Credit Card Processing Fees

Credit Card Processing Fees: The Complete Guide for Small Businesses

Small businesses are getting popular these days, and it comes with technicalities and other requirements to manage it. One of these complexities would be the credit card fees (for merchants) or commonly known as credit card processing fees. Here we will help merchants understand fee structures to help them find cheap credit card processing rates. So, here are a couple of things you should know about credit card processing fees:

What is a credit card processing fee?

credit card transaction feesIt’s a fee that a merchant pays for when they process credit card payments, but there’s more to it than that. There are three different types of fees that are covered under credit card processing fees you need to know about:

  • Transaction fees — It’s the fee you pay per transaction for credit card payments, which mainly includes interchange rate, assessment fee, and payment processor markup.
  • Flat fees — These fees are for payment gateway or the merchant services provider. It’s actually a monthly fee charged for their services.
  • Incidental fees — This is charged by your payment processor or account provider when there are incidents like chargebacks or insufficient funds.

Is it legal to charge a credit card processing fee?

As a merchant, you’ve probably heard your customers ask you this. It’s actually legal to charge processing fees, especially if the business you run accepts payments in person. A convenience fee is also added, if a merchant opts to use mail or telephone orders. This is called a surcharge, and it’s done as credit card transaction fees.

However, surcharges are not always permitted - there are states that do not allow this. These are Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas, among others. It’s also required to display a notice of surcharge before confirming the purchase, for both online and in-store. There should be a clear indication that there’s a surcharge in the customer’s receipt.

How much are payment processing fees?

Now that you understand what it is and know that it’s legal, it’s time to know how much the credit card processing fee really is. Here are the several fees you need to pay per transaction:

  • A percent of the total transaction amount — The issuer gets a percentage of the sale, called credit card interchange fees. It varies depending on the industry, total amount, and the kind of card used for the transaction.
  • Another percent of the transaction amount — The bank gets a cut by charging a markup fee. It also depends on the industry, the monthly processing volume, and the amount of sale.
  • Assessment fee — The credit card association such as Visa or Mastercard charges an assessment fee. The payment processor pays the card networks an assessment fee every time their credit or debit card is used.
  • Dollar amount per transaction — Payment processors earn by charging you per transaction made by the credit card. It also charges for setup, monthly usage, and account cancellation.

The first three fees are usually combined into a single rate and separate from the transaction fees like 2.9% + $0.30. There are credit card processing companies that offer cheap credit card processing rates without compromising services. This is why it’s important to do your research first before settling for the first payment processor, as there might be a company that offers the lowest credit card processing fees and are more competent.

How to compare credit card transaction fees

There are a lot of credit card processing companies out there, offering different deals and fees. When looking for a credit card processing company, one should understand the two different pricing structures that most companies follow.

  • Tiered pricing — This kind of model is basically offered by most processing companies as it makes them earn more money, and it takes more money from merchants like you. Providers who use this kind of pricing model usually bundle credit card interchange fees in their preferred selected general rate tier.

They are usually ranked from lowest to highest rates: Qualified, Mid-qualified, and Non-qualified. They are also known to modify their rules and make it confusing for most merchants to understand what they’re paying for. And usually, some of these modifications will result in merchants paying more.

  • Interchange plus pricing — This kind of model is more transparent and works well with smaller businesses. This pricing model used to only be introduced to businesses with a high processing volume. And now that the market is brimming with competitive businesses, they now welcome smaller businesses as well.

This is also known as a pass-through, as providers pass along rates from the Visa, MasterCard, American Express and Discover Interchange networks. This means the details are listed clearly on the monthly statement to understand the fees better. This model is used by providers to determine straightforward interchange markup fees added with every transaction fee.

How to find cheap credit card processing rates?

lowest credit card processing ratesThere are ways to save up on credit card processing fees. While they might be cheap in a single purchase, it really racks up and it becomes more expensive. Here are some nifty ways you can do to save some money with cheap credit card processing rates:

  • Negotiate with the credit card processing company — The best way to persuade a company to give you a better deal is to give them your transaction volume. The more customers you have, the better chances of them giving you a better card processing price model.
  • Reduce the possibility of credit card fraud — This is doable when you swipe the card and manually enter the security data needed. Transactions where you enter the card details means it will likely become fraudulent. It can also make the transaction secure if the merchant asks for billing information with a ZIP code and security code.
  • AVS or Address Verification Service — The main function of this service is to double-check and verify the address of the card holder with the card issuer. This will drastically lessen the probability of fraud in the transaction. Some companies actually offer lower interchange rate when the merchant offers AVS.
  • Setup your account and terminal properly — Sometimes inaccurate information actually racks up your credit card processing expenses, so it really pays to set it up right. It’s also ideal to process transactions within 24 hours to reduce the number of transactions and eventually reduce the processing fee.
  • Consult an expert — Some information can be overwhelming for small businesses, so it’s ideal that you consult an expert first before diving in. They might even know some information that can land you a good deal.

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