The costs of accepting credit card payments can be one of the most confusing and frustrating fees small business owners face.
This is not surprising: business owners don’t pay just one commission when closing a sale with a credit card. Instead, business owners pay commissions to three different parties whenever customers make purchases using plastic.
- The credit card network associated with the card the customer is using: Visa, Discover, Mastercard, or American Express.
- The bank that issued the card, be it Capital One, Wells Fargo, Chase, Bank of America, or whatever.
- A merchant account provider, which is a company that provides the hardware and software that businesses use to scan and process credit card payments.
Challenge here? Credit card payments can be expensive, and finding the lowest processing fees can be tricky.
What is a credit card fee?
Most small business owners struggle to figure out how much their trading account fees will cost each month. This is because the pricing plans these companies offer can be confusing.
They offer pricing models that can be very complex, and this is especially true if you’re a small business that doesn’t have the accounting staff to really look into these fees.
What if you, as a business owner, don’t have time to fully explore credit card processing fees? It may make sense to take a closer look at what is known as your trade discount, the final rate you will pay to accept credit transactions.
Basic costs
Understanding the underlying costs is important for business owners. The first thing to understand is that you cannot negotiate these costs no matter which credit card processing company you choose.
Base costs consist of interbank fees and valuation fees.
Exchange fee
These are fees paid to banks that issue credit cards.
- This fee is paid every time business owners accept card payment.
- Visa, Mastercard, Discover and American Express charge their own exchange fees.
The exchange fee varies depending on:
- They differ depending on whether customers swipe their cards in person or shop online or over the phone.
- Fees will also differ depending on the type of card — Visa, Mastercard, American Express or Discover — that consumers use.
These variables explain why exchange fees published by major credit card companies are so long and complicated, and why it is so difficult for business owners to estimate how much they will be charged each month for credit card transactions.
For example:
- Visa charges businesses 1.51% of the sale amount plus 10 cents for credit cards withdrawn from certain stores.
- But Visa can also charge 1.65% plus 10 cents if you use a Visa Signature in the same store, or 2.10% plus 10 cents if you use a Visa Infinite card.
- Mastercard charges businesses 1.90% of sales for certain credit card transactions for gasoline, but 1.58% and 10 cents for credit card home and car rental purchases.
Evaluation fee
Exchange fees irritate small business owners, but credit card companies don’t make money from them.
The four major card networks — Visa, Mastercard, Discover, and American Express — make money from the evaluation fees they charge on every transaction made with their cards.
- Visa charges a fee of 0.14% for every payment made with its credit cards and a fee of 0.13% for transactions made with its debit cards.
- Mastercard charges 0.1375 percent for credit transactions of $1,000 or less and 0.1475 percent for transactions of $1,000 or more.
- Discover also charges 0.13% as a fee for evaluating their credit cards.
- American Express charges 0.15 percent.
markup fee
If you want to negotiate commissions, look at the markup commission.
These are the fees charged by the business owner’s credit card processing company. While you cannot negotiate with Discover, American Express, Visa, or Mastercard to reduce exchange or assessment fees, you can negotiate with a credit card processor about the fees they charge you.
Which pricing model to choose?
Usually, when choosing a merchant account provider, you can choose between two main pricing structures.
- Exchange Plus: In this model, business owners will be charged the exchange and assessment fees that the credit card company charges for each transaction, as well as a flat wholesale or mark-up fee charged by their merchant account provider.
- Tiered Pricing: Tiered pricing, where merchant account providers assign different transactions to cheaper or more expensive tiers, is the worst type of arrangement for business owners.
A business owner can process a transaction that is at a lower level, and now that owner pays more. Or the processor may make a mistake and incorrectly downgrade the purchase. Basically, you give your credit card processor the authority to determine exactly how much they want to charge you.
Thus, several factors determine how much you will pay each month for a trading account.
- What industry is your business in?
- How much do you sell on average per month
- How you accept cards: different fees if you accept cards in person, by phone or online
- Pay less if your company only accepts card transactions in person
While costs will vary, the fair effective rate each month — what business owners will actually pay in total for processing credit card payments, including base costs and markups — will be approximately 2 percent of their credit card transaction volume when dealing with domestic clients. a person makes purchases and between 2.3% and 2.5% for the volume of credit transactions registered through online purchases.
How can I reduce my credit card processing fees?
Looking to lower your credit card processing fees but not interested in spending too much time researching merchant accounts? Here are some options to pay as little as possible:
- Betting lockA: Require your provider to offer a lifetime fee lock. This way, your fees will remain the same every month. Service providers often lure business owners with low upfront costs. But over time, these figures can slowly creep up. Soon, business owners are paying much more than they expected.
- No cancellation feeA: Never sign an agreement with a trading account that charges cancellation fees. Without these fees, business owners can cancel their accounts and move to a lower service provider without having to pay a huge amount of money.
- Multi-level or batch – no-no: Within these pricing packages, merchant account providers classify some purchases as qualified and others as non-qualified, with those purchases being cheaper per transaction.
Merchant account providers have too much leeway in determining what counts as a qualifying credit card purchase. Some providers may only consider a debit card transaction that requires a PIN to be a qualifying purchase. These purchases will cost less, but everything else will cost more, which is expensive for business owners. If merchant account providers feel they are not making enough money, they may send more transactions at an unqualified rate.
Set minimum
Small business owners can also set a minimum amount for credit card sales. The Federal Reserve says merchants can require consumers to make a purchase of at least $10 before they accept credit card payment for that purchase.
However, be sure to follow the Fed’s rules. For example, you should evaluate this minimum limit for all types of credit cards. You can’t have a $10 minimum for Mastercard purchases, but you can’t have a minimum for Visa payments.
Having this minimum can convince more consumers to use cash for small purchases, saving you money, as well as lowering the fees for each of those small transactions.
What other factors should be considered?
Price is not the only factor to consider when choosing a merchant service provider.
Simplicity can be important
Credit card processing fees are confusing, so it’s no surprise that some providers like Stripe or Square advertise themselves as an easier solution by charging a monthly flat fee for credit card processing services.
Typically, small businesses with transactions average no more than $10, such as coffee shops that benefit from partnerships with providers like Square or Stripe. Companies with larger transactions usually pay more each month.
Consider accepting different payments
It is important for business owners to accept a wide variety of payments, even if some of these payments, such as credit cards, will cost more. The goal is to convince more customers to make more purchases. By offering more payment options, you can achieve this goal.
Don’t Forget Support
Business owners should be careful not to focus only on price when choosing a merchant account provider, and should also consider the type of support they will receive if something goes wrong.
Some providers provide you with software and that’s it. If you have a bad launch it can hurt your business and you could lose customers right and left. Perhaps you need a company that provides more hands-on support.
bottom line
As a small business owner, you are busy. Navigating the confusing world of credit card processing fees is tedious and time consuming. But this research can pay off: any savings can help a small business meet its yearly financial goals. By reducing the amount you pay for processing, you can provide a financial boost to your small business.
Editorial disclaimer
The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
