Friday, December 2, 2011

A Guide to Bank Transactional Fees (Direct and Indirect)

In general, transactional fees fall into two categories-those that are charged to the end customer or the consumer and those that are charged to an organisation or merchant, when it wants to allow payment services to its customers.

Direct Customer fees

Transactional fees typically apply only to the direct customers or account holders of a given bank (as the bank has no direct relationship with other consumers) and even then, only when a customer has gone beyond what is deemed to be the core commercial relationship that the bank is prepared to offer at no direct cost. Hence, fees are typically charged to customers when they have overdrawn an account, written a cheque in circumstances where they are insufficient funds to cover it, or perhaps used an automated teller machine or ATM in another bank's network. However, even here, a bank will allow many transactions without fees, if a customer maintains a positive balance (sometimes with a minimum threshold) or commits to regular income being paid in or saved every month. This is because banks worry a lot about customer "churn" and know that fees can often be a "switching factor" if they become too much of an irritant to an account holder (especially now that opening another account with a different bank can be done online very easily in many cases). The simple logic here is that it is more cost effective and profitable to keep good customers who transact regularly with a bank (and do so for the most part in the black) for what might be many years, than to risk losing them completely over a fair but nonetheless irritating fee that "pushes them over the edge". But even though this results in what might be seen as a better deal for the end consumer, banks still have to find ways to recover their internal transactional costs and overhead in some way. For some transactions, such as bank cheques, wire transfers and transactions involving foreign exchange a customer will be relatively happy to pay (as these are often "one-off" or special instances). However, these fees will not always cover the costs involved completely and it therefore often falls to the other major category to provide the fees that can cover costs and the bank's overhead-the merchant.

Merchant fees

Although every individual commercial merchant relationship will be different, depending on a given organisation's size, type of business, types of services offered etc, banks will typically charge a very wide variety of transactional fees to most merchants to provide a payment service.

The most obvious fees charged to merchants (because they have been around for a long time) are for cash and cheque handling. In both cases, these payment transactions are expensive for any financial institution because they involve human intervention (a teller in a branch perhaps or a reconciliation and settlement clerk in a head office) and in both cases, considerable human data entry (sometimes carried out multiple times) is required. As with an end consumer, a merchant may be able to bring about lower fees by maintaining a positive balance or "float". However, it is rare for any merchant these days to be able to operate without an overdraft, at least some of the time, so fees in this area need to be monitored carefully by every merchant.

Outside cash and cheque payments, the majority of transactional fees that are charged by a merchant bank are credit and debit card use fees. Cards are typically issued to a consumer without charge, and with no transaction fees when they are paid off regularly each month. However, a merchant will be charged for every transaction that a customer makes with a credit and/or debit card and this may be a very complex affair. In some cases, the fee charged will be a single "aggregate rate" for say credit card use, such as 2.5% of the transaction size. Hence for a 100 consumer purchase, a charge of 2.50 will be made to a merchant. However, this rate may vary from one transaction to another and this is because the aggregate rate is made up of many sub fees that every merchant needs to know about. Here are just some of the fee types that are typically charged:

The Discount Fee Rate

Credit and debit card companies (Visa and MasterCard being by far the largest of these) have what is called "interchange" rates. These can range in price- so in order to make it easier, the merchant banks often have sub-categories. These include rates such as the Qualified Discount Rate - a pre-set or agreed percentage is paid for each pound charged or the Non-Qualified Rate - a fee added to the qualified discount rate in certain transactions. For example, this may occur if a merchant does not use an address verification service (AVS) when they manually enter or take a transaction.

Per Transaction Fees

This is a specific flat rate (such as 5 or 10 pence) that is paid on every sale processed through the particular credit card processor. Sometimes the transaction fee is called the interchange fee, authorisation fee, or per inquiry fee.

Address Verification Service (AVS) fees

Merchant banks charge a small fee for the validation service to ensure that the customer billing address provided in say an online checkout process matches the card issuing bank's records. Not using this service can sometimes result in charges on the processing of the card for that sale.

Chargeback/Retrieval Fees

When a customer requests a refund (or the customer's credit card issuer requests a refund), merchant banks typically charge a "chargeback" fee. This can typically range from

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