At the most basic level, credit card processing fees are the cost that a business owner pays to accept payments by credit card. There are many components that are involved which determine the total cost including transaction fees, flat fees, and incidental fees. The average credit card processing fees generally range from 1.7% to 3.5% per transaction. These fees are the price your company pays to process credit cards.
It is a crucial move for business development to accept credit cards as a means of payment. However, it can be challenging learning how to accept credit cards at your point of sale, or online and learning and understanding all the credit card fees involved. Learning about these credit card processing fees may not be the most thrilling part of running a small business. But these credit card processing fees can add up and become a significant aspect of your overall finances. We have developed this complete guide to credit card processing fees to help you make the financial decisions that make the most sense for your business. We will explain what credit card processing fees are, their average cost, and how your company will be charged by different providers to accept credit cards.
What Are Transaction Fees for Credit Card Processing?
Transaction fees are fees that you will be charged per each transaction you process with a credit card. These fees are made up of interchange rates, the assessment fee, and the payment processor markup.
Flat fees are fees that you will have to pay typically on a monthly basis for working with a gateway or merchant service provider, which is the cost for using their service.
Incidental fees are fees that you are charged for a particular occurrence such as a chargeback (voided dispute or fraudulent claim) or a non-sufficient funds (NSF).
Credit Card Processing Fees/Transaction Fees
Now that you grasp the types of fees involved with the processing of credit cards, let’s break down in terms of both expense and procedure, what each means and what you should anticipate as a business owner. Every time a customer taps, dips or swipes their card these are the parties that are involved:
Issuing bank: This is the institution that has provided a credit card to your customer.
Credit Card Network: This is usually one of four main firms, Visa , Mastercard, Discover, and American Express, while foreign purchases may include others.
Receiving Bank: This is the bank that collects the funds from the issuing bank and deposits the funds in the bank account of your organization.
Payment Processor: This is the intermediary between the collecting bank and the issuing bank. Your payment processor may be a merchant service provider or a payment gateway, based on your specific company. The processor addresses problems such as authentication of the cardholder and account conflicts.. Each transaction charge consists of the exchange rate, evaluation fee, and markup of the payment processor, and each of the aforementioned parties earns a portion of this amount that you pay as the business owner.
Interchange Rate: The exchange rate is a fee paid to the receiving bank by the issuing bank when a consumer uses their credit card. That is how the issuing bank benefits from credit card transactions. You, the merchant, are going to compensate any or more of the exchange rate directly or with an exchange refund— which may be marginally cheaper than the entire exchange rate. Usually, exchange rates or returns are measured as a percentage of the gross purchase price. Each card network decides its own prices, which differ depending on factors such as:
- The card carrier
- The type of card; debit, credit, business
- How risky the card network considers the merchant’s business and industry
- The various ways the merchant can accept credit card payment
The Assessment Fee: The exchange rate is how the issuing bank gains from utilizing a credit card. What about the card network itself, what fees do they charge? This is when the appraisal charge falls into effect. The network charges a flat price on each purchase, in addition to the interchange cost or refund. The evaluation charge plus the interchange rate or rebate is also known collectively as the interchange fee. Each network sets its interexchange fees), and is modified twice a year. The measurement model is incredibly complicated and quite obscure, but the card network uses some codes to help them calculate the danger of which any particular seller is exposed— the possibility of default or theft. The appraisal charge comes straight from the card network and is part of the total conversion fee, it is a non-negotiable fee, and would be set independent of the payment method.
Payment Processor Markup
You’ll never get out of paying all of these fees, but you can negotiate the payment processor fee, this fee is charged on top of the interchange fee. The markup depends on the specific payment provider you choose, with various pricing plans. Whatever package you want, avoid long-term contracts. This way, you can compare plans and change processors at any point, as your business grows
Payment processors typically offer their services in three packages: Tiered Plans, Interchange – Plus Plans and Flat-Rate Plans. While it might be clearer to grasp tiered plans than other arrangements, the processor itself decides which category a given sale falls under. You can never be absolutely sure which tier the purchases of your client would fall into, which in the long run can prove costly. While Interchange – Plus Plans provides more transparency for future expenses, the drawback is that your statements are more complex, and you may or may not actually end up saving. For brand-new small business owners who don’t yet have the volume required to negotiate with payment suppliers, a flat-rate contract is a smart option. Additionally, since flat rates are often focused on a proportion of the larger purchase, if the purchases are on the smaller side, the added expense will not be too expensive.
Credit Card Processing Fees
Flat rate: The processing charge is shared by many separate parties. For the whole company credit card fee, the flat rates you pay to receive credit card payments come straight from the payment processor. In other words, this fee is what you pay the processor to access the multiple aspects of their service. The exact payments differ depending on the specific payment provider, they are usually periodic on a monthly or annual basis. However it is necessary to remember that with such programs, the payment provider can also charge one-time flat rates.
Recurring Flat Fees: Based on which payment processor you use, you may need to pay a variation of the following flat fees:
Monthly or annual account fees: It is a monthly cost to hold the account open with the payment processor and to operate the processing platform.
Monthly minimum processing fee: There is a recurring minimum charge for certain payment card processing firms. You will have to compensate for the variance between how much you have incurred in processing fees and their monthly minimum if you have not met the necessary minimum sum of fees per month.
Terminal lease or rental fees: Many payment processors require or encourage you to buy or lease a credit card processing machine.
Withdrawal fee: If you transfer funds from your payment processor account into your business bank account, a processor can impose a charge.
Payment gateway provider fee: Note that you’ll likely need a payment gateway provider if you offer goods or services online. If you use this feature, you may want to compare various supplier rates.
Statement fees: A processor can charge a fee for preparing your statements, in paper or online.
IRS reporting fee: Certain payment processors charge you for reporting your transactions to the IRS and for sending you the necessary tax reporting forms. You should dispute this charge on your monthly statement. Industry standards require the processor to deliver the service free of charge.
Payment card industry (PCI) fees: PCI Data Security Standard (DSS) is a series of requirements for data storage that extends to all credit card authorizing institutions. While not federally mandated, most major card providers demand that certain requirements be adhered to for all companies associated with them and several states have enacted them into legislation. Failure to comply with PCI DSS leaves a corporation vulnerable to fines, civil proceedings, and even government investigations, but you may be paid a fee from the payment provider to offset the expense of enforcement. And the payment provider may offer help to guarantee that you are in line with PCI DSS should you incur this charge. But these are hidden costs much of the time that retailers don’t notice on their statements. Ask about it if you notice these charges on your statements.
One Time Flat Fee: Sometimes the above payments are subject to negotiation, and you could ask a payment provider to completely waive them. Some companies charge more flat rates than others but when searching for specific policies, you will want to remember this. The avoidance of these payments is also marketed by such providers as an advantage to their specific service. A couple of the flat payments you will find more often are:
Account setup fee: This may involve a technician who sets up the appropriate devices, or who offers customer service on the phone with the setup. There may be a fee for the setup of the merchant account.
Terminal purchase fee: You should buy a credit card terminal, which can be a decent investment relative to rented or leasing facilities, although you should try to negotiate.
Cancellation fee: This is a fine for early termination of the deal paid by the payment processor, and it may be expensive. Check if this charge can be forgiven by the processor, and be sure that the agreement you sign allows for such a waiver.
Incidental fees: Incidental fees are the last factor involved in the total cost of accepting credit cards for your company. These payments come straight from the payment processor, like the flat fees, which are a product of a single case, ensuring you may not face either of these fees for several months. The exact fee will differ from processor to processor. Here are some of the more typical incidental fees:
Card holder dispute fees: The processor might charge a fee for each time a customer disputes a charge.
Chargeback fees: If the customer conflict ends in a chargeback, which results in a credit to the cardholder, you will be required to pay a fee.
Non-sufficient funds fee (NSF): They will charge you an extra fee if you do not have sufficient funds in your business banking account to pay your payment processor.
Batch payment processing fee: Each time your company submits a batch of payment card payments, perhaps as much as once or twice a day, your processor can charge a fee.
In general, we simply worry about purchase costs while talking about average credit card fees, and not generally flat fees or incidental fees. As a company owner, the biggest challenge is calculating how much you are paying with each purchase, because this payment derives straight from the sales. The cost of processing credit cards usually falls between 1.7% and 3.5%. Of course, this number depends on the considerations we listed before, such as how the purchase is made, the market, the card form, etc.
Payment Service Provider vs Merchant Account
There are various payment processors, each with different characteristics, resources and rates. PSP (payment service providers) have been trying to simplify credit card processing transaction costs by offering flat prices for each transaction of the same nature and avoiding lengthy contracts and secret fees. You don’t have to buy pricey business computing machines to use a PSP, nor do you need to sign a long-term deal or think about undisclosed costs. While these services might have easy-to-grasp price models, they may not always be cheaper than conventional merchant account providers.
For card-presented purchases, card-not-present payments and internet payments, PSPs charge an annual fee. For example, if you accept a credit card in your retail store, you can incur a lower price. If a consumer wishes to buy electronically on the website, even if you use payment information that is saved on a register, you pay a higher price. In general, payment processing providers have improved security from chargebacks relative to commercial processors.
Credit card payment costs, as you will see, can be a bit complicated and challenging to understand. However, breaking down all the multiple elements adding to the total expense and how payment processors arrange their prices will help you overcome this. In the end, the processing of credit card payments can be important (but necessary) costs for your company, so the most important thing is to consider what types of fees you will be facing so that you are willing to budget your finances appropriately. Selecting the right payment processor will make a big difference in the reduction of credit card charges. You may want to use the particulars of your market-business, revenue amount, payment acceptability, etc.-to decide which payment processing provider or merchant services fit better for you. In order to ensure that you have a good deal, you should pay particular attention to the features and facilities provided by any provider of flat or incidental fees and to discuss your costs wherever possible. Companies like Square and PayPal have generally simplified the expense of issuing credit cards dramatically and have rendered conventional account processors inefficient. This ensures that your credit card processing costs are more manageable and simpler to understand.