The Real Deal About No Fee Credit Card Processing: What You Need to Know

It’s worth stating that hardly anything in business (and in life) really comes for free. When you’re presented with a “no cost” option, know that someone, somewhere is paying for it. Nevertheless, it’s pretty tough to turn away when we see a free service or solution and it’s only natural to want to learn more.

No fee credit card processing, sometimes known as free credit card processing has this kind of appeal. There are obviously costs attached to processing credit card transactions—including interchange fees and processor markups, among other things. But the “no fee” promise always gets the attention of merchants.

Small businesses, in particular, tend to gravitate to the idea of zero-cost processing. So, we want to unpack the concept. Free credit card processing is possible, but there is a lot that business owners should know before diving straight in.

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What is Free Credit Card Processing?

The free credit card processing offer goes by a few different but similar names. Whether you see “no-fee,” “free,” or “zero-fee” processing, it’s all the same. And in the fine print, you will see that it’s all actually “surcharging.”

Credit card surcharges aren’t new or unique. Most major credit card processors offer a surcharging solution (where it’s legal to do so). What is more recent, though, is the packaging of this solution as “no-fee.”

Surcharging versus Zero Fee Credit Card Processing

Financial institutions don’t allow anyone to avoid interchange rates and fees, and no credit card processor can stay on the market long without any payments from their clients.

As such, all “free” credit card processing offers are really just surcharging the customer paying at the terminal.

Surcharging is a credit card processing solution that allows merchants to pass the credit card processing fees onto their customers. Almost every merchant services provider can set this up for their clients. Many simply don’t advertise it, for reasons we will discuss more below.

So is there a difference between surcharging and zero-fee credit card processing? Not really.

No fee credit card processing is simply a spin on the standard surcharging solution. What’s unique is that some companies specialize exclusively in this processing program, setting up their business entirely around “no-cost” or “free” processing. By doing this, they sell the solution as a whole package. In that package is the setup of surcharging, including programming terminals and notifying the card brands, such as Visa and Mastercard.

How Do No-Fee Credit Card Payments Work?

When setting up a credit card processing solution, all terminals need to be programmed with certain rules to process the payments. For no-cost payment processing, the programming rule is set so that all credit card transactions get a markup to cover the credit card processing fees.

Across the US, there is a limit on how much can be added as a surcharge. Most states have a 4% limit. In Colorado, merchants can surcharge at 2% or pass along their full processing costs to the customer.

A fashion retailer, for example, may have a customer come in to buy some jeans. The jeans are $50. The cashier would scan the tag and tell the customer their payment options: cash or card? The customer says they want to use a credit card as their payment method. The cashier puts this in their system, and the total amount automatically comes up with an additional fee on top of the $50 to cover the credit card processing fees. Fifty dollars could end up somewhere between $51 (2%) and $52 (4%).

The result? The merchant avoids the fees, as those costs are passed automatically to the customer.

Let’s talk about the other credit card processing costs

Credit card transaction fees are but one of the costs incurred when processing credit card transactions. Some “no-fee” processing companies may allow you to bundle those additional fees into the customer’s surcharge. But many will still require additional monthly fees to cover services fees, PCI compliance, chargebacks, convenience fees, and more. If you need equipment, you’ll also have to pay for that.

And here’s a kicker: debit card transactions cannot be surcharged. In the whole “no-fee” solution, credit cards are the only payment method that merchants can pass the processing costs back to.

Legal Issues Around Zero-Fee Processing

Zero-fee processing comes with some controversy. There have been numerous legal cases for and against merchants vs. banks. Merchants argue that they should be able to pass fees onto the customer. Banks say that they shouldn’t.

The argument is this: if merchants can put the surcharge onto the cardholder, the cardholder is more likely to choose another payment method. Banks don’t love this idea. Merchants, naturally, want to be able to steer customers away from cards that come with high processing costs. With the prohibition of surcharging, the merchants’ ability to do this is limited.

At the time of publication, there are two states where surcharging is prohibited:

  • Connecticut
  • Massachusetts;

On top of this, there are a number of other states with anomalous surcharging rules still in place. Merchants should check the situation in these states before signing up with no-fee payment processors:

  • California;
  • Florida;
  • Kansas;
  • Maine;
  • New York; and
  • Texas

What to Look Out For in a Free Credit Card Processor

Surcharging offers great benefits to merchants that don’t have the sales volume or cash flow to cover the processing rates of interchange-plus pricing. Although there is a lot of caution around the no-fee pricing model, it’s well worth considering. Here’s what to look out for to find the best solution:

Pricing and credit card processing fees

No payment processing solution can be completely free. Although you’re passing the processing fees onto your customers, you’re probably still going to be charged additional fees. Read the fine print and look out for:

  • PCI compliance fees
  • Service fees
  • Convenience fees
  • Equipment fees.

Remember that some fees are inevitable (debit card processing fees, for example). Be careful to calculate exactly how those extra fees cost, as they may add up. Compare them with other payment processors to make sure you select the best deal.

Point of Sale (POS) system requirements

Part of the no-fee deal is often the setup of equipment, dealing with banks, and all the burdensome steps of setting up surcharging. This does save a lot of time, but it may get you stuck leasing equipment.

Beware of claims that promote pre-programmed equipment. Of course, it’s convenient to avoid reprogramming existing card readers, but pre-programmed equipment will likely be proprietary hardware. You could get stuck in a long-term contract, or you could have to buy new equipment if you wanted to change your provider.

Setting up credit card surcharging

To set up surcharging, the physical and virtual terminal has to be reprogrammed. Surcharges need to be listed as a separate line item on the customer’s receipt. The terminal can’t charge more than the maximum amount (2% or 4%), and it has to recognize a debit vs. credit card so that it only charges the surcharge on the credit cards.

Whether you go for surcharging with a traditional credit card payment processor or one that’s specifically offering no-fee, it will be the processor’s responsibility to program the terminal.

The no-fee companies may be appealing because they do all the other stuff you would usually have to do yourself.

All you have to do is put up signage in your store (or at the checkout of your eCommerce site) that lets customers know you charge a surcharge for credit card payments.

The main difference, then, between traditional companies and no-fee companies is the elimination of your paperwork burden.

Which Type of Business Works Well With No Fee Merchant Services?

No fee credit card processing isn’t for everyone. Here are the types of businesses that may benefit from this type of offering.

High-risk merchants

If you’re a high-risk merchant (i.e., are in a risky industry or have irregular sales volumes), you may need every bit of cash that comes in so that you can invest it back into your business. For these situations, no-fee processing can be a great solution.

Small business

Customers tend to understand costs being passed on when they’re dealing with independent small businesses. Small cafes, retailers, market sellers, and independent merchants are some common types of businesses that may not need extra merchant services. No-fee processing is perfect if the debit card transactions rates are reasonable.

On the other hand, the larger you get, the less forgiving your customers become. Adding surcharges may turn them towards competitors, and the rates from debit card transactions will probably end up too high to justify this type of solution.

Enterprise-level customers will have more need for software and added merchant services that help with business operations. These services wrapped into your card processing solution will often work out better value than just going with a no-fee credit card processor.

Enterprise-level business

If your business falls under the enterprise banner, surcharging is a viable option to counter the collective costs that come with processing a high volume of credit cards. As a result, there is a significant amount in fees that can be reduced, especially when it comes to business credit cards – which tend to carry some of the highest interchange rates.

Other Ways to Reduce Credit Card Fees

If you’re in a state where surcharging is illegal, or you don’t want to put the costs onto your customers, cash discount programs could be a great alternative solution. The method is simple. You can give customers the usual card payment options (tap, swipe or insert their EMV chip) or pay in cash for a discount on the total price. You could also offer ACH payments if you’re happy to wait for it to process.

Yes, you may want to add a little extra to your prices so that the discounts don’t harm your bottom line. But this is the normal practice for businesses trying to balance their credit card fees anyway.

Signing Up For Surcharging

If you’re an established business wanting to eliminate your credit card processing fees and get competitive pricing on everything else, get in contact with the team at Stax. We provide several solutions to give you the best of both worlds: fee-free credit card transactions, low-cost debit card transactions, and high-value merchant services.

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