What Is Zero Cost Credit Card Processing and Is It Suitable for Your Small Business?
As the world continues to move toward a cashless economy, credit card payments remain a major part of the global payments industry. In fact, credit card payments are projected to attain annual volumes of $1.82 trillion by 2024.
As such, two emerging trends are driving the credit card industry’s growth. First, 75% of consumers have a favorite credit card with a rewards program.
Second, more millennial and Gen Z consumers have spurred merchants to offer mobile point of sale (or POS) payment methods. Business Insider Intelligence predicts the existence of 16.6 million mobile POS (or mPOS) terminals in the United States by 2024.
For retailers, however, hefty credit card processing fees continue to be a concern. No wonder that they are constantly on the lookout for ways to minimize these costs.
In this article, we’ll explore the nitty-gritty of zero cost credit card processing — how it works, how to implement it in your business, and the things you should consider before you do.
Let’s dive in.
The Merchant Service Provider’s Role
To accept credit cards from your customers, you must sign an agreement with a merchant services provider. This company is also called a payment processing company. The merchant services provider furnishes the equipment and services needed to process your credit card transactions.
After each purchase has been approved, the payment processor deducts their service fee. Then, they place the net sales proceeds into your dedicated merchant account. From there, the funds are transferred to your business bank account.
Credit Card Processing Fees
Every day, customers swipe, tap, or dip their credit cards for in-store purchases or mobile-based sales. For every completed transaction, the merchant pays between 2% and 3% in processing fees.
For reference, credit card networks maintain the virtual infrastructure within which credit card transactions take place. The networks assess non-negotiable interchange fees, based on interchange rates, to merchants. Interchange fees make up the biggest component of card processing rates.
Visa, Mastercard, Discover, and American Express are the four primary credit card networks (and card brands). Discover and American Express are also credit card issuers.
Interchange-plus Pricing
Some credit card processors use an interchange-plus pricing model. Here, the processor separates the bank/credit card issuer fees from the processor’s markup rate. This method provides the merchant with added transparency about often-murky credit card fees.
What Is Zero Cost Credit Card Processing?
Credit card processors are keenly aware of the strong dislike that retailers have for credit card processing fees. From the business owner’s perspective, these transaction fees impact their bottom line.
As a result, some enterprising payment processors now offer zero cost credit card processing. This enables merchants to realize a 0% payment processing fee.
Zero cost credit card processing is also called zero fee credit card processing. This processing method transfers part (or all) of each transaction fee to the customer (or cardholder).
How Zero Cost Credit Card Processing Works
Each zero cost credit card processing program consists of a targeted software add-on. The merchant installs the software on their credit card terminal and/or point of sale (or POS) system. The software is used in card-present transactions for magnetic stripe and EMV (chip) cards.
Virtual terminals or payment gateways (for online payments) can also accept the software add-on. These payment options are not considered card-present transactions.
Once activated, the software detects each credit card use and adjusts the item’s purchase price. If the merchant has installed a surcharging program, the software will add an extra charge to the purchase. Alternatively, the merchant can use the same software to opt for a cash discount program.
Note that all transactions must comply with Payment Card Industry Data Security Standards (or PCI DSS). Under the PCI DSS standards, merchants who process sensitive customer payment data must prove that they do so securely.
How ACH Transactions Fit In
Note that credit card processing fees do not apply to ACH transactions. Instead, funds are transferred from a customer’s bank account to the retailer’s bank account. The transaction travels through the ACH network.
Merchants who accept customer-not-present payments or recurring payments (such as subscriptions) often choose ACH transactions. Although ACH payments have longer processing times, they cost considerably less than credit card transactions. ACH providers charge either a flat-rate fee or a low per-transaction percentage fee.
Is Zero Cost Credit Card Processing Really Free?
The old adage “there’s no such thing as a free lunch” certainly applies here. As such, there’s no such thing as free credit card processing. Zero cost card processing simply enables you to pass most transaction costs to your customers.
However, you must still pay fees applicable to credit card transactions. Examples include setup fees, monthly service fees, PCI compliance fees, additional fees, and chargebacks costs.
Realize that surcharges only apply to credit cards. You must still pay all debit cards processing costs, even if the customer chooses the “run as credit” option. So, you will not be able to escape the fees for debit card transactions.
Finally, certain zero cost card processing companies may invite you to lease your credit card machine(s). This is strongly discouraged, as you will pay monthly fees that add up to much more than the equipment’s purchase cost.
Surcharging vs Cash Discounts
Imposing a transaction surcharge is substantially different than offering a cash discount. Either way, the merchant avoids the processing fees associated with credit card payments.
Credit Card Surcharge
In this straightforward method, the merchant tacks a percentage onto the transaction if the customer pays via credit card. For example, a $100 purchase with a 3% surcharge means the customer will pay $103.
Cash Discount
A cash discount program uses the opposite approach. In this framework, all store prices reflect the higher credit card price. However, a customer who pays with cash will receive a discount during checkout. For example, the $103 item will only cost $100 if the customer pays with cash.
Legalities of Surcharges and Cash Discounts
Cash discount programs are legal in every state and local jurisdiction in the United States. However, 10 states and Puerto Rico have made credit surcharging illegal or limited in scope. Five states have laws regarding cash discount programs. Finally, understand that a legal credit surcharge may violate your payment processing provider’s terms of service.
How to Implement Zero Cost Credit Card Processing
Zero cost credit card processing might sound like a budget-friendly credit card processing solution. However, before you add this software to your payment processing system, keep the following guidelines in mind:
1. Perform Your Due Diligence
Verify that zero cost credit card processing is legal in your local jurisdiction. If you operate your business from one location (e.g. a corporate office), and your customers are located in other cities or states, this payment solution needs to be legal in both locations.
Ensure that implementing a zero cost credit card processing program will not cause any contractual conflicts. Take the time to read the fine print in your payment processing provider’s and/or financial institution’s service agreement.
2. Find a Reputable Provider
Your credit card processing company may not offer the zero cost credit card processing option. If you can legally implement the program, look for a reputable provider. Alternatively, consider a cash discount program.
3. Communicate With Your Customers
After making your decision, and putting the software in place, tell your customers about the new system. Ensure that your customer-facing and support employees are notified of the change.
In-store Customers
Train your sales associates on the details of the new system. If applicable, encourage them to promote cash discounts and/or purchase incentives. Anticipate customer questions, and provide your staff with appropriate responses. Finally, install informative signage near your POS station.
Website Viewers
Add a professionally designed banner announcement to your website’s home page, but make sure that viewers have the ability to close the message if they desire. Update your store’s Pricing Policy page and Frequently Asked Questions (FAQs) page. If you operate an ecommerce business, include a note on every product page.
Email Recipients
Hire a skilled copywriter to communicate the change to your email subscribers. Tell your readers how the new processing system will affect them. Focus on the benefits to the customer rather than to your business.
Things to Consider Before You Adopt Zero Cost Credit Card Processing
Before jumping on the zero cost credit card processing bandwagon, look at your competitive landscape. Do your competitors impose a credit card surcharge? If that’s not the case, determine how you can attract and retain customers when you do not have the cheapest credit card processing fees.
Consider whether your target market is strongly against credit card surcharging practices. If so, and customers can easily obtain your products elsewhere, look at other ways of reducing credit card processing fees.
Choosing the Right Program for Your Business Needs
Let’s assume that credit card surcharging is legal in your jurisdiction. If so, ask yourself three questions before deciding to implement surcharging vs a cash discount option.
1. Gauge your Customer’s Price Sensitivity
Your customers might be sensitive to product pricing fluctuations. If so, they may not take kindly to a zero cost credit card processing program (especially surcharging).
Conversely, other target market customers may be less price-sensitive, and they might view a credit card surcharge as a minor inconvenience. Decide which program is best for your business needs.
2. Consider your Debit Card Sales Volume
Remember that you cannot impose a debit card payment surcharge. If debit card sales comprise much of your card volume, surcharging may annoy your customers without bringing you any return.
3. Determine Your Effective Rate
To calculate your surcharge fee or cash discount amount, find your business’ effective rate. This figure is the total average percentage you pay to process credit cards. To obtain this number, divide your monthly fees by the total processing volume.
Generally speaking, this calculated result will match the surcharge or cash discount you should use. Most surcharge or discount programs offer fixed 3.5%-4% rates. If your effective rate is lower than 3.5%, you will be overcharging customers, which is not advisable.
Is Zero Cost Credit Card Processing Right for Your Small Business?
Consider the pros and cons of zero cost credit card processing before making your decision. On the plus side, you will save money on processing fees and incur more predictable expenses.
However, you will likely alienate (and possibly lose) some customers. In addition, this new processing add-on could violate your credit card processor’s terms of service.
Before putting the wheels in motion, carefully weigh your options. Obtain feedback from other business owners who have implemented this software.
Payment Depot’s Budget-Friendly Pricing Structure
Finally, realize that you can implement a budget-friendly payment processing solution without damaging your customer relationships. Payment Depot is a membership-based payment processor offering affordable wholesale processing rates.
The company assesses a monthly fee for its services. However, Payment Depot does not utilize markups or charge added fees or cancellation fees. In addition, your business will not be locked into a long-term contract. Not surprisingly, this highly respected provider is the first choice of many small business owners.