Understanding Credit Card Processing Fees for Businesses

Post on Tuesday, April 24th, 2018 in Accounting

There are a lot of costs you should take on as a business owner. You should have adequate office space and facilities. If you have a product, you need an efficient inventory management system, for example. Then there are the costs you have to take on.

Paying credit card processing fees is inevitable if you are running a business that accepts credit card payments. The bad news is that you cannot avoid those fees entirely. However, the good news is that you can try to reduce credit card processing costs for your business.

In this article, we are going to dissect credit card processing fees, see which payments they consist of, and find out whether a business owner can somehow influence those payments.

First of all, let’s discuss who typically charges a credit card processing fee from your business:

  • Credit card associations. These are companies that produce credit cards, such as Visa, MasterCard, and American Express.
  • Financial institutions that issue credit cards. These are banks, like Bank of America, Wells Fargo, or Citigroup, for example.
  • Credit card processors (acquiring banks). These are institutions that act as intermediaries between merchants and credit card associations, helping merchants carry out various business transactions. There can be several acquirers for one transaction – one that creates monthly statements, one that issues funds to a bank account, and one that handles technical support.
  • Payment gateways. Websites that route transactions to acquiring banks.

All of the above parties act as intermediaries between customers and merchants. Taking them into account, the payment makes the following journey:

Customer → Merchant → Payment gateway → Credit Card Processor →Credit Card Associations → Credit Card Issuing Bank

And almost each stage of this journey requires the payment of certain card processing fees.

Credit Card Processing Fees: Interchange Fee Breakdown

What does interchange mean in credit card processing? Well, interchange fees are the fees that the banks and credit card associations charge per transaction. Here is the interchange fee breakdown: a percentage of each transaction plus a flat per transaction fee.

The interchange fees may vary depending on the credit card association, such as Visa credit card processing fee, MasterCard processing fee, etc. You can find the credit card processing interchange rates at the websites of credit card associations.

Credit Card Processing Fees: Assessment Fees

Credit card assessment fees are typically based on a percentage of the total monthly transaction volume. Assessments for each credit card brand are currently 0.11% of volume plus about $0.02 per transaction.

Credit Card Processing Fees: Flat Fees

The flat fees consist of the following sub-fees:

  • Payment gateway fees. These fees are charged from e-commerce businesses for processing transactions with online shopping carts. However, some processors have internal payment gateways that are free of charge.
  • Terminal fees. These fees are charged from physical store owners for processing their transactions with payment terminals.
  • PCI compliance fees. All businesses that use credit cards must comply with the PCI (Payment Card Industry) standards that ensure secure payment transactions. Unfortunately, businesses pay the fees both in compliance and in non-compliance cases.
  • Annual fees. These fees are charged every year to cover the basic use of the provider’s services.
  • Minimum monthly fees. These fees are charged to merchants who do not reach a specific transaction total for the month or year. These totals vary depending on the provider, but most of them are about $50,000 a year.
  • Statement fees. These fees cover the printing and mailing costs for credit card statements.
  • Early termination fees. These fees are charged if a business decides to finish the contract earlier that decided.

So how to reduce credit card processing costs? There are several ways to do it:

  • Insist on an “interchange plus” pricing model. This is the most transparent pricing model with the clearest terms and fees, unlike the “bundled” model with higher costs and hidden fees. If you’re wondering how interchange plus pricing works, it’s like this: the actual interchange fees and assessments are passed directly to your business, and the processor’s markup is added to the actual cost. The typical credit card processing fees for the interchange plus model is, for example,  0.25% + $0.10, whereas average credit card processing fees for the bundled model may look like, say, 1.5% + $0.30.
  • Insist on a written contract. Some processors may promise you attractive merchant processing fees, but their words come into force only when put on paper. Therefore, remember everything they say and insist that it is fixed in a written form.
  • Carefully study your financial statements. Read the first page of your statement each month to make sure your fees remain low, as agreed. Your processor should notify you in advance about possible increases.

Now you know what the typical credit card processing fees include, how they are formed, and how much credit card processing fees can cost, you should be aware of ways to lower your processing fee for credit cards. This understanding will be a half of the battle for your business.

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