Payments

Exposing fee inflation: Understanding your merchant statements and the red flags to avoid

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October 4, 2023 by Michael Seaman — Founder & CEO, Swipesum

The restaurant industry is a delicate business where every incoming dollar counts and merchant statements can often be an unintended culprit for necrotic revenue loss.

Restaurants are consistently burdened with hidden fees and unnecessarily high rates from their payment processors. This widespread issue is not only affecting restaurant owners but their customers as well. Over the last few months, restaurant chains across America have spoken out about intense fee increases and their effect on their customers. Restaurateurs are fed up and tired of taking the blame for fees they can't control, let alone support.

To compensate for lost revenue and increased inflation, many businesses are adding surcharges on top of already high bills. This tactic was widely used and accepted during the pandemic because it enabled restaurants to cover expenses such as delivery fees, supply shortage costs, employee healthcare and personal protection equipment. However, nearly four years later, surcharges and elevated rates have yet to decline, heightening tensions throughout the industry for customers and restaurateurs alike.

Unfortunately, these fees have become a necessary evil for many operators, but how necessary are they? Intricate, complex statements can easily confuse CFOs and accountants because they are simply made to be that way. The first step to recognizing unnecessary or hidden merchant processing fees is to understand the ins and outs of a merchant statement.

So what makes a merchant statement so difficult to decipher? The sheer volume of transaction notes and monthly billing statements can easily overwhelm an accountant, and every payment processor has its own pricing structure. The three most common pricing structures include flat rate, tiered pricing, and interchange plus, and not all unique fee structures look the same from business to business.

Flat rates

One of the simplest pricing structures, flat rate pricing, gives merchants a "flat" percentage with a transaction fee and no other additional fees. While simple and easy to understand, this structure may not be the best solution for all businesses. Merchants who are charged based on the flat-rate pricing model sometimes end up paying more per transaction than tiered pricing because the fee is non-negotiable. There are, however, some hidden advantages to this model. Agreeing to a flat rate pricing model can eliminate businesses from contracting extra fees.

Tiered pricing

Tiered pricing, otherwise known as "bundled pricing," offers merchants fully-qualified, mid-qualified and non-qualified rates. This three-tiered pricing structure provides a charge per swipe based on a percentage. While the tiered pricing model is often described as the better structure to flat rate pricing, its usage depends on the business's specific needs and the overall operational framework. Tiered pricing can be an expensive option because it allows room for additional surcharge fees inputted by the payment processor.

Interchange Plus

With this structure, merchants pay the hard cost associated with each transaction, in addition to an agreed-upon markup fee from their credit card and payment processing provider. Interchange plus pricing is referred to as "cost-plus," "pass-through," or "wholesale pricing." This structure is the most transparent pricing model providing more room for negotiation and the opportunity to create the price best fit for the business at hand.

Processing red flags and swipe fees

According to the Nilson Report, swipe fees have more than doubled over the past decade, skyrocketing by 16.7 percent in the last year alone. However, this massive increase in the fees associated with credit and debit card transactions is not set in stone. Restaurateurs are often unaware of the different types of fees that can be negotiated with their merchant services provider.

Here are the most common (and often negotiable) fees on merchant statements:

Credit card transaction fees
- Depending on the merchant services provider's pricing structure, credit card transaction fees can be completely negotiable. Determining whether a flat rate, tiered pricing or interchange plus structure is the right fit is critical to understanding how these fees will impact revenue.
Annual/monthly fees
- Annual or monthly fees are a simple way for payment processors to cover their costs and are often an indication that they are trying to ensure their own profit.
Terminal fees (Processing equipment)
- Brick-and-mortar stores are routinely charged with these fees through their credit card terminals. For online businesses, these fees will appear as "gateway fees." A merchant statement should never include both costs.

Understanding these fees and recognizing the red flags is imperative to ending the vicious cycle of overcharging within the restaurant industry. Restaurants will continue to be an integral part of the American economy, but unless restaurateurs overcome the barriers associated with their merchant services, unnecessarily high rates will continue to persist. By analyzing and auditing their merchant statements regularly and clearly outlining the pain points within them, businesses can save precious revenue from being washed down the drain.

Financial Management Payments

About Michael Seaman

Michael Seaman is the co-founder and CEO of Swipesum, a comprehensive payment processing and merchant services consultancy delivering innovative auditing solutions to businesses nationwide. Seaman founded Swipesum in 2016 with his brother, Stephen, to serve as Chief Payments Officer for businesses nationwide, combining industry knowledge, AI and proprietary software to create a transparent payments strategy that optimizes payment processing fees.

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