How to Offset Credit Card Processing Fees: A Small Business Owner’s Guide

Credit card processing fees are one of a small business owner’s biggest expenses. They cost merchants between 1.3% to 3.5% of each transaction. 

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.  

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

Let’s take a look at a few different strategies that merchants can use to offset their credit card processing fees.

What Are the Average Credit Card Processing Fees?

Card issuers each have their own fee structure. There are a few different variables when it comes to what a credit card company charges 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 an e-commerce, 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. On average, American Express charges the highest rates. But American Express also provides advanced security protections for customers.

Visa rates tend to be the most affordable for merchants. Mastercard and Discover fall somewhere in the middle. However, cash, in-app, or mobile payments are still the best option to avoid credit card processing fees.

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.

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. 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:

• Chargebacks (if a customer’s card is declined)
• 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 clear about the exact features they’re paying for as well as what exact categories 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 SMB owner’s monthly expenses. Many small business owners have tried 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.

How Does Surcharging Differ From Cash Discounts?

Surcharging is actually the exact opposite of offering a cash discount. A cash discount involves giving customers a price reduction 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 impacts all customers, regardless of their preferred payment method. Convenience fees, on the other hand, only impact those using non-traditional payment methods. Say 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-2021, 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. No, it 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.

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. 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 Payments

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.

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.

Payment Depot offers a transparent, membership-based 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.