In today’s highly competitive marketplace, business owners are always seeking ways to reduce expenses and maximize profits. Brick-and-mortar retailers, as well as eCommerce merchants, are equally interested in decreasing their credit card processing fees.
Merchant Cost Consulting lists the average credit card processing fees in May 2022. For card-present transactions, average Mastercard, Visa, and Discover fees range from 1.70% to 2.05% while riskier card-not-present sales average 2.25% to 2.50% per transaction. American Express’ average credit card processing fees tend to be higher.
Fortunately, understanding credit card processing fees is key to reducing them. Besides helping you with that, this article also discusses some useful strategies to reduce this drag on your business’s bottom line.
Understanding Credit Card Processing Fees
Every day, merchants of all stripes process customer credit card (and debit card) transactions. Each time a merchant completes a customer’s purchase, they are hit with multiple card processing fees.
Each payment processing company maintains its own fee schedule. Some processors, such as Payment Depot, utilize a business model that minimizes these annoying charges.
Let’s take a look at some common types of fees that most processors charge.
Interchange Fees
Interchange fees (or wholesale fees) make up the majority of a merchant’s credit card processing fees. Credit card networks like Visa, Mastercard, American Express, and Discover set these non-negotiable transaction fees.
The issuing bank (or card issuer) receives these interchange fees. These charges partially cover transaction costs and eliminate credit card and debit card fraud risks at checkout.
The type of business typically influences the merchant’s interchange rate. Business owners in lower-risk industries generally pay a lower interchange rate than higher-risk businesses. PIN-enabled debit cards have the lowest rates while higher-tier rewards cards are charged higher rates.
The type of transaction also affects the interchange rate. Card present transactions see lower rates while riskier eCommerce purchases are charged higher interchange fees.
Assessment Fees
Card brands also charge assessment fees to brick-and-mortar and online merchants. The merchant’s payment processor implements these non-negotiable charges.
Assessment fees cover the card networks’ operations costs and allow the merchant to use the specific card brand. Assessment fees are considerably lower than interchange fees.
Payment Processors’ Markup Fees
Besides the interchange rate, some credit card processing companies also charge a markup fee (or commission). This negotiable fee covers the processor’s operating expenses. When comparing payment processors, merchants should consider each processor’s markup percentage.
Merchant Service Fees
The payment processor (or merchant services provider) also assesses a multi-component service fees package. Many processors charge all these ongoing fees. However, other companies do not pass certain processing costs to the merchant.
Setup Fees
Some payment processors charge merchants to connect to the company’s network. The setup fee would likely apply regardless of whether the merchant completes the process over the phone or a technician installs the hardware.
Payment Gateway Fee
eCommerce retailers accept credit card payments through an electronic payment gateway. Each merchant pays a monthly fee for the payment gateway access.
Virtual Payment Terminal Fee
Merchants who process phone orders will benefit from a virtual terminal. This software enables the merchant to manually enter customers’ card details. Most payment processors include a virtual terminal in their services. However, a few companies assess a charge for this feature.
Merchant Charges Batch Fee
This small daily fee covers the batched submission of the merchant’s daily transactions. A batch fee is one of the smallest merchant charges.
Monthly Minimum Fee
Certain merchants may not meet the processor’s predetermined monthly transaction numbers or transaction volume requirements. These merchants will be charged a monthly minimum fee for failing to reach the minimum business levels.
PCI Compliance Fees
Merchants are responsible for compliance with the payment card industry data security standard (better known as PCI DSS). These measures help to ensure cardholder data security for each credit card transaction. If payment processors handle compliance issues, they often (but not always) assess PCI compliance fees for this service.
Note that Payment Depot’s pricing plan includes PCI compliance services at no extra charge. However, merchants must still complete a Self-Assessment Questionnaire every six months. After completing the form, the business can determine if changes are needed to meet PCI compliance standards.
PCI Non-Compliance Fees
A small business merchant may not meet the PCI compliance criteria during a given month. If that’s the case, some processors may charge PCI non-compliance fees for their failure to meet the standard during that month.
Statement Fee
Some credit card processors may charge merchants a monthly statement fee. This charge covers the processor’s customer service and statement preparation services.
Cancellation Fee
Most merchant account providers typically require a merchant to sign an extended contract. A three-year contract is common throughout the payment processing industry.
If the merchant cancels the contract prematurely, they will be charged a substantial cancellation fee. Notably, Payment Depot’s month-to-month pricing model does not include a cancellation fee.
Additional Non-Standard Payment Processing Fees
The term “additional fees” is a catch-all phrase for non-standard payment processing fees. The first two fees below cover optional services. The third fee results from a customer’s dispute about a previously completed transaction.
AVS Fee
An address verification fee (or AVS fee) is a charge for an anti-fraud measure. The AVS fee verifies the cardholder’s address and zip code. The merchant only pays a few cents per transaction for AVS verification.
Voice Authorization Fee
A voice authorization is another anti-fraud tactic. Here, the merchant’s point of sale (or POS terminal) reminds them to get in touch with the card-issuing bank. The bank associate collects the transaction details before approving or declining the transaction.
Chargeback Fees to Merchant
Merchants of all sizes and types dread the appearance of chargebacks. A chargeback occurs when a customer challenges a completed transaction with their card-issuing bank. To resolve the issue, the financial institution launches an investigation. At the same time, the credit card processor assesses chargeback fees to the merchant.
If the dispute is resolved in the merchant’s favor, the processor refunds the charged purchase amount. However, the processor will probably not refund the chargeback fees.
Common Credit Card Pricing Models
Four credit card pricing models are common throughout the payment processing industry. Most models are best suited for a specific business stage and/or monthly processing volume. In certain cases, larger-volume businesses may receive a discount rate for their transactions.
Interchange-Plus Pricing
Many businesses prefer the interchange-plus pricing model because of its transparency – hence why we here at Payment Depot feature this solution. Here, the merchant’s monthly statement clearly separates the card networks’ predetermined interchange fee and the processor’s markup fee. Therefore, comparing several processors’ markup fees is an easy task.
Most businesses will benefit from the interchange-plus pricing model. Depending on the processor’s markup fee, this model could be the merchant’s lowest-cost option.
Flat-Rate Pricing
Under a flat-rate pricing model, all credit cards receive the same processing rate. Here, the interchange fee and markup fee are combined into a single flat fee. This enables the merchant to predict the exact cost of every transaction. In addition, flat-rate processors rarely charge additional fees.
A flat-rate pricing model may benefit a small business with lower monthly transaction volumes or small purchase amounts. However, this model’s transaction cost could be higher than other pricing models.
Tiered Pricing
The tiered pricing model’s concept is simple. Depending on the type of card, the merchant will pay one of three tiered rates.
- Qualified rates apply to debit cards and non-rewards credit cards.
- Mid-qualified rates apply to conventional rewards credit cards.
- Non-qualified rates apply to premium credit cards along with card-not-present sales.
Unfortunately, most transactions fall into the non-qualified and mid-qualified tiers. Both tiers have higher processing rates. Overall, the merchant will see higher processing rates with tiered pricing, so it’s not recommended.
Membership-Based Pricing
Under a membership-based pricing model, the merchant pays a monthly membership fee and a small preset transaction fee. However, the processor does not typically nickel-and-dime the merchant with additional fees every month. High-volume businesses will benefit from this model. Stax Payments is known for its small business-friendly membership pricing model.
6 Ways To Reduce Credit Card Processing Fees
By combining six smart strategies, merchants can decrease their credit card processing fees. Note that a business’s situation can change over time. Therefore, merchants should closely monitor their credit card processing expenses and adjust as needed.
1. Choose The Most Appropriate Pricing Model
A company’s current and projected growth will influence the business owner’s choice of pricing model. The transaction type and transaction volume are additional factors to consider.
2. Transfer Payment Processing Fees To Customers
Many merchants have considered the feasibility of passing payment processing fees on to their customers. These four practices may be worth consideration. Before doing so, however, merchants should consider whether this practice will alienate customers and drive them to the business’s competitors.
Minimum Purchase Amount
Payment processing fees impact every company’s bottom line. When merchants must pay the fees on low-dollar purchases, the business receives very little income from the transaction.
Therefore, some businesses have established a minimum dollar amount for credit and debit card sales. From the customer’s perspective, this is likely the easiest option to understand.
Cash Discount Program
Under a cash discount program, all merchandise automatically reflects the higher credit card price. If a customer pays with cash, they receive a discount at checkout.
Convenience Fee Assessment
A merchant may charge a convenience fee if a customer pays with a credit, debit, or another electronic payment card. Customers who pay with cash, check, or ACH transfers will not pay the convenience fee.
A convenience fee can be a percentage of the transaction (generally 2% to 3%). Alternatively, the fee can remain at a specific dollar amount. Either way, the merchant must disclose the convenience fee before the customer makes the purchase.
Credit Card Processing Surcharge
Most states allow a merchant to add a surcharge to a credit card purchase. This surcharge is designed to cover the transaction’s credit card processing fees. Customers who pay with cash, a debit card, or a prepaid card will not receive the surcharge.
Surcharging is legal in most states, but specific laws may apply. Speak with a payment processing representative to see if your business is eligible.
Merchants Must Follow These Four Surcharging Practices:
- The surcharge cannot be higher than the payment processing fee or 3% of the transaction amount. The surcharge will be the lower of the two figures.
- The merchant’s POS station or checkout page must clearly display the surcharge.
- The transaction receipt must clearly show the surcharge.
- The merchant must tell Visa and Mastercard about the surcharging plan.
3. Prioritize Card-Present Transactions
Merchants should favor less expensive (and less risky) card-present transactions. Here, the customer swipes, dips, or taps their physical card into the POS system or card reader.
A riskier card-not-present (or CNP) transaction typically involves manual data entry for online payments or telephone orders. Historically, card thieves and cybercriminals have enjoyed racking up purchases from unsuspecting customers’ stolen card numbers.
Today, merchants typically require the CVV code from the physical card. This essentially prevents criminals from using stolen card numbers to go on a buying spree.
4. Reduce Credit Card Processing Fraud Risks
Merchants who process more potentially fraudulent transactions will be charged higher card processing rates. Therefore, decreasing credit card fraud risks will lower these rates over time.
For starters, the merchant should encourage card-present transactions whenever possible. As an added security measure, encrypted EMV (or chip) cards are designed to prevent card fraud.
Alternatively, the merchant can ask customers to enter their zip code or CVV code. All three practices will verify the transaction and reduce expensive chargebacks.
Some merchants choose to negotiate account details with a payment processor. During this conversation, highlighting anti-fraud measures is always a good strategy.
Here Are Five Useful Tactics That Should Apply To Any Business.
- Follow a clear, simple return and refund policy.
- Save customer receipts and other transaction history details.
- Utilize the latest technology and obtain the right equipment.
- Ensure consistent PCI DSS compliance.
- Train employees in correct card processing procedures.
5. Decrease Credit Card Chargebacks
A credit card chargeback occurs when a cardholder disputes a completed credit card transaction. The customer could have fallen victim to fraud.
Alternatively, the customer could have forgotten the purchase or been unhappy with their product or service. Perhaps the customer did not recognize the merchant’s name on their credit card statement.
Each chargeback has negative effects on the merchant’s bottom line. First, the retailer loses revenue from the sale. The merchant’s payment processor assesses a chargeback fee for the incident. Too many chargebacks place the merchant in a high-risk category.
In extreme cases, the merchant can lose their ability to complete customer card payments through that processor. To avoid this unwelcome outcome, merchants should take steps to reduce credit card chargebacks.
6. Consider Accepting ACH Payment Processing And eChecks
Merchants should strongly consider accepting Automated Clearing House (or ACH) payments and eChecks. These electronic bank-to-bank fund transfers are processed more quickly than physical checks. In addition, ACH payments do not carry card-based interchange fees. An ACH payment can be processed with only a bank account number and routing number.
An electronic check (or eCheck) involves an electronic fund withdrawal from the payer’s checking account. The funds are transferred over the ACH Network before reaching the payee’s checking account.
Finding A Small Business-Friendly Payment Processing Partner
Small- and medium-sized businesses looking to reduce their credit card processing expenses should definitely consider Payment Depot when choosing a processing partner. The company is a small business-friendly payment processor with an excellent industry reputation.
At Payment Depot we believe that merchants deserve better. We streamline your credit card transactions by equipping you with the latest payment technologies and terminals. Plus, with Payment Depot, you won’t encounter hidden fees thanks to our transparent, Interchange Plus pricing model, ensuring you always know what you’re being charged.
To learn how you can save more on credit card processing, contact us today.
Quick FAQs about Credit Card Processing Fees
Q: What are the average credit card processing fees?
The average credit card processing fees range from 1.70% to 2.05% for card-present transactions, while riskier card-not-present sales average 2.25% to 2.50% per transaction. American Express’ average processing fees tend to be higher.
Q: Who receives the interchange fees in credit card transactions?
The issuing bank or card issuer receives these interchange fees. These charges partially cover transaction costs and eliminate credit card and debit card fraud risks at checkout.
Q: What factors influence the interchange rate?
The type of business and the type of transaction influence the interchange rate. Business owners in lower-risk industries generally pay a lower interchange rate than higher-risk businesses. Card present transactions see lower rates while riskier eCommerce purchases are charged higher interchange fees.
Q: What are some common types of fees charged by most processors?
Some common types of fees include interchange fees, assessment fees, markup fees, setup fees, payment gateway access fees, virtual terminal fees, batch fees, monthly minimum fees, PCI compliance fees, and cancellation fees.
Q: What are the four credit card pricing models common throughout the payment processing industry?
The four common credit card pricing models are interchange-plus pricing, flat-rate pricing, tiered pricing, and membership-based pricing.
Q: How can merchants decrease their credit card processing fees?
Merchants can decrease their credit card processing fees by choosing the most appropriate pricing model, transferring payment processing fees to customers, prioritizing card-present transactions, negotiating the markup fee with credit card processors, and implementing effective anti-fraud measures.
Q: What are some practices for passing payment processing fees on to customers?
Some practices for passing payment processing fees on to customers include establishing a minimum dollar amount for credit and debit card sales, implementing a cash discount program, charging a convenience fee for payments made with a credit, debit, or another electronic payment card, and adding a surcharge to a credit card purchase.
Q: What steps can merchants take to reduce credit card chargebacks?
Merchants can reduce credit card chargebacks by accepting Automated Clearing House (or ACH) payments and eChecks, following a clear, simple return and refund policy, saving customer receipts and other transaction history details, utilizing the latest technology and obtaining the right equipment, ensuring consistent PCI DSS compliance, and training employees in correct card processing procedures.
Q: What is Payment Depot?
Payment Depot is a small business-friendly payment processor known for its transparent Interchange Plus pricing model. Payment Depot streamlines your credit card transactions by equipping you with the latest payment technologies and terminals. Plus, with Payment Depot, you won’t encounter hidden fees thanks to our transparent, Interchange Plus pricing model, ensuring you always know what you’re being charged.
Q: What are ACH payments and eChecks?
ACH payments and eChecks are electronic bank-to-bank fund transfers processed more quickly than physical checks. These do not carry card-based interchange fees and can be processed with only a bank account number and routing number. An electronic check (or eCheck) involves an electronic fund withdrawal from the payer’s checking account, with the funds transferred over the ACH Network before reaching the payee’s checking account.
