Credit Card Processing Fees

Accepting credit cards is crucial for the success of your business. But, it comes at a cost - one that could put you in over your head if you aren't careful.

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Credit card processing fees often range from 1.5% to 2.9% for swiped credit cards. Keyed-in transactions have a higher average processing fee of 3.5% to account for the higher risk.

Read on to learn what business owners should know about credit card processing fees.

• The processing method matters.
  Card-present (swiped or chip reader) transactions pose a lower risk for banks. They have a lower risk of fraud and/or chargebacks. This allows for lower processing fees. Card-not-present transactions (over the phone or internet) have a higher risk of fraud and chargebacks, resulting in higher processing fees.

• The size of your average transaction matters.
  The lower your average transaction, the more you'll pay in transaction fees. For example, 100 $5 transactions are much more expensive than five $100 transactions. If the merchant service provider charges 2% plus $0.15, for example, you'd pay $0.15 one hundred times for the lower transaction. Compare that to the five times you'd pay it for the $100 transactions and you'll see the difference.

• The type of business you run matters.
  All businesses have a Standard Industrial Classification Code and a Merchant Category Code. These standard codes let card issuers know what type of business the consumer is trying to conduct. Risky businesses are often provided higher credit card transaction fees just because of the risk they pose.

With numerous credit card fees thrown at you, it's easy to overpay simply by not understanding what you are being charged.

Each merchant provider has different credit card processing fees. Before you choose a merchant provider, it's important to understand how the process works. Understanding the pricing model will help you understand what you have to pay and what you may negotiate.

Choosing the wrong fee structure based on your company's projected sales could mean the difference between a profitable and unprofitable business.

Keep reading to learn all about credit card processing fees.

What Parties Are Involved in Credit Card Processing?

When your customers swipe their credit card or insert it into the chip reader, a lot goes on behind the scenes. It's not just a transaction between your store and the credit card company. There are many parties at work here:

• Card issuer: This is the issuing bank - the one that provides the credit card to consumers. This is not Visa and MasterCard, but rather the banks, such as Chase or Bank of America as a couple of examples. The banks work with Visa and MasterCard (the brand) to process the transactions. The bank charges merchants a fee for accepting credit cards. You'll usually see it as a percentage plus a flat fee.

• Card network: This is the brand of the card, such as Visa or MasterCard. The consumer doesn't receive the card directly from Visa or MasterCard, though. It comes from the card issuer or issuing bank.

• Merchant: This is you, the store or business accepting the credit card, either in person or online.

• Acquirer: This is your bank; the one that will try to collect the money for the credit card transaction. Your bank sends the information from your credit card transactions to the issuing bank through the payment processor in order to collect payment.

• Merchant account provider or payment processor: The third-party that processes your transactions. This is the "middle man" that stands between you, the merchant, and the consumer's issuing bank. A few common examples are Square and PayPal.

• Payment gateway: If you conduct business online, all payments go through the payment gateway. The payment gateway encrypts the data and sends the request for authorization to the card issuer (through the merchant account provider). The issuer's bank approves or denies the request and the result is sent back to the merchant. This all happens in the matter of a few seconds (sometimes longer for EMV cards).

How the Credit Card Process Works

In-store transactions and online transactions have slight variations in their processes. We'll cover both below:

Retail Transactions

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The consumer presents you with their credit card. You run it through the hardware provided (swipe or chip reader). The information is sent to the payment processor, which then contacts the issuing bank for approval. The issuing bank approves or denies the transaction based on the availability of the consumer's funds.

The payment processor lets the merchant know if the transaction was approved or denied. If it was approved, the money shows up in the merchant or acquirer's bank account in a few days.

Online Transactions

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Online transactions go through one more step.

Once the consumer enters the credit card information, it enters the payment gateway. The payment gateway then sends the information to the payment processor.

At this point, the process is the same. The payment processor contacts the issuing bank for approval of the transaction. Upon approval, the issuing bank alerts the payment processor who then alerts the payment gateway. Finally, the information reaches your website, where you are able to see that the transaction went through.

Once the transaction is complete, you receive the funds in a few days.

Top Credit Card Processing Fees

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As you can see, there are many entities involved in credit card processing. This means one thing - many fees. Understanding these fees is important so you know what steps to take.

Fees per Transaction

Credit card transactions incur transaction fees. These "interchange fees" are set by the issuer (Visa, MasterCard, etc.) each year. Each issued card has a different interchange rate depending on its type.

Take, for example, Visa; they categorize cards by retail, rewards, corporate, and business. Each type has its own interchange rate. Right now Visa Rewards Signature cards cost merchants 2.3% + $0.10 of a transaction. So a $100 transaction would cost you $2.40.

However, Visa, MasterCard or any other credit card brand doesn't bill you directly. You'll go through your "middle man" or merchant account provider who charges the fees. Typically, they will charge you more than the basic fees charged by the issuer. They call it an "upcharge."

Merchant Account Provider Fees

Merchant account providers may charge you in one of three ways. The simplest is the flat-rate processing fee, but that is not as common as the interchange-plus credit card processing fees.

Flat Rate Fees

Some merchant providers, such as Square, charge a flat fee per transaction. For example, Square charges 2.75% of each transaction. A $100 sale would cost you $2.75. It does not matter what brand credit card or type of credit card the consumer used.

These fees are the most predictable. You know what each transaction will cost ahead of time. The only difference in their fees is if it's an eCommerce transaction or you have to key in the card's information. There's higher risk in both transactions, which is why Square charges different fees.

Interchange Plus Credit Card Fees

Some merchant account providers use the interchange fees as their basis, but then add their own fees on top of it. They may call it interchange plus or cost plus. In other words, they add onto the fees the interchange already charges. Payline Data is one good example. They charge the interchange fee plus a percentage of the transaction and a fixed per transaction fee.

Using the above $100 transaction and hypothetical fees, let's see how this works. If the merchant provider charges 0.5% plus $0.15 on each transaction, and the non-negotiable interchange fee is 1.15% plus $.10, it would cost you a total of $1.90. This is less than the above flat fee transaction.

On a $10 purchase, however, the flat fee transaction would cost $0.27. The interchange plus fee would cost $0.42.

Tiered Fees

Perhaps the most confusing credit card processing fees are the tiered fees. Unlike interchange plus, there are no fixed fees. The amount you pay depends on the type of card charged. This program often has add-on fees that merchants don't recognize, making it an expensive method to process credit cards.

Monthly or One-Time Fees

Merchant account providers charge a variety of fees in addition to the processing fees. They may call them one-time or monthly fees. You may even see them as miscellaneous fees. You should know the cost of these charges ahead of time to help you choose the right processor. At the very least, if you already signed up, check your statements for any of the following:

• Set up fees: Some merchants charge a fee to set you up on their network. This could be for a technician to come out and set up the hardware or even for over-the-phone support. Not every merchant account provider charges this, but it's worth looking into.

• Account cancellation fees: Merchant account providers that have a contract may require a cancellation fee if you don't fulfill the contract. Again, reading the fine print is crucial.

• Monthly subscription fees: Many merchant account providers charge monthly subscription fees. This covers customer support and PCI compliance. Some providers charge the monthly fees as an annual charge instead. They may also call it monthly minimum fees, meaning if you don't reach the minimum amount of charges, the provider charges you a fee.

• Terminal fees: If you have a brick-and-mortar store, you'll need a terminal to swipe customers' credit cards. Some providers charge a one-time purchase fee, while others lock you into a lease and potentially charge cancellation fees.

• Payment gateway provider fee: If you sell your products or services online, you'll need a payment gateway provider that may charge monthly fees. However, there are several that don't charge.

• PCI fees: If, and only if, your merchant account provider actively provides PCI support to make sure you are in compliance with the Payment Card Industry rules, should you pay these fees. However, a majority of the time, they are "junk fees" that merchants don't even realize are on their statements. You may also see them titled non-compliance fees or data breach insurance. In any case, inquire about the fee, ask what you get for it, and if you are non-compliant, ask for help getting compliant to eliminate the fee.

• Statement fees: Your merchant provider may charge you for statements, whether paper or online. They may call it a processing fee or even a miscellaneous fee.

• IRS reporting fee: Some merchant providers charge a fee to report your transactions to the IRS and provide you with the required 1099-K. This practice isn't widely accepted and the fee should be disputed if you see it on your statement. Many merchant providers charge as much as $3.95 per month per account for this unnecessary fee.

Are Flat Rate or Inter-Change Plus Fees Better?

Choosing the right merchant provider requires a lot of research into their fees. Your first question should be, however, whether you should choose a flat rate or inter-change plus provider.

Unfortunately, the answer is different for each merchant. It depends on your total monthly transactions as well as the individual transaction amount. That's not all, though. You also have to figure in any monthly fees or other add-on fees merchant providers charge.

Don't forget, you may also have special pricing for certain types of cards. For example, Payline charges the same interchange plus fees for all credit cards except AMEX. Processing AMEX could cost you as much as 0.5% more than any other credit card.

Choosing the Right Interchange-Plus Provider

If your transactions are too high for a flat fee provider to make sense, you'll need to shop around for the right interchange-plus provider.

Obviously, you'll want to find the lowest upcharge. But, don't focus on the percentage alone. Look at the merchant provider's requirements. Some have volume minimums you must meet. If you don't meet the minimum quota, you'll pay the difference in fees. In other words, don't jump at the first merchant provider with the lowest add-on fees. If you can't meet the minimum requirements, you won't enjoy the low percentages.

You'll want to read the fine print. Some merchant providers charge a monthly or annual fee in addition to their add-on fees. They may also charge miscellaneous fees for things like customer support, training, statements, or PCI compliance. If you need to integrate your payment processor with your POS or eCommerce, they may charge for that as well.

Reading the fine print and asking as many questions as possible will help you decide what's right.

Negotiating Lower Credit Card Processing Fees

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High volume sales merchants usually have the best luck negotiating credit card processing fees. What you negotiate should depend on the type of sales you make.

For example, large transactions are more affected by the percentage add-on than the per-transaction fixed fee. Using our above example of 0.5% plus $0.15, let's see the difference on two transactions:

• $10 transaction: $0.05 percentage fee plus $0.15
  
• $100 transaction: $0.50 percentage fee plus $0.15

The lower the transaction amount, the more sense it makes to negotiate the per transaction fee. If you were to negotiate a lower percentage, you would save a penny or two. But, if you negotiate the per transaction fee, you could save as much as $.05 to $.10 per transaction. That might not sound like a lot, but after 1,000 transactions, you'd save $50 - $100.

Higher transactions, on the other hand, would save you more with a lower percentage fee. If you were able to negotiate a 0.4% fee rather than 0.5%, you'd save $0.10 per transaction. After 1,000 transactions, you'd save $100. Of course, the higher your transaction amount, the more you save.

Bottom Line

Credit card processing is a necessary component for a successful business today. However, you should choose your merchant account provider wisely. If you don't understand their fee structure, ask questions. Compare the flat fee companies to the interchange plus companies on a per transaction as well as monthly basis.

Only then will you be able to make the decision that works best for your company's bottom line.

Also, don't forget to inquire about early termination fees or equipment rental fees.