Credit card processing fees take a significant bite out of small business profits. By being aware of how your rates are set, you can shop around for the best deals. Interchange fees, which go to the card networks, make up most of your fee structure and are non-negotiable. Other factors include assessment fees and processor markup.
Look Beyond Per-Transaction Fees
In a world without cash, credit card processing fees are an unavoidable aspect of business, but they don’t have to be a significant financial burden. Learning your effective rate and negotiating with providers can lower your costs to accept card payments. But really, what are credit card processing interchange fees?
Credit and debit card transaction fees are made up of three parts: interchange fees set by the card network, assessment fees imposed by the card issuers, and markups added by your payment processor. Each fee is calculated differently, and each can vary based on the type of card used. It makes comparing fees between different providers difficult without first calculating your average transaction cost.
When looking for a new provider, consider the per-transaction rates and the miscellaneous fees that can add up quickly. These may include an IRS reporting fee, a statement fee, or a monthly fee for managing your account. In many cases, these fees aren’t negotiable and can add up quickly. For example, a merchant with a transaction fee of $0.25 might be paying an effective rate of 4.2% or higher, depending on the card networks and issuers, the types of cards being used, and how these factors are weighted in the calculation. To avoid these hidden fees, look for a processor that offers a flat-rate pricing model.
Calculate Your Effective Rate
Credit card processing fees can be perplexing and annoying when comparing the costs of merchant accounts offered by various providers. The problem is that the rates charged are only sometimes transparent, and it’s common for processors to hide or mislead their clients by using complex monthly statements filled with line items that are often meaningless. The good news is that you can avoid these costly traps by learning how to calculate your effective rate, a single percentage that represents all of your combined fees for one month of processing. This metric can help you avoid paying unnecessary charges and make smarter choices about your payment processing provider. To find your effective rate, scan or search through your merchant statement for a section that summarizes your credit card transactions for the month. Then, multiply the total processing fees by the total sales to get your effective rate.
A fair and reasonable effective rate is between 2.5% and 3.5%, depending on your industry and POS type (physical vs. online). It includes the base interchange fee and any service fees you may be paying, such as a monthly fee, processing gateway fee, PCI compliance fee, or statement fee. Remember that your effective rate will differ in your first month of processing, including start-up costs that will remain the same. Revisiting your effective rate for as many months as possible is essential to get the most accurate picture of your processing expenses.
Negotiate
A business credit card processing fees are a significant expense that can affect their bottom line. Thankfully, retailers can lower these expenses by taking specific actions. It’s essential to understand what goes into a credit card processing fee. It includes the service fees imposed by a payment processor or merchant services provider and the charges set by the card network and the card issuing bank. You can negotiate these rates and fees with your provider as a merchant. However, knowing that a processing fee has some non-negotiable components is essential. For example, the card networks set the interchange rate, which is not negotiable.
On the other hand, a percentage markup is a negotiable part of the total credit card processing fee. To get started, you’ll need to calculate your effective rate by adding all of the fees that go into a transaction — including monthly statement fees, gateway fees, equipment leases, and other charges – and then dividing that total by the number of transactions processed per month. It will give you a number that can be used to compare processors that offer interchange plus pricing models. Once you have your rate, it’s time to talk to the processor. If you can demonstrate that your company is less risky, you can lower the credit card processing fees you pay. It can be done by showing sales projections and demonstrating that you follow PCI DSS standards.
Look for Alternatives
Keeping your expenses in check is an essential part of managing any business. But while calculating other operating costs is relatively straightforward, credit card processing fees can add up quickly and eat into your bottom line. Here are a few ways to keep them under control. Promoting cash payments is one of the simplest ways to reduce credit card processing costs. You can lower the amount of credit card transactions you receive and your credit card processing costs by giving customers who pay with cash or debit a discount. Another way to cut your credit card processing fees is by reducing the risk of fraud and chargebacks. By implementing strong data security measures and providing a seamless customer experience, you can help prevent these issues, lowering your processor’s cost of doing business with you.
Finally, many payment processing services offer alternative pricing models that can help you save money on transaction fees. For example, some offer flat-rate processing that includes a fixed percentage of each sale plus a corresponding fee that matches the interchange rate set by the credit card network — an ideal option for small and seasonal businesses. Whatever methods you choose to use to save on credit card processing fees, you must be proactive and make your voice heard. You can also find solutions to lower your fees by comparing offers and choosing a transparent processor about their charges, including monthly service fees, PCI compliance fees, equipment costs, and more.
