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Ultimate Guide to Credit Card Processing Fees (2022)

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Ryleigh Stangness | July 1, 2022

“Here's how to understand credit card fees and what credit card processors are charging you.”
8 min read
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    Credit card processing fees are a double-edged sword. On the one hand, the convenience you're able to offer your customers by allowing them to pay via credit card is huge- on the other, the fees you pay can be crushing depending on your pricing model.

    As a business owner, it pays to understand your costs- and where you are being duped into paying more.  

    The more you know.

    If you're reading this, chances are you are already processing payments for your business. You are either sick of deciphering your merchant account statement and the endless list of fees or are looking into ways to cut unnecessary costs. Either way, you want to learn more about why and what you're being charged for.

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    What Types of Credit Card Processing Fees Are There?

    Credit card fees are the cost you pay, as a merchant, to accept credit card payments whether your customer is purchasing online or when they pay at the counter in-person.

    Credit card processing fees are made up of two factors:  The interchange fee  and  the card processing fees.  

    Banks and card brands set the interchange fee, while the payment processor that processes your payments adds their cost and profit margin.  

    Below, we will get into how those two costs are decided, how that process works, what types of credit card fees there are, which ones to watch out for, and how you can save your business from overpaying for credit card processing fees overall.

    What is an interchange fee?

    As mentioned above, the interchange fee is one of two components that make up your payment processing costs.  

    The interchange fee is essentially the price card brands (i.e., Visa, Mastercard) charge acquiring banks and businesses for the privilege of processing a credit card on the card network.

    Each transaction type  has a different cost depending on factors such as cardholder perks such as high reward and privilege cards which cost issuing banks and card brands more, and other factors such as risk, which goes up for card-not-present transactions, for example.

    This is one of the ways that card brands make money and offset their costs -the card brands get a cut, and the  issuing banks  get an amount.

    Learn more about how  interchange fees  work here.

    Card processing fees- the secret ingredient

    The following fee that merchants need to be aware of is the card processing fee. This is what your credit card processor or acquirer will charge you on top of the interchange rate to process credit cards.

    Remember how acquiring banks have to pay issuing banks?  Well, they want their money.

    You'll recall that the interchange rate is getting kicked back to the card brands and the banks that issue customers with credit cards, so the processing fee is how payment processors and acquirers get their slice of the pie.

    Remember, credit card processing involves many different entities that work together to support the movement of funds from the customer to the business owner.

    All these entities require some form of compensation for their role in making  the credit card processing cycle  work.

    If you're concerned with how much you are paying for credit card processing, you need to watch out for how your payment processor charges this fee and what pricing model they use.

    Pricing models- How payment processors charge processing fees

    As we've mentioned, there are specific fees that come with many payments companies that aren't necessary, and you should make sure you've done your research before committing to an attractive-looking rate or a big brand name.

    One fee that merchants can't escape, however, when it comes to accepting credit cards is the processing fee, meaning the cost of the actual transaction. Now all payment processors charge a processing fee, but they don't all do it the same way. That's why understanding your processor's pricing structure is vital because all merchants are subject to these, and you want to get the best deal possible.

    Frequently, payment processors will tout the "simplicity" of their rates, which are often easy to understand, but in reality, they don't benefit the merchants as much as they do the processor. One of the best examples is flat-rate pricing, which you can read more about  here.

    On  the other hand, interchange plus pricing is the most transparent and affordable pricing model in the industry:  see how it compares to flat rate pricing.

    There are a few  other pricing models  in the market, such as subscription, tiered, and differential pricing. Before signing up for a new merchant account, make sure you learn how your payment processor plans to charge you- while knowing that all fees may not be upfront (more on that in the next section.)

    Watch out for these Credit card fees and costs

    Now besides the processing fees (meaning the costs directly associated with transactions and moving money around the network), there are a host of other expenses that merchants can sometimes be charged by their payment processor.

    The bad news is that many of these fees are entirely unnecessary and are only "standard" in the industry because too many companies have been reaping benefits from these fee schemes for years.

    Here are a few of  those hidden fees  that you'll want to keep an eye out for when you're shopping around for a  merchant service provider:

    PCI Compliance/non-compliance fee (security standards shouldn't cost extra)

    Customer service fees (paying for customer support is just unethical in our minds)

    Installation fees (do you really need someone to come to plug in your card reader for you and charge you an arm and a leg to do it? Besides, most businesses are  gearing towards wireless  card readers nowadays)

    Monthly minimums (meaning you'll be dinged if your business doesn't do so hot one month)

    Annual fees (yearly costs sometimes in addition to monthly fees and PCI fees)

    Cancellation fees (if you don't like your payment processor, you should be able to leave free of charge, not stay just because you're locked into a contract)

    The bottom line with these fees is that merchants should never need to pay them. If you're working with a payment processor that cares about helping you build your business, they're going to put serving you at the top of their list and make it easier for you to do business-not harder.

    Can I Reduce My Processing Fees?

    The good news for business owners is that there are four tangible ways to reduce your credit card processing costs, one of which you can start doing today!

    Learn more about interchange rates.  

    Understanding how processors and card brands determine risk and cost can help you get the best bang for your buck when processing credit cards. Here are a few examples based on the  2022 April interchange fees.

    In the U.S., Small businesses can catch a break right now with:

    • Small Merchant Rates
    • Small ticket transactions
    • Tokenized transactions.

    Knowing that, you can sign up with a payments company that educates their merchants and offers interchange-plus pricing or one that provides a card vault for recurring processing so you can take advantage of lower fees.

    Process more  in-person transactions.  

    This is the first thing you can do (and what you can get started on immediately.) While online transactions are a convenient way to get paid when people can't visit your store (and bring your products to more customers), they are deemed higher risk by processors and card brands. Businesses often pay slightly more in processing fees for online transitions than those processed when the customer pays in-person (known as a card-present transaction).

    Why volume matters: Credit card fees for small vs. large businesses

    Some businesses will receive preferred rates from payment processors because they process a considerable amount of transactions (or large amounts on average) compared to the processing volume of an average business. If you are a business with a lot of processing volume, check if your processor has preferred rates for businesses like yours and  look for a payment processor that automatically applies volume discounts.

    If you're a small business, you may not be eligible for better rates off the cuff, but some processors will offer you volume discounts as your business grows (though you usually have to ask for them). This will significantly reduce your costs over time and as your business grows.

    Look for a processor that offers interchange-plus pricing.

    Finally, look for a payment processor offering interchange-plus pricing to save on processing fees. We already explained how understanding interchange rates could help you optimize your credit card transactions, but you'll need a processor who lets you capitalize on those savings.

    While flat rate is simple, it doesn't save merchants money; tiered pricing is generally costly for merchants, and interchange plus is more affordable and transparent, so you always know what you're being charged for.

    Final Thoughs

    Credit card processing fees are a pain for most merchants, but it's good to know the difference between the necessary fees and the ones you can avoid; that way, you won't end up paying more than you need to for essential services.

    Understanding the different pricing structures and interchange fees that affect transaction costs can also make a difference to your bottom line, so make sure you do your homework on how the different payment processors operate.

    At the end of the day, finding a processor right for you and your business is going to be one of the most important decisions you make as a business owner, so don't be afraid to shop around. And now, you can choose your next payment processor armed with the knowledge of how credit card processing fees work.

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