Credit card usage shows no signs of slowing down anytime soon. Research shows that 83% of Americans have at least one credit card and are likely to use them to make purchases 40% of the time.
Convenient as they are for consumers, credit card processing fees, however, can eat away a large part of a small business’ revenue. Traditional providers charge unnecessarily high processing fees for things that don’t actually cost them any money. These are intended to make a larger profit, banking on the fact that the business owner won’t question the charge among all of the confusing line items.
All this to say, small business owners need to find the cheapest credit card processing rates while ensuring security and providing convenience to customers.
There are three main ways payment processing fees can be broken up–required, recurring, and one-off. Here is a breakdown of what to expect on your statement, and how to avoid paying more than you need to for something as essential as payment processing.
Understanding Credit Card Processing Fees
There are a number of fees that merchants have to pay to accept credit cards which are collectively referred to as credit card processing fees. Different credit card processing companies have different rates and fees, so take the time to understand them and shop around when choosing a merchant services provider.
Transactional credit card processing fees (and their role in helping you get the lowest credit card processing fees)
Transaction fees are associated with each transaction you run for your business. They are broken down into interchange costs and cents per transaction. These come directly from the credit card companies and are considered the “pay-to-play” cost for accepting credit cards at your business. Interchange fees are non-negotiable and every company must pay them regardless of their credit card processing services provider.
Interchange rates vary depending on the type of credit card you are accepting. The more expensive it is for the credit card company to maintain the card with things like rewards, cashback, and other perks, the more costly the interchange. This means that debit cards typically charge the lowest interchange rate and business credit cards are the most expensive.
An assessment fee is a very small charge on your monthly sales. For example, Visa charges an assessment fee of 0.11% and Mastercard charges 0.095% of the transaction cost. These credit card networks set different flat-rate fees on the overall monthly sales paid using credit and debit cards of their brand. This fee goes directly to the card networks and will often appear in a merchant’s credit card bill as a separate line item called “Assessments” or “Dues.”
Apart from interchange and assessment fees, some credit card processors may charge a markup fee and this can vary depending on which provider you choose. Hence, it is very important to compare markup fees to make sure you get the lowest credit card processing fees for your business. This is a charge that you can negotiate to your advantage too.
Recurring credit card processing fees
Most traditional payment processors make a lot of money by not only adding a percentage on top of the interchange, but also adding recurring processing fees on your monthly statement. These monthly fees are typically pure profit, as it doesn’t actually cost the processor anything in order to offer the processing services that these fees are allegedly for.
Keep an eye out for these additional fees on your next statement and you could save hundreds of dollars on your next bill.
- Monthly Minimum Fee
- Statement Fee
- Batch Fee
- Next Day Funding Fee
- Annual Fee
- IRS Report Fee
One-off credit card processing fees
You’re probably already wondering how many more ways you could possibly be charged for payment processing – but believe it or not, there are other ways processing service providers will try to take your money.
Some fees might not be on every single business account statement but rather triggered by individual actions. As a small business, these one-off (or incidental fees) are hard to control or predict as they are triggered for certain complicated cases such as chargebacks, special verifications, insufficient funds, etc. Also, some payment service providers may charge extra fees for using their card readers, point-of-sale systems, payment gateways, or virtual terminals.
Keep an eye out for:
- Credit Card Terminal Fees
- Setup Fees
- Early Termination Fees
- Reprogramming Fees
- PCI Compliance Fees
- Address Verification Fees
- Chargeback and Retrieval Fees
- Payment Gateway Fees
Related Article: 5 Credit Card Processing Fees Small Business Owners Can Avoid
Needless to say, unexpected credit card processing fees can all really add up. Credit card processors make huge profits on the fact that the average business owner is not aware of what they are paying and why.
Factors Influencing Credit Card Fees
Before you start accepting credit card payments from customers, it may be worthwhile to understand the different factors that determine your payment processing costs.
Card brand and type
To facilitate credit and debit card payments from a customer to a merchant, card networks charge a transaction fee on every purchase. The four major card networks in the US—American Express, Mastercard, Visa, and Discover—charge a maximum of 3.3%, 2.64%, 2.54%, and 2.53% as per-transaction fees respectively, on average.
Additionally, the type of card your customers use also affects your overall credit card fees. The interchange rate is higher for credit cards compared to debit cards. The interchange rate is even higher on credit cards that offer rewards.
Type of business
A merchant category code (MCC) is assigned to a business once they start accepting credit card payments from its customers. The MCC is based on the industry that your business operates in and is used by financial institutions to determine the risk factor when calculating your interchange fee. For example, high-risk merchants operating in industries like gambling, healthcare, and travel will have higher fees.
Transaction volume
Larger transaction volumes can allow you to negotiate for lower credit card processing fees. Credit card brands and processors also offer discounts or special rates for monthly transaction volumes over a certain limit. Credit card networks often categorize businesses into different tiers based on their sales volumes with each tier having a different transaction fee. Most often, these rates favor larger transaction volumes.
Type of transaction
As credit card usage surges, small businesses are obliged to offer different payment methods to customers. The most common ones are in-person payments, online payments, and mobile payments. These different methods can affect the credit card processing fees for your company. In-person payments, for which merchants need a POS system, have the lowest credit card processing fees as it carries the lowest risk.
Credit card processing fees are higher for mobile and online transactions as security risks such as fraud are more likely. The security risks are also higher for payments made over the phone or through email, fax, or mail, and hence the processing fees are higher for such credit card transactions.
Strategies to Reduce Credit Card Fees
Thankfully, there are several strategies you can use to save money and cut down on non-essential payment processing fees. Here’s how.
Choosing the right pricing structure
Different merchant account providers have different pricing structures. Take the time to research different fee structures and choose what’s right for your business needs.
In flat-rate pricing, for example, the payment processor applies the same flat fee for any credit card payment—regardless of the brand, type, or method. This pricing structure is beneficial for new and small businesses that do not process large transaction volumes.
Interchange-plus pricing allows the payment processor to add a fixed charge on top of the interchange fee. The interchange fee varies by credit card company but the markup fee remains the same. This pricing strategy is better for businesses that handle a lot of credit card transactions as interchange plus pricing structures are more negotiable.
Under the tiered pricing structure, the payment processor categorizes interchange fees based on the risk of the transaction. The “qualified” rate category has the lowest rates as transactions in this category have the lowest risk as assessed by the processor. The “mid-qualified” tier has higher rates, while the highest rates are applied to the “non-qualified” tier which consists of high-risk transactions such as eCommerce ones.
Minimizing chargebacks and fraud
Use a payment gateway that adheres to PCI compliance guidelines to process credit card payments. This software authorizes payments by transferring transaction information between the issuing bank and credit card network. Payment gateways that follow PCI guidelines make transactions safer and less susceptible to fraud by protecting credit card information using tokenization, encryption, fraud detection features, etc.
Implementing a surcharge or cash discount program
A great way to offset your credit card processing costs is to transfer some of it to your customers. Credit card surcharging allows you to charge a certain amount per transaction when your customer pays using their credit card. The surcharge rates are controlled by national and state regulations and are capped at 4% On April 15th, 2023, Visa changed their brand rules to set the maximum surcharge at 3%. This will require merchants to lower the surcharge to 3% for all brands’ credit cards when Visa is accepted. Make sure to inform your customers about the surcharge and follow all applicable guidelines.
Another way to reduce credit card processing fees is to encourage customers to move away from credit card payments. You can do this by offering cash discount schemes where customers get a discount if they pay using cash at checkout. This works well for in-store purchases and you can create a discount plan best suited for the type of customers that you have.
Encouraging alternative payment methods
Apart from using discount programs to discourage customers from using credit cards, you can allow customers to pay via cryptocurrencies, eChecks, or ACH bank transfers. Cash and debit cards are also more economical for merchants, and customers tend to align with business owners once this is explained properly. Check with your payment processor if they support these payment modes or offer automated surcharging for different methods of payment.
Choosing the right payment processor
You need to read the fine print before signing up with a payment processor. Payment providers can often add unnecessary fees or services to your credit card processing plan that could rack up your final bill.
Keep an eye out for add-on or hidden fees such as termination fees (also known as cancellation fees), chargeback fees, statement fees, monthly minimum or annual minimum fees, long-term contract fees, etc. The best credit card processors are the ones that have transparent pricing structures and a chargeback management process to help you handle complicated and sensitive transactions.
How to Save on Credit Card Processing Fees
With Stax, your card processing statement is simple. All you pay is a monthly subscription which provides you with access to the direct cost of interchange and absolutely no extra fees. Stax takes pride in never adding hidden charges or payment processing fees just for the sake of making a profit.
In the meantime, be sure to look into the additional ways mentioned above to immediately reduce costs and increase savings.
If you have any questions on how the Stax team can help you, request a Custom Pricing Quote by reaching out to Stax. Stax will be happy to answer your questions and see how to best support your business.
FAQs About the Lowest Processing Fees
Q: What are credit card processing fees?
Credit card processing fees are charges merchants pay to facilitate transactions made by customers using credit cards. They include transactional fees like interchange costs and cents per transaction, as well as other charges such as assessment fees, monthly minimum fees, statement fees, batch fees, and others. These fees are collectively billed by credit card processing companies and credit card networks, such as Visa and Mastercard.
Q: Who charges credit card processing fees?
There are a number of players involved in credit card processing fees. These costs are charged mainly by credit card companies, merchant service providers, and credit card networks like Visa and Mastercard. They are incurred when businesses accept payments made with credit cards.
Q: How can businesses get the lowest credit card processing fees?
Scoring the lowest credit card processing fees starts by understanding how the process works and the fee structures involved. From there, shop around for providers and choose payment partners that provide a favorable pricing structure. Stax, for example, uses a subscription model that gives you access to the direct cost of interchange, without pricey markups.
You can further lower your payment processing fees by minimizing chargebacks and fraud, implementing surcharge or cash discount programs, and encouraging alternative payment methods.
