing statement. You may be surprised to find a Risk Assessment fee has been added. The amount of the fee is typically based on the amount of the credit card volume you are pumping through your business. I’ve seen fees range from .05 percent all the way up to 5 percent of the total credit card volume. As you can imagine, these fees can add up to a significant amount each year.
In theory, a risk assessment fee is added to merchants that carry a greater risk for customer chargebacks. The rationale is that businesses with a lot of advance sales, for example, tend to have a higher risk for chargebacks. The credit card processor is assuming this risk so it’s reasonable to charge an added fee to cover that risk.
Problem one is that the fee is not always limited to higher risk merchants. It is often added to all merchants in a credit card processor’s portfolio. Problem two is that these fees can be astronomical and vary by processor. Recently I was talking to a retail business owner who was paying about $70,000 in risk assessment fees every year. Yes, you read that right — $70,00, and his business is not even in a higher risk category. Side note: he dumped that credit card processor and is moving to Wind River.
Merchants that are in industries with a greater propensity for fraud and chargebacks are deemed higher risk. Examples are businesses that offer custom-made products, travel and accommodations, excursion services, memberships, and those that sell digital products and services. In fact, 75 percent of ecommerce businesses reported an increase in fraud attempts over the last couple of years.
Let’s talk about that ecommerce stat for a moment. The increase in fraud attempts can be traced back to the increase in online purchasing – particularly since the pandemic. These are card-not-present transactions, and as such, they pose a greater risk for fraud. Merchants are charged a higher interchange fee when a physical card is not presented at the point of purchase.
Higher interchange rates for riskier transactions makes sense. For example, it costs a lot more to insure an 18 year old driver with limited experience than it does a 30 year old driver with years of experience. This is why 18 year olds pay higher premiums. Seems fair. That said, the 30 year old should not be charged a risk fee to help cover the added risk that 18 year old drivers bring to the insurance company. That sounds a bit greedy. The same principle applies with credit card processing. Not everyone should have to pay a risk assessment fee.
If you find a Risk Assessment fee on your credit card processing statement, and you’re not okay with that, it may be time for a change. Changing processors is less complicated than you may think. There are payment providers out there, such as Wind River, that do not just arbitrarily lob a risk assessment fee onto their merchant base. It’s worth it to explore an alternative. You may not be paying over $70,000 in risk assessment fee like the retailer I mentioned earlier, but any amount is better off in your pocket than your credit card processor’s.