In the world of small business, accepting credit cards is almost non-negotiable, making credit card processing fees inevitable. However, for businesses accepting digital point-of-sale (POS) payments, those fees can pose a significant challenge, especially when trying to sustain strong profit margins.
The first step in navigating the world of credit card processing fees is to understand what they are, how they work and their impact on your business.
What are credit card processing fees?
To put it simply, credit card processing fees are charges small-business owners pay credit card networks, issuing banks, and payment processors to certify and initiate credit card transactions. For most businesses fees for credit card processing average between 1.5% to 3.5% of the total transaction. However, these fees can vary by card type, processor and the type of business you are running.
“These fees are paid to cover the cost of handling the transaction and verifying funds, and, ultimately, the risk involved of accepting payments so that the merchant doesn’t have to be concerned if a customer’s payment will go through,” says Ian Tennant, wealth advisor at Pioneer Wealth Management.
Every time a customer swipes their card to pay, the seller pays these fees to complete the transaction. According to the Merchants Payments Coalition, these fees total about $160 billion in the US and represent sellers’ “highest operating cost after labor.”
What are the types of credit processing fees?
A key part of understanding credit card processing is knowing the types of fees that are charged when accepting credit card payments. The three types of credit card fees are explained below.
Interchange
An interchange fee is a predetermined percentage of every sale paid to the card-issuing bank. This covers handling costs and, as Tennant mentioned above, the risk involved in credit card processing from fraud and bad debts. This fee varies depending on specifics like industry, transaction amount and type of card used.
Average interchange fees by credit card network
Assessment
Credit card associations, such as Visa and Mastercard, charge a negotiated percentage, which is the assessment fee. This fee, also known as a card brand fee or card network fee, helps cover the networks’ operating costs.
Average assessment fees by credit card network
Processing
The payment processor or merchant services provider charges a fee every time a transaction is processed, regardless if it’s a sale or a declined or returned transaction. This covers the cost of authorizing and settling transactions. The fees can be a fixed rate, a percentage of the transaction or a combination of the two. We’ll provide details on some of the top credit card processors below, along with some sample fees.
Other costs associated with credit processing
In addition to credit card processing fees, there are other costs to consider that come with accepting credit cards.
- Terminal or equipment fees: Small businesses can purchase or lease payment processing equipment like their point-of-sale (POS) systems. These systems have a setup cost ranging from $0 to $2,000, and there can also be a monthly cost from the payment processor that varies by business type and size.
- Payment gateway fees: To process digital transactions, businesses may need a payment gateway, which has its own set of fees that can include setup fees, transaction fees, monthly fees and batch fees. These fees can vary depending on the payment type used.
- PCI-compliance fees: Businesses are required to adhere to the Payment Card Industry Data Security Standard (PCI DSS), which is managed by the Payment Card Industry Security Standards Council (PCI SSC) to protect cardholder data securely. The average cost of this ranges widely and depends on the specifics of your business, with costs averaging around $300 per year for smaller businesses and up to $70,000 per year for large enterprises.
- Chargeback fees: If a customer opens a dispute on a transaction seeking to have payment returned to their card, the payment processor is likely to charge a fee to offset the cost of doing an investigation. These fees can average from $20 to $100 and up depending on the amount of chargebacks your business gets.
How are payment processing fees determined?
Multiple factors affect how credit card fees are determined by payment processors. A few of these include:
- Payment methods: The fees for each payment method — credit cards, debit cards, and digital transactions — can and do vary. Business owners may discover that credit cards have higher overall fees compared to debit card transactions.
- Type of transaction: The method used to complete the transaction can also impact the processing fees assessed. In-person transactions, where a customer swipes their card, tend to have lower fees in comparison to online transactions due to the increased opportunity for fraud.
- Industry and sales volume: Businesses that are part of industries with higher occurrences of chargebacks or fraud typically have higher processing fees. However, businesses that have a higher sales volume or larger purchase orders can generally negotiate lower fees with their processor.
- Processor pricing structure: Payment processors can use a variety of pricing models which can impact the overall credit card processing fee they are charging to businesses.
How processors structure pricing plans
The three main credit processor pricing structures are interchange plus, tiered and flat rate.
- Interchange-plus pricing: The most transparent of all pricing structures, interchange-plus pricing allows business owners to see exactly what they are paying for the interchange fee and the credit card processor’s fixed service charge.
- Tiered pricing: For this pricing structure there are tiers for types of transactions — qualified, mid-qualified and non-qualified — based on specific criteria such as a point-of-sale or digital transaction. Each of these tiers has its own rate (from the lowest for qualified to the highest for non-qualified), making this simple but not always transparent when it comes to the reasoning behind why a transaction falls into a certain tier.
- Flat-rate pricing: A flat-rate pricing structure is when the credit processor charges a fixed percentage rate of the transaction. While straightforward, it may not be the most cost-effective option for businesses with high-volume transactions or those with a large amount of small transactions.
How to calculate credit card processing fees
As a small-business owner, having an estimate of what you can expect to invest in credit card processing fees is important. Here are three steps to take to calculate these fees:
- Ask for a recent statement: Request a monthly statement for your merchant account. You may be able to download this directly from your online portal using your login information.
- Identify your pricing model: Your statement will have information on your business’s pricing model. If you can’t find this information, contact your merchant service representative for support.
- Calculate your effective rate: If you’re not able to find your rate easily via your statement, you can calculate your effective rate. To get this number, you’ll take the total amount of processing fees and divide it by the sales volume on your statement.
Can businesses reduce or negotiate processing fees?
For some small businesses, finding the cheapest way to accept credit cards is the priority. As Jennifer Williams-Buffalo, owner of a small counseling service in Austin, Texas, puts it: “I approach choosing a credit card processor with a ‘watch the cents and the dollars will take care of themselves’ mindset. I have routinely chosen the merchant service providers who offer the lowest percentage of service charges, even if their service isn’t the best. I will make an exception because they are .75% lower than the next lowest servicer or don’t have extra fees, and those pennies add up!”
You may find it possible to reduce or negotiate your credit card processing fees with the following strategies:
Be mindful of your monthly statement
It’s essential that small businesses keep an eye on their monthly credit card processing statements to ensure they are getting the most for their money. Reviewing these regularly can help you identify fees you want to question or negotiate or decide when it might be time to consider a different provider.
Require a minimum purchase amount
One way to offset payment processing fee costs is to consider establishing a minimum amount for a credit card purchase, as higher average transaction sizes mean an overall lower cost to process credit cards. This method is the most straightforward for your business and customers, although you can’t set a minimum of higher than $10, and all cards must be treated the same.
Promote ACH payments
If you want to offer your customers a digital payment option without the hefty fees, consider automated clearing house (ACH) payments. These are electronic bank-to-bank transfers that have lower fees (generally from 0% to 1.99%) than credit card transactions.
Reduce chargebacks and fraud
The higher your number of chargebacks, the more likely it becomes that your business will be considered high-risk, which results in higher processing fees. To reduce chargebacks, communication is key. Have clear contact channels (phone, email, social media) and a strong refund/exchange policy. Provide a clear description of the transaction and send confirmation emails or texts when a purchase is completed. Anything that strongly communicates to the customer what they purchased, when they purchased and how they purchased can help reduce chargebacks.
According to Mel Patel, business manager of Williams-Buffalo’s counseling business in Austin and responsible for negotiating processing rates, “The risk associated with refunds and chargebacks for the business is associated with the amount you’re going to pay in fees because the processor is taking a higher risk.”
Pass the fees along to your customers
Although you should be careful with this strategy and make sure you follow all state and local laws and credit card policies, some small businesses choose to pass credit card processing fees along to their customers. This can be done via a credit card surcharge, a cash discount program or a convenience fee. Not all of these strategies are legal in all jurisdictions and they have specific requirements you must follow, so research them thoroughly before implementing a program. Additionally, some customers will be put off by surcharges and extra fees.
How to choose the right credit card processor
The credit card processing company is a partner in your small business, so choosing one that aligns with your business goals is imperative.
As with all investments in your business, there are specific things to look for to ensure you’re making the best choice for your business. When it comes to choosing the right provider, keep an eye out for:
- Transparent pricing structure: Be mindful when choosing the right payment structure for your business and your unique needs and wants in a processor. Look for clear pricing with no hidden fees.
- Security and PCI-DSS compliance: Make sure the processor you choose follows PCI-DSS best practices to ensure protection for your business and the data of your customers.
- Integration with current systems: To make things more streamlined, whichever system you choose, ensure it integrates with your current systems and software.
- Accessible customer service: A key benefit to look for in a payment processor is reliable and informed customer service support.
Other helpful considerations:
- Contract terms: Payment terms, early termination fees, length of contract and flexibility are important metrics for small businesses when choosing a processing provider.
- Transaction reliability: To remain efficient and keep customers happy, the speed and reliability of your processor are essential.
- Mobile payment capacity: As the world continues to trend toward more digital wallets and mobile payment options, you’ll want an agile processor.
- Customization and scalability: It’s vital that small businesses partner with a payment processor that offers customization of features and can accommodate additional functionalities as the business grows.
- Global transaction capability: If your small business has international sales, you’ll want to seek out a processor that can support transactions in a variety of currencies and follows international payment standards and regulations.
- Fraud protection: The more protection a payment processor offers on fraud prevention and detection the better.
Top credit card processors
There are many options when it comes to choosing the right credit card processor for your business. Below are some of the best credit card processors in the market, along with their payment processing fees for in-person and online transactions.
Frequently Asked Questions (FAQs)
The price of credit card processing fees varies by type of business, industry, transactions and pricing structures. Fees generally range from 1.5% to 3.5% of the total transaction.
Yes, credit card processing fees can be tax deductible for business owners. The IRS has provided guidelines for this in Section 162 of the Internal Revenue Code, which states that tax-deductible items must be deemed “ordinary” or “necessary” for a business to write them off. For guidance specific to your business, it’s best to check with your CPA or other tax professional.
Yes, credit card surcharges can be legal. However, some states have laws prohibiting them. The maximum amount that can be charged in states that allow it is 4% of the total transaction.
The most effective way to calculate credit card processing fees is to find your effective rate. Your effective rate is the average percentage you as the business owner pays to process a credit card transaction. Understanding and knowing your effective rate will allow you to see exactly what you’re paying regardless of what pay structure you have with your processor. To find your effective rate, you divide your total sales by your total monthly fees.
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