Tobacco businesses in the market for payment processing services usually shop around for merchant account pricing before applying to a payment processor, and like in the other industries, realize that the tobacco merchant account fees can be extremely confusing and even more difficult to compare between payment processors. As we take a look into the various rates and fees that are part of a merchant account, we will try to help clarify the complicated and puzzling industry of tobacco merchant accounts and the fees surrounding this financial service.
Many of the common fees that businesses incur when applying for a merchant account are common to all types of payment processing services, while some of the fees are specific to a payment processor while other fees are generally incurred by the merchant. These fees include:
- Application and Set Up Fees
- Transaction Fees
- Credit Card Processing Fees
- Gateway Fees
- Monthly and Annual Fees
- Other Fees
What are the common Tobacco Merchant Account Fees?
The fees and costs that come from a tobacco merchant account are usually consistent between different payment processors; with the possibility of slight variations as to how billing is computed or special processor promotions that might eliminate certain fees. The most common merchant account fees are:
- Monthly Account Maintenance Fees
- Annual PCI Compliance Fees
- Monthly Minimum Fees
- Application Fees
- Set Up Fees
Banks and financial institutions charge monthly fees for their tobacco merchant accounts, while these fees are slightly higher per month than a general e-commerce store’s maintenance fee, they normally fall between $15-$25 per month and include a paper statement being sent out, online portal access to manage your merchant account online and customer support for any questions concerning transactions or other concerns. Unlike most banks and financial institutions that offer discounted fees for combined banking services, tobacco merchants are rarely offered any type of discounts through the bank due to the high-risk nature of the business and the limited availability of tobacco merchant accounts.
Since around 2004 when the largest payment card brands including Visa, MasterCard, Discover, American Express and JCB came together and decided to create a uniform standard, called PCI-DSS or Payment Card Industry Data Security Standard for merchants and 3rd party payment operators to follow for the acceptance and handling of customer card account information. Similar to merchant account monthly maintenance fees, many general e-commerce merchants have their PCI Compliance covered by their payment processor while higher risk merchants, including most tobacco businesses, are assessed either a yearly compliance fee or pay a monthly fee for their compliance.
Many merchant accounts, both general e-commerce and high risk, have a minimum monthly fee to ensure that the merchant account generates profits for the bank or financial institution. The minimum monthly fee is a set cost per month that the business’s merchant account needs to generate in transactions fees or risks being charged the difference of total transaction fees and the monthly fee. Most monthly minimum tobacco merchant account fees are in the $20-$40 range, with many high-risk merchant accounts surpassing that mark relatively quickly due to the higher costs to process transactions.
Rarely seen with domestic merchant accounts, application fees and set up fees are generally reserved for offshore merchant accounts and other payment services. Unlike banks in the United States, the costs for payment processors can be high for each Merchant ID (MID) number that is used by the banks, resulting in these fees for offshore merchants that are frequently over $1000 per account. Many of these same accounts also charge merchants set up fees to activate the MID or the payment gateway account, making the startup costs for offshore merchants steep when compared to a domestic merchant account.
Another practice that is common with offshore merchant accounts and some domestic high-risk accounts, is the use of reserves by the payment processors for their higher risk clients. Most offshore payment processors use a rolling reserve system that holds 10% of the settlement funds for 6 months (180 days), then dispersing those funds on the 7th month and so on. Domestically, when a merchant is presented with a reserve, it is generally a set amount taken over a number of payment periods and held for the life of the merchant account or until the risk that triggered the reserve is gone.
Most tobacco merchant account fees are non-negotiable due to the nature of the business and the guidelines set forth by the payment processors, but merchants are always encouraged to speak to their payment services providers to see if any fees can be reduced or even eliminated from their merchant agreement.
What are the Tobacco Credit Card Processing Fees?
The most significant tobacco merchant accounts fees are the costs derived from the discount rate and account transactions, commonly referred together as the credit card processing fees. These fees can vary dramatically between different types of merchant accounts and the various payment processors, with some merchants charging below 10 basis points to some accounts being accessed fees over 5%, it can be the most complicated and confusing part of the merchant account process.
Credit card processing rates can be determined by 1 of 3 different pricing models that are commonly used by payment processors today; interchange pricing tiered pricing or flat fee pricing. Historically, tiered pricing was the most commonly used pricing model for merchants but has slowly been phased out by interchange plus and flat fee pricing which has become increasing in favor of both merchant services companies and merchants alike.
The most prevalent method of pricing for years was the tiered model, which established typically 3 different levels, or tiers, of credit card processing discount rates that all types of cards were processed through. Depending on the type of card, cost of the card and certain acceptance factors, the cards would either be classified as qualified, mid-qualified or non-qualified with rates fluctuating nearly 4% between qualified and non-qualified cards. Though the qualified rate was usually a fantastic price, cards that did not “qualify” for that tier were downgraded to much more costly levels.
Interchange plus pricing is a method of billing that allows for the true cost of the payment card to be realized by the merchant and allows for the payment processor to tack on a flat fee on top of the true card price. With minimal fees and a transparent base price, this model was usually reserved for larger merchants processing significant volume per month, but it has become increasingly popular as an easy way for both merchants and merchant services companies to manage the payment processing fees.
With the advent of PayPal and other online payment companies, a recent trend has been the use of flat fee pricing, charging nearly 3% for every transaction and no monthly fees have gained in popularity with merchants and payment processors alike. While in theory, the thought of never paying over 3% in tobacco merchant account fees for an expensive credit card might sound appealing, this method allows for significant price gouging of debit card transactions, a form a payment that accounts for about half of all payment card transactions today. The flat fee price model is ideal for smaller, part-time businesses as it charges other merchants too much in excessive fees.
Merchants that are using high-risk merchant accounts located outside the USA are almost always set up using a flat fee pricing model, unlike with the domestic flat fee services charging roughly 3%, offshore merchant accounts can go as high or above 10% per transaction.
During the course of shopping around for a merchant services provider that can offer reasonable tobacco merchant account fees, its good for merchants to understand the different types of credit card processing pricing methods; how they work and what will be the best fit for their business model. For many tobacco businesses that are generating good sales volumes, processing payments through an interchange plus pricing model will be the most cost-effective way.
Explain Per Occurrence Tobacco Merchant Account Fees?
Another set of costs associated with payment processing are the per occurrence charges, fees that are laid out on the pricing agreement forms that are generally much more costly than the transaction or monthly fees. Types of per occurrence fees include:
- Batch Header Fees
- Retrieval Fees
- Chargeback Fees
- Wireless Fees
- Wiring Fees
At the conclusion of the business day or at a predetermined time by the credit card terminal or payment gateway, the authorized transactions from the day are sent to the merchant acquiring bank for settlement by the card holder’s banks. This “batch” can either be manually sent out by the merchant or the credit card terminal can be automatically programmed to send out the daily batch. Some payment processors do not charge for the daily transaction while others might charge less than $0.50 to finalize all the day’s sales.
One of the more costlier transactions on the pricing agreement sheet is a retrieval fee charged by the merchant acquiring bank, generally costing over $10 per occurrence. A retrieval is initiated by the customer’s card issuing bank after a customer inquires about a charge, at that time the card issuing bank requests to see a copy of the transaction to confirm the information provided to inform the customer as to the charge. If the retrieval is then escalated to a chargeback, the retrieval fee is refunded once the chargeback fee is accessed.
Usually the most expensive item on the pricing agreement form, a chargeback can cost a merchant from anywhere starting at $25 per occurrence while businesses with offshore merchant accounts can be charged well over $100 per occurrence if chargeback rates become a problem. After a retrieval has been completed and if the customer and customer’s bank do not feel the product or services purchased were fulfilled, a chargeback can return a portion or the full amount of the transaction to the customer.
Some merchants outside of the business at trade shows or events occasionally opt to use a wireless terminal other than their mobile phone to process remote credit card transactions. Access to a mobile credit card terminal along with the mobile service can incur fees upwards of $20/month, but some payment gateways have also developed their own products to help merchants maintain lower costs while still processing payments through their tobacco merchant account.
Merchants utilizing the services of an offshore merchant account will have wiring fees for their settlements to their business bank accounts, though merchants using domestic merchant accounts are generally not charged a fee for their settlements. Typical of any bank wires, fees can end up costing merchants over $20 per occurrence, with most settlements occur once or twice per week.
What are the Tobacco Payment Gateway Fees?
Online businesses that are processing sales through a website or over the phone using a virtual terminal will be using the services of a payment gateway. The tobacco merchant account fees usually do not affect the costs of the payment gateway since it is usually managed by an outside company even though there are various fees and monthly fees associated with its services.
Most payments gateways that are managed by companies other than the merchant acquiring bank charge the following fees:
- Monthly Maintenance Fee
- Transaction Fees
- Other Services
Similar to the monthly merchant account fees charged by the merchant acquiring banks to their clients, the payment gateways generally charge merchants per month for use of their gateway services, providing fully PCI-DSS Compliant services that eliminate merchant liability while keeping merchant in full compliance with the Payment Card Industry. With a number of different payment gateways operating around the world, monthly fees can vary from almost nothing for gateways managed by the acquiring bank upwards to an average $10-$25 per month for payment gateways managed by outside companies.
Another fee generally charged by payment gateways is the fee for every transaction processed through the payment application, including authorizations, AVS, settlement requests, and batches. This fee can vary greatly depending on if the merchant acquiring bank is managing transactions, where transaction fees might be rolled into 1 cost, to upwards of $0.20 per transaction by payment gateways managed by an outside organization.
Most payment gateways offer add-on services that can be used at the discretion of the merchant for such services as integration into accounting software, remote storage of payment card account information or additional fraud scrubbing services. These services can help merchants lower costs or save time, but it all depends on the wants and needs of the merchant and their business since they do increase the total tobacco merchant account fees.
The Other Tobacco Merchant Account Fees
Unlike most e-commerce businesses that can be approved rather quickly for a merchant account, online tobacco stores need additional documentation, registration and website functionality for approval with a payment processor. These additional requirements will cost tobacco merchants more money than merchant accounts used in other online industries and also makes the application process much more difficult.
As part of the MasterCard high-risk guidelines, merchant acquirers are required to confirm that the tobacco merchants they are underwriting and processing transactions for are in full compliance with all Federal and local laws regarding the sale of tobacco in a card not present environment. The MasterCard guideline states that for compliance in the USA, merchants will be accessed a $500 per year fee by their merchant acquirer once they check that the business is in compliance.
Another request of MasterCard that can become expensive for tobacco merchants during the underwriting process is the requirement of a compliance letter, drafted by either an attorney or a recognized consultant in the payment processing industry, that can confirm the business and e-commerce website are operating within the law. This letter is generally only needed for underwriting, but as laws and requirements change, these letters have been requested for merchants already processing tobacco products.
The age verification software requirement for e-commerce tobacco websites has remained relatively affordable since the payment card networks and merchant acquiring banks accepting tobacco products have not enforced strict guidelines for this verification. As of now, the requirement is either an age verification popup or a checkbox that needs to be marked confirming the customer is over 18 before either the website can be access or the shopping cart transaction finalized.
How to Lower your Tobacco Merchant Account Fees
Merchants in the tobacco industry are always suggested to shop around the various tobacco payment service providers to check credit card processing rates and the merchant account fees. As a discount tobacco merchant account provider, Tobacco Merchant Services has always aimed to provide the lowest cost tobacco merchant account fees while providing the best services.
Tobacco businesses, with either question about their existing tobacco merchant account or for general guidance and questions about our merchant services, are encouraged to call one of our friendly tobacco payment processing professionals for more information or to get started processing credit card today.