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-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. 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.
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.