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Small businesses face a range of overheads to stay operational, and credit card processing fees are one of the biggest recurring expenses. 

Every time a merchant accepts a credit card in a transaction (one of the most preferred payment methods both in-store and online) they have to pay a percentage of that transaction to the card issuing bank and card payment network–and it quickly adds up.

Unfortunately, though, there’s no way for merchants to completely avoid paying these fees. The charges that come with debit card and credit card transactions are an inevitable part of doing business, making these costs challenging to manage.  

Merchants can’t lower credit card processing fees themselves, since they’re paid directly to the card network, not their chosen payment solution provider. However, there are ways for merchants to offset credit card processing fees when customers make credit card payments.

In this article, we’re diving into how credit card processing fees apply to credit card transactions and the ways that businesses can offset these costs and improve profitability. Then, we’ll explore how choosing the right payment processor is key to lowering credit card fees, and what to look for to find a reliable provider.

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What Are Credit Card Processing Fees?

Credit card processing fees refer to charges that merchants rack up whenever they accept credit card payments from customers, on both online and in-person transactions. What we call “credit card fees” are made up of multiple fee types that are paid to the parties involved in the transaction process. This includes the credit network and the credit card issuer. If unchecked, these fees can quickly start eating into your profit margins.

There are ways for businesses to offset credit card processing fees, such as setting minimum transaction amounts on credit card payments or building the fees into pricing. However, these strategies can easily backfire and end up doing more harm than good, especially if it pushes customers to shop at competitors who are absorbing these costs.

If you’ve going to effectively lower rates for processing credit card payments, you need to start at the source; how fees are structured, the types of credit cards you’re accepting–and most importantly, who is processing your payments.

What Are the Average Credit Card Processing Fees?

Card issuers each have their own fee structures that are unique to them, even if the service they are offering is the same. There are a few different variables when it comes to what credit card processing companies charge to process transactions. The transaction volume, the type of business and the types of transactions play a role. It also depends on whether it’s a card-not-present, in-person, keyed-in, or swiped transaction.

What about how the different credit card processing fees stack up against one another? Each card brand is different, as are the cards within their range offered via financial institutions. On average, American Express charges the highest rates. But American Express also provides advanced security protections for customers, in addition to bigger rewards and perks to incentivize regular use.

Visa processing rates tend to be the most affordable for merchants, meaning they are often listed as a ‘preferred’ merchant at businesses. Mastercard and Discover fees range somewhere in the middle:

  • Visa: 1.29% to 2.54%
  • Mastercard: 1.29% to 2.64% 
  • Discover: 1.53% to 2.53% 
  • American Express: 2.5% to 3.5%

They might seem minor. However, these fees can quickly stack up over the course of larger transactions. Cash, in-app, or mobile payments are still the best option to avoid credit card processing fees.

It’s also worth noting that fees can vary widely based on other factors not related to card brands, such as:

  • Monthly transaction volume
  • Industry risk level
  • Processing history i.e. number of chargebacks 
  • Pricing model (interchange-plus, flat-rate, or tiered)

Businesses that are larger and process higher, more consistent payment volumes typically qualify for better rates, while newer or high-risk businesses will face higher fees.

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How to Offset Credit Card Processing Fees

Merchants actually pay three different types of fees on payment processing: service fees, interchange fees, and assessment fees.

Service fees 

Also known as payment processing fees, these are a markup charged by the payment processing provider a merchant is using. The size of these fees (not to mention what is covered) can vary widely between different service offerings. Generally speaking, these fees cover the cost of the payment processor providing security and technological infrastructure, customer support, equipment, recurring billing add-ons, and more. Depending on transaction volume or pricing structures i.e. per-transaction fee or monthly fees, service fees can make up a significant chunk of your total credit card fees.

Interchange fees

Interchange fees are the costs that banks pay each other for accepting a credit card purchase from another financial institution e.g. Chase accepting a transaction from Bank of America. These fees are set by credit card networks like Visa and Mastercard, and are consistent between banks. An interchange fee is paid to the card-issuing bank i.e. the customer’s bank, and range from 1.5% to 3.5% of the total transaction value, making it one of the largest fees that make up overall credit card processing costs.

Assessment fees

Assessment fees are charged by credit card networks directly for using their payment infrastructure in order to process a credit card transaction. They serve as a type of access and maintenance charge for allowing a merchant to accept their credit card brand at their business and build trust with consumers.

As mentioned earlier, there’s no way to completely eliminate credit card processing fees. However, part of the fee you pay (the transaction fee) goes to the payment processor you’re partnering with. Of course, payment processors don’t do this work for free. What merchants wind up paying largely depends on their payment processor’s fee structure.

Additional fees that can be added to credit card processing, include:

  • Chargeback fees PCI compliance fees (many credit card processors don’t charge this)
  • Monthly fees
  • Assessment fees
  • Non-compliance fees
  • Interchange fees
  • And more.

There’s a wide variety of processing cost structures out there. The dollar amount of these fees can vary quite a bit. So, merchants need to get clarity from their payment processing company about the exact features they’re paying for, as well as what exact charges  to expect on their first bill.

1. Know the different credit card processing pricing models

What a merchant pays for credit card processing is largely dependent on their payment processor’s fee structure. Credit card processors use a few different unique pricing models to process customers’ card transactions. Here are three of the most common ones:

Interchange plus pricing. Interchange-plus pricing is pretty transparent, as far as pricing models are concerned. That’s because the credit card processor charges a fixed rate on top of the interchange rate. So, merchants can easily quantify what they’ll be paying each month for card processing rates.

Tiered pricing. Tiered pricing divides consumer transactions into different bundles or tiers, for which there are different rates. This is also called a bundled pricing model. It rarely ends up being cost-effective for merchants and makes it nearly impossible to determine their own monthly bill. Square uses a tiered pricing model.

Flat fee pricing. This is one of the most transparent pricing models. Since all of a merchant’s charges are bundled into one flat rate, there are fewer surprises on their monthly statement. They can pay a monthly fee for payment processing instead of paying each time they process a payment. Flat rate pricing is also called a subscription model or membership-style pricing. Stripe is a flat-fee payment processor.

2. Pass on the fees to customers via credit card surcharging

Credit card processing fees average a large percentage of any small business owner’s owner’s monthly expenses. One tactic used by many small business owners is to offset credit card processing fees by passing them on to customers. This is called “surcharging.” However, it’s not always advisable (or legal) for merchants to surcharge customers who are using credit cards.

How does surcharging differ from cash discounts?

Surcharging is actually the  opposite of offering a cash discount. A cash discount involves giving customers a discount rate for using cash or mobile payments. Surcharging involves charging a fee to all customers to recoup payment processing charges.

Surcharging vs charging a convenience fee

“Surcharging” is often used interchangeably with “convenience fees.” However, the two have different applications.

Convenience can be applied to any payment method that isn’t standard for a business to accept, not just credit cards, and this practice is legal in all U.S. states. For example, if someone uses their debit card to pay their taxes, instead of a check or an ACH transfer. They may be charged a convenience fee for the one-time use of their debit card on that transaction.

Is surcharging legal?

Credit card companies and the government both have regulations of where and how surcharging can occur. As of mid-2023, surcharging is legal in all but two states and one territory––Connecticut, Massachusetts, and Puerto Rico. But regulations are constantly changing. New York, for instance, has incredibly specific surcharging regulations. So merchants need to work with their payment processor to confirm ongoing compliance.

Other Ways to Lower Credit Card Transaction Fees

Business owners don’t have to accept lofty credit card processing fees lying down. There are a few other options, even for retailers that don’t want to toe the slippery line of surcharging. 

 This doesn’t mean making customers pay for apparel with ACH payments, or anything wild. Just a few simple tweaks to the in-store experience can work wonders to minimize credit card fees–without creating a lot of inconvenience for your customers.

1. Accept card-present transactions

When cardholders key in transactions at a merchant’s point of sale, it’s the merchant that winds up paying for it. Most card networks charge 3.5% for keyed-in transactions. Because of this, some merchants only accept card-present transactions i.e. when the card is swiped/entered into a card reader. It’s an easy way to eliminate unnecessary fees, without passing those fees along to customers.

2. Minimize chargebacks through PCI compliance

Chargebacks occur when customers dispute the validity of a purchase they made at a merchant’s payment gateway or website. They dispute the transaction with their (issuing) bank, however, it’s the merchant that pays the price. Fortunately, business owners can minimize chargebacks through PCI compliance and increasing dialogue throughout customers’ shopping journeys.

3. Encourage debit card transactions

The payment method a customer uses at a merchant’s POS system has a big impact on their monthly statement. Debit card payments cost merchants less to process than credit card payments. Merchants can benefit from this by training their staff to ask for debit cards first, in a friendly manner.

4. Limit acceptance of high-fee cards or methods

Credit card processing fees will differ between card brands and card types. If you have small transaction volumes, consider restricting acceptance of certain cards with high interchange fees, such as American Express, premium rewards cards, and contactless payments. This will have a positive impact on your bottom line while still accepting the most common payment types.

5. Negotiate with your payment processor

If you’ve been with your payment processor for a long-time or have a high monthly/annual transaction volume, there may be opportunities here to ask for lower credit card transaction fees. At the very least, it’s a good idea to ask them for a detailed breakdown to understand how their fees are charged; this will enable you to see where the main costs are coming from and look for alternative vendors who can save you money in this area.

Choose the Right Payment Processor

Card processing is one of the least glamorous parts of owning a business. But choosing a merchant service provider with a pricing plan that makes economic sense is critical. The payment processor a merchant creates a partnership with determines their ability to get a good rate.

Here’s what you should look for when selecting a payment processor:

Variety of payment options: Accept as many payment methods customers are likely to prefer, including major credit cards, debit cards, digital wallets, and ACH. Not only will this help you appeal to as many shoppers as possible, you can also direct them to lower-cost alternatives to credit cards.

Scalability: Your payment processor should be able to grow seamlessly with your business, and be able to handle increased transaction volumes without delays or reliability issues.

International payment methods/currencies: If you have ambitions to expand into new markets, it’s important to choose a processor that accepts different currencies and offers competitive exchange rates.

Customer support: Look for a payment processor offering reliable 24/7 customer service through multiple channels, including live chat, phone, and email.

Pricing structure: Different providers will use different payment models, such as monthly fees, per-transaction fees, and markups. The most cost-effective structure will depend on your transaction volume and any add-on features you may require.

Final Words

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No matter your business type and whether you’re processing in-person or online transactions, credit card processing fees can seriously affect profitability. While there are strategies you can leverage, such as controlling what payment methods your business accepts or credit card surcharging, these will have limited impact if you’re not using the right payment processor. 

Using a payment processor that offers easy to understand pricing and fee structures means that your business understands how much credit card processing is costing–and take further steps to lower it.

Payment Depot offers a transparent, interchange-plus pricing model that helps merchants save an average of $400 a month. Payment Depot simplifies credit card processing and makes it easy to get the best rates. 

We’re even PCI compliant and can give merchants all of the information they need on surcharging legality. No unexpected markups, no surprises. Just incredible rates on payment processing. Contact our award-winning support team today to learn more about how we can help your business.

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FAQs about Credit Card Processing Fee

Q: What are credit card processing fees?

Credit card processing fees are charges that merchants have to pay for the service of processing credit and debit card transactions. These fees usually range between 1.3% to 3.5% of each transaction.

Q: How can small business owners offset credit card processing fees?

Small business owners can offset credit card processing fees through various strategies, such as preferring cash, in-app, or mobile payments which come with lesser or no processing fees. Surcharging is another option, where the merchant charges a fee to customers to recoup payment processing charges. Training staff to request debit cards first or accepting only card-present transactions also helps in lowering fees. Another way is negotiating with payment processors and choosing a pricing model that suits their business needs best. 

Q: What are the different types of fees involved in payment processing?

In payment processing, merchants typically pay service fees, interchange fees, and assessment fees. Some additional fees can be chargebacks, Non-compliance fees, PCI compliance fees, and monthly fees. The payment processor’s fee structure largely determines these fees.

Q: What is surcharging, and how does it work?

Surcharging is a strategy some businesses use to offset credit card processing fees. It involves adding a fee to a customer’s bill to recover the cost of payment processing charges. However, surcharging is governed by certain regulations and is not legal in all states. Therefore, merchants need to consult their payment processors for compliance.

Q: What are the different pricing models used by credit card processors?

Credit card processors typically use three pricing models: Interchange plus pricing, where they charge a fixed rate on top of the interchange rate; Tiered pricing, which divides transactions into different bundles or tiers with different rates; and Flat fee pricing, where all the charges are bundled into one flat rate.

Q: Is it advisable for small business owners to pass on credit card processing fees to customers?

While passing on credit card processing fees to customers, also known as surcharging, does help offset processing costs, it may not always be advisable or even legal. It might negatively impact customer experience if not implemented or introduced properly. Transparency is vital with customers when it comes to adding a surcharge. We recommend merchants work with a payment processor, like Payment Depot or CardX, that offers automated surcharging compliance.

Q: How can Payment Depot help businesses offset credit card processing fees?

Payment Depot, a merchant service provider, offers a transparent, membership-based pricing model that helps merchants save an average of $400 a month. They assist businesses in understanding surcharging legality and provide PCI compliance information. Their goal is to eliminate unexpected markups and surprises, offering excellent rates on payment processing. 

Q: Are there any exceptions to credit card processing fees?

Some types of transactions, like those done through digital wallets or cash payments, may not incur processing fees. Additionally, fees can vary based on transaction volume, type of business, types of transactions, and whether transactions are completed in-person, online, or manually keyed in.

Q: How can businesses prevent chargebacks?

Chargebacks, which occur when customers dispute a transaction, can be minimized by ensuring PCI compliance and maintaining effective communication with customers throughout their shopping journey. 

Q: What factors determine the fee structure in credit card processing?

The fee structure in credit card processing is determined largely by the payment processor’s fee structure and the types of transactions made. Fees can also vary by card issuer, with different companies having their own fee structures.