Authorization Fees – What are they?

Your Credit Card Processing facility will involve various fees and charges and an authorization fee (actually called an authorization request fee) is one of them. Each time you submit a customer’s card details to your payment gateway you will incur an authorization fee, regardless of the outcome of the transaction: an authorization fee is the charge you pay simply for communicating with your payment gateway. A point of sale transaction will also incur an authorization fee when the point of sale device dials the bank.

Authorization fees are just one of a long list of expenses you’re going to pay for the benefit of taking online payments. Unfortunately you have little choice but there is method in the madness, to some degree. The process of charging your customer’s credit card account and having the funds paid into your account involves numerous processes between a multitude of intermediaries and, truth be told, your bank does need to chip in to pay for a lot of these processes. There’s some room for argument though as to which of these costs and charges really reflect an underlying cost and if they do, to what extent. For one, the authorization you pay for each transaction is likely to be around, say, $0.25 and it is questionable whether it costs anywhere near that amount to send a message over an electronic network.

However the authorization request needs to go from your website server to the payment gateway, from the payment gateway to the issuing bank (the cardholder’s bank) and follow the same route back whilst bouncing around each organization’s internal systems and encountering strict security measures along the way. Eventually once everyone had their say in the cost of the matter your payment gateway has to pay up, which makes for a substantial part of that $0.25, the rest being the a (generous) markup.
There are other fees and charges across the board but the biggest charge is likely to be the discount rate. A very substantial part of that fee goes towards fattening the profits of the large credit card organizations including Visa, MasterCard and American Express. Your bank and the cardholder’s bank will take a large bite of it as well, purely to generate profits but there are also some underlying costs.

The discount rate on a transaction varies depending on the nature of the transaction. The difference between the higher discount rate and the lower discount rate is mostly in relation to the perceived risk of the transaction. The difference can be as much as an additional 2% of the transaction value and the organizations involved in the transaction use this money to cover claims from cardholders (chargebacks). You may be out of business by the time the chargeback occurs or the card may have been use fraudulently but in both cases your bank or the card organization will need to refund the money out of their own pocket.

By the time you’ve added your authorization fee to the discount rate you might be thinking it is barely worth accepting cards for online sales. Remember however that your competitors simply incorporate the transaction fees into the prices they charge their customers and you’re free to do the same.

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