Authorization Fees Explained

Definition: In payment processing, the amount charged to a merchant account each time communication occurs with bank card network. (Detailed explanation below)…

Does this picture look familiar? Merchant statements can be confusing and a multitude of varying fees and charges make analyzing them a frustrating experience. Authorization fees are common to all merchants from the large established restaurant chain to the brand new ecommerce website. The material on this site will help explain what Authorization fees are, why they exist and how to minimize them.

 

Authorization Fees are commonly referred to as Transaction Fees

Authorization fees are sometimes called Transaction or Network fees and although semantically correct, in the context of card processing there are actually separate per item transaction and network access fees to be aware of. Those fees however are a topic for another article, for now let us understand what authorization fees are and why they happen.

 

Authorization fee from Wikipedia…

“The Authorization fee (actually an authorization request fee) is charged each time a transaction is sent to the card-issuing bank to be authorized. The fee applies whether or not the request is approved. Note this is not the same as Transaction fee or Per Item fee.”

 

How to Apply to Every Day Business Transactions

What these means is that every time you use your point of sale (POS) system, credit card terminal or other card processing software to run a credit card you are charged an auth fee. This fee is charged regardless if the transaction is approved or declined. In addition, when an authorization in initiated a response code from the issuing bank is returned to the merchant. This is usually a 6 or 7 digit code and is commonly obscure to the merchant as it is recorded in either the POS, terminal or software. This code is also printed on the credit card receipt and is proof of authorization that protects the merchant in the case of a chargeback dispute.

Along with the basic auth fee there are two types of special authorization fees to be aware of. These are the Voice Authorization and Misuse of Authorization fees. Both of these auth fees typically happen in exclusive situations and can be unique to certain types of businesses.

– To learn about voice authorizations please visit Voice Authorization

– To learn about misuse of authorization please visit Misuse of Authorization

 

How to Get a Lower Authorization Fee

Why are Authorization Fees Necessary?

Authorizations are designed for security and to protect card holders, merchants and financial institutions. When an authorization occurs the issuing bank is checking to ensure the card has not been stolen, that the purchase is within the cards max limit and daily spending limits along with other security information. This check or authorization happens within seconds and can transpire via telephone (modem) or internet (IP) connection. There are literally thousands of employees, departments and infrastructure across multiple financial institutions along with Visa and MasterCard that support this security check along with other fraud concerns.

So part of the authorization fee goes to pay for cost of security. Part of the authorization also goes to the Independent Sales Organization (ISO) or sales agent for service and commission of account. Of course part of the authorization fee also generates profit for the both the financial institution and sales originations involved. How much profit though certainly depends on how many transaction the business processes. There is a big difference in authorization fee profit between a restaurant and a high end electronics wholesaler that only makes a dozen or so sales a month. Although the credit card gross volume could be similar say $50K, the number of transactions it takes to get there would be much different (3,000 vs 30) and thus the number of authorizations will varying widely between different types of businesses.

 

Low Fees Come from both Negotiation and Processing Volume

When looking to lower your authorization fee either with your existing merchant services provider or when applying for a new account, be sure to understand how many transactions your business does on a monthly basis. You only need to understand it in rough categories such as, around 500 or three thousand plus and so on. Typically auth fees range from 5 cents to 25 cents so when you understand roughly how many transactions your business does, you can apply a simple multiplication to understand the gross revenue generated on a monthly basis.

Knowing this will help you negotiate with your merchant services provider. Also understand that many organization are limited on how low they can go, meaning they have a floor or “buy rate” that restricts them from charging anything less than say 8 cents. Also understand that these sales organizations make money that support their cost of doing business, etc., so charging their floor or doing the service for free does not make sense just as any business would not give their product or service away for free.

That being said, some organizations or sales representatives simply do not have the leverage or the willingness to provide the type of pricing that your business deserves based on transaction volumes.