Credit cards are becoming one of the preferred payment methods for many US consumers. In the fourth quarter of 2022, credit card users reached 166 million, and this number is constantly growing. And some of these users even have more than one credit card account.
By offering customers a credit card payment option, small and growing businesses can tap into the market that prefers this payment method. You can accommodate customers even from different countries, which results in expanding customer base. Adding this payment option can even help boost customer satisfaction since payment processing becomes more convenient and secure.
Unfortunately, there’s a downside to accepting credit card payments: the processing fees. It can reach 3.5%, which isn’t cheap, especially for starting businesses. But don’t worry because this article will discuss everything you need to know about credit card processing and ways to minimize them.
What Are Credit Card Processing Fees?
Like with debit cards, merchants and business owners pay credit card processing fees each time they accept a credit card payment. Credit card merchant fees are typically split among financial institutions: issuing banks, card networks, and processors.
You should pay attention to credit card processing fees when planning to offer credit card payment options to your customers, especially if you own a startup or an SMB. The processing fee can take a huge chunk of your total profit, which significantly impacts your bottom line and even your business’ survival. The average fee ranges between 1.5% and 3.5%.
Credit card processing fees are charged on each card transaction. Depending on your payment processor, you may have to pay the fees in one lump sum each month end or it may be reduced to every deposit.
Types of Credit Card Processing Fees
So, where do the credit card processing fees go? Why are these fees often so high?
Different financial institutions are involved in processing credit card payments. Each time you accept credit card payments, you’ll be paying three primary services: the card issuer, payments processor, and card network.
Let us take a closer look at the credit card fees charged by each of these services:
Payment Processor Fees
A payment processor collects payment information from clients or customer transactions. They work with issuing banks, receiving banks, and credit card networks to transfer the payment to you.
You often encounter the term payment processor alongside payment gateway, but it is important to note that these two entities are different. Payment gateways are technologies like a credit card reader where a customer enters their credit card information while payment processors work behind the scene to transmit the information from the point-of-sale (POS) system to the banks.
Payment processors charge a fee for processing the payment. It’s the only way these companies make money. The fee varies depending on the service provider, but it typically includes per-transaction fees, monthly fees, and statement fees.
Podium is an example of a credit card processing application specially designed for small businesses. While the company is known for its marketing solutions, you can still count on its payment solutions. The team charges 2.2% and $0.15 per in-person transaction.
Interchange Fees
This fee goes directly to the credit card issuer. Also called issuing banks, a credit card issuer is a financial institution that provides people with credit cards. Examples are Bank of America, Chase, and Citi.
The interchange fee often accounts for a huge percentage of the total credit card processing fee. It’s often pretty high because they are designed to pay for the billing services, associated risks like fraud, and the cost card issuer incur when transferring money from the cardholder to the merchant.
Interchange rates vary depending on many different factors. Card issuers typically consider the following factors when determining the rate they will charge a business:
- Card Type: There are many types of credit cards, including reward credit cards, travel credit cards, and business credit cards. They are categorized as per their use cases. And credit card network providers typically charge a different rate for each type.
- Payment Processing Method: How you accept credit card payments will also affect your interchange fees. The fee tends to be higher when the risk of fraud is high. For example, the fee will be higher when a customer purchases goods through your website and pays it by entering their credit card information on a payment link than when they shop in a brick-and-mortar store.
- Merchant Category Code (MCC): This is a four-digit number that classifies the kind of service or products a business offers. It is given to a business when it opens a merchant account to start accepting credit card payments. Each code has an associated rate, which will affect your total credit card interchange fee.
Assessment Fees
These are the fees charged by the credit card network like MasterCard, Visa, and Discover. Unlike interchange fees, assessment fees are quite small. The average assessment fees charged by major credit card networks only fall at or around 0.14%. However, it can go higher when payment processors charge additional fees, also called mark-ups.
Average Credit Card Processing Fees
Credit card processing fees vary depending on the credit card brand or company and many other factors, including the pricing structure, which we will discuss below. Sometimes, credit card providers also consider the type of business a merchant owns.
Here’s a look at some of the major credit card companies and their average processing fee:
Credit Card Processing Fees Pricing Model
Credit card processing fees vary from one credit card network to another partly because of the pricing model the company is using. Generally, there are three different pricing models credit card companies adopt:
Interchange Plus Pricing
Interchange plus pricing is usually the least expensive pricing structure and offers the greatest amount of variability.
With the interchange plus pricing model, the service provider calculates the processing cost based on various factors, including the interchange fee from the credit card network, the type of card used, and the way the card is processed.
In addition to the interchange rate charged by a card network, the interchange plus pricing structure also includes a transaction fee charged by the processing company, also called a markup.
Flat Rate Pricing
Flat rate pricing is exactly what it sounds like the processor charges merchants one flat rate for all credit card transactions. PayPal, Square, and Stripe are just among the companies that use this pricing model.
The flat rate pricing model may seem simple, straightforward, and cheap at first glance. You need to pay a fixed percentage for every transaction you make. But there’s more going on with this pricing structure, and you can end up paying more.
The flat rate price or flat fee is usually a combination of interchange fees and assessments. Processors always ensure that their flat rates cover all transactions, both high and low-cost. It means when you choose this pricing model, you will need to pay the same percentage for all transactions, small or big. There’s little chance of saving money.
Tiered Pricing
Tiered pricing plans usually categorize credit card transactions into three possible tiers: qualified, mid-qualified, and non-qualified. The processing fee will vary depending on the type of card you accept.
Qualified transactions apply to non-rewards credit card transactions and often have the cheapest rate. On the other hand, mid-qualified transactions apply to card-not-present and manually keyed transactions as well as to membership rewards cards. International cards, high-reward cards, and corporate cards fall into non-qualified transactions and generally have the highest rates.
Like the flat-rate pricing model, the fees in tiered pricing are represented as a percentage plus the flat rate. Nevertheless, it is less expensive than flat-rate pricing.
How Are Credit Card Processing Fees Determined?
There is no standard model for card processing companies to follow when determining merchant account fees. Every credit card processor evaluates accounts differently based on various factors, but it all boils down to the degree of risk.
Here are some variables that can affect how much you need to pay to process credit card payments.
Processing method
There are many ways to accept card payments, like in person, online, and over the phone, to mention some. Each method carries a different level of chargeback and fraud risk. Aside from chargeback fees, there are typically higher rates for methods with an increased risk of fraud.
Transaction Volume
This is another factor that affects your processing fee. Small businesses with $250,000 in yearly credit card transactions can be looking at a processing fee of at least 3%.
Miscellaneous fees
Credit card processing companies also charge different types of incidental fees; these are fees triggered by accident. An example of a miscellaneous fee is a voice authorization fee, which merchants must pay when they call a help desk to manually authorize a transaction.
Other Variables
There are many other fees associated with credit card processing. Examples are Fixed Acquirer Network Fees (FANF), which you must pay when accepting Visa cards, and Network Access and Brand Usage fee, which Mastercard charges for all refunded or settled credit card transactions.
Negotiable Fees
Some credit card processing service providers charge fees that are not required for processing cards. Examples are account fees, contract cancellation fees, minimum monthly processing fees, PCI compliance fees, and payment gateway fees. In some cases, business owners may be able to get a discount rate on such fees.
Optimize Your Payment Processing
If you are planning to start accepting credit card payments, one of the steps you need to take is choosing a payment processor. Podium Payments is payment processing software specifically designed for small businesses. In addition to credit cards, this solution also allows you to accept other major payment options.
What’s unique about this solution is its text-to-pay feature. You can use text messaging to send invoices to your customers. Text messages usually have a higher open rate than email, another common channel for sending payment updates. Hence, payment reminders and invoices will likely be seen and paid on time.
Podium also offers tools designed to help you capture more leads, communicate with customers, and boost your online reputation. It’s an all-in-one solution small businesses can rely on.
How to Lower Credit Card Processing Fees?
Credit card transaction fees can be a bit expensive for small businesses. But since offering this payment option opens up more business opportunities, it can be hard to pass on. So here are a few tips to help you accept credit card payments without the fees breaking the bank:
1. Compare and negotiate rates.
Don’t settle with the first credit card provider you come across. Find at least three providers, get quotes, and compare them to find the best deal for your business. If you don’t have enough time to research rates for each credit card processing company, you can find credit card processing fee comparison resources online.
2. Monitor and address chargebacks.
Chargebacks are the payment amount returned to the credit card after a customer disputes their transaction. Fees for processing chargebacks are typically high, often $20 to $100 for every dispute. Save money by minimizing the risk of chargebacks. Some of the things you can do are using contactless card readers and offering return policies.
3. Look for avoidable fees.
Fees like statement fees, PCI compliance fees, minimum monthly processing fees, and terminal lease fees are usually avoidable. Find out whether or not a processor charges these fees and consider working with a processor that does not charge these fees. Some processors waive these fees, so ask your prospect provider if they can do the same.
4. Prioritize in-person transactions.
In-person transactions have a lower fraud risk, so they typically have lower processing fees. It’s a good idea to encourage your customers to conduct in-person transactions.
5. Set a minimum transaction amount.
Credit card processing fees are charged for every transaction. If you sell inexpensive items and your customers pay using this method, your credit card processing cost can easily increase. Setting a credit card minimum per transaction will help you avoid this issue.
FAQs
1. What is a small business’s average credit card processing fee?
The average business credit card processing fee ranges from 1.5% to 3.5%.
2. Is there a maximum credit card processing fee?
Credit card processing fees usually don’t go beyond 4%. Given the high processing fee, some merchants add an extra fee to the price of a purchase when a customer chooses to pay using a credit card to recoup the cost. If you plan to do the same, make sure not to add a surcharge of over 4%.
3. Can I avoid credit card processing fees?
Unfortunately, if you plan to accept credit card payments, there is no way to avoid credit card payment processing fees. Credit card processing is a service that you can use only if you pay for it. But as mentioned above, fees for things like PCI compliance are not required to process credit card payments. These are the fees you can avoid.
