Say Goodbye to Credit Card Fees for Merchants

Understanding Credit Card Fees

Credit card processing fees, also known as merchant discount rates, are effective transaction taxes that businesses pay anytime a customer pays with a credit card. These fees cover the costs of authorizing and completing the transaction and are split among the payment network’s numerous entities.

• Merchants pay the fees: Companies pay these fees as part of the cost of accepting credit card payments.
• Multiple recipients: The fees aren’t collected by a single body, and they are distributed to.
• Issuing bank: The bank that issued the credit card that was used in the transaction.
• Payment network: Payment networks such as Visa, MasterCard, and others enhance transaction flow.
• Acquiring bank: The bank that executes the transaction for the merchant.
• Payment processor: The company in charge of the technical parts of the transaction.

Types of Credit Card Processing Fees

Interchange Fee

• This is the largest portion of the fee that directly goes to the bank that issued the credit card used to make the payment. For example – if you have used a Bank of America credit card, a significant portion of the fee will be transferred to the Bank of America.
• In addition, interchange fees differ according to the type of card the customer pays with and how it is accepted. While debit cards often have the lowest interchange costs, credit cards with attractive rewards schemes may have higher fees.

Assessment Fee

• The assessment fee goes to the card networks such as Mastercard, Visa, American Express, and Discover. This fee will be charged to your total monthly sales and goes to the card networks.
• The assessment fee is less than the interchange rate and is determined by the volume of transactions made by the merchant, the kind of card the customer uses, and any ancillary fees.

Payment Processor Fee

• The payment processor fee goes to the mediator – the company that manages the credit card transaction and bridges the gap between the bank and the merchant. Some of the payment processor companies are Clover, Square, Helcim, etc.
• These payment processors might either draft the credit card processing fee directly from the bank in a lump sum at the end of each month or reduce the deposit amount after each transaction.

Average Credit Card Processing Fees

Credit card processing costs range from 1.5% to 3.5% of the total transaction amount on average for merchants.

Numerous variables like credit card issuer, merchant category code (MCC), credit card type, type of transaction, transaction size, payment processor payment structure, and method of transaction entry (swiping, keying in, or using an online system) may all affect the rate. Their payment processor determines the average cost of processing credit cards for most merchants.

• It is simple for merchants to comprehend the entire cost of credit card processing fees by comparing the top payment processing companies.
• The credit card fee for merchants associated with each transaction are stated rather overtly.

How Credit Card Fees for Merchants Work?

The way credit card processing fees work depends on the pricing structure of a payment processor, which is divided into the following categories

Flat-Rate, or Blended, Pricing

This pricing includes fees from PayPal, Square, and Stripe. Users pay a fixed fee plus a percentage of the transaction amount under this pricing structure. For example, the rate for in-person transactions may be 2.6% + 10 cents. Although blended pricing is easy to understand and predictable, its final cost may be higher than that of other pricing models.

Tiered Pricing

Tiered pricing, like flat-rate pricing, is expressed as a percentage plus a flat price. The processing fees you pay under this pricing arrangement are determined by the sorts of cards you accept. Although more expensive than interchange-plus pricing, it is marginally less expensive than flat-rate pricing.

The three pricing tiers are as follows:

• Qualified – This includes debit cards and cards without reward programmes
• Mid-Qualified – This includes cards with specific programmes
• Non-Qualified – This includes corporate cards and cards with substantial incentive programmes.

For qualifying cards, rates are lowest, while for non-qualified cards, rates are highest.

Interchange-Plus Pricing

The interchange plus price consists of the rate charged by major credit card networks plus a specified markup, or transaction fee, paid to the processing provider. For merchants, each transaction will carry a credit card cost in addition to a percentage fee, similar to flat-rate and tiered pricing. If you’re looking for a less expensive choice, this is it.

Interchange-plus pricing is the most variable of the price options because interchange costs vary depending on a variety of circumstances, such as:

1. Card Network: The rates for Mastercard, Visa, and any other card networks are different.
2. Type of Cards Used: Processing fees for rewards credit cards are higher than those for non-rewards credit cards.
3. Card Handling Process: The method by which the card is handled also determines the interchange rates. Transactions made in person cost less than those made using a card that is not present.

Membership-Based Pricing

Some suppliers provide membership-based pricing, which in some circumstances might be the most affordable processing choice. The membership-based pricing model does not require processors to take a cut of your sales. Rather, they charge monthly or annual membership fees, often with fixed per-transaction costs, to generate the majority of their income. For instance, Clover charges a monthly fee of $14.95 and includes the interchange fee in addition to 10 cents for each in-person transaction.

Additional Costing Associated with Credit Card Processing

Merchants may be charged additional fees for processing services in addition to standard and incidental fees. The following are a few costs that merchants need to be aware of –

1. FIXED ACQUIRER NETWORK FEES
A Fixed Acquirer Network Fee (FANF), formerly known as the Network Participation Fee (NPF), was introduced by Visa in 2012. It is a quarterly fee that is assessed and charged the next quarter. This fee is imposed on all businesses that accept Visa cards, however, the fees can vary. The average credit card fees for merchants vary according to the number of physical locations a merchant has for their business. ECommerce vendors will be required to pay a fee determined by the transaction amount.

2. KILOBYTE ACCESS FEES
This is one of the most common assessment fees that your credit card processor charges while accepting credit cards. Every transaction that is submitted to the card network for settlement is subject to fees, which both Visa and Mastercard impose. Except for a Kilobyte Access Fee, that is, if you are conducting a Visa or MasterCard transaction. Visa costs $0.0047 and MasterCard $0.0035; however, the price may be padded by your price or at your expense.

3. NETWORK ACCESS AND BRAND USAGE FEES
The Network Access and Brand Usage Fee (NABU) for MasterCard is $0.0195 as of 2018. Processors pass this fee on to merchants because MasterCard receives all of the income from it. Just like the Kilobyte Access Fee, the NABU fee can also be padded.

4. ACQUIRER PROCESSING FEES
For credit card purchases, the acquirer processing fee (APF), sometimes called the Visa Authorization Processing Fee, is $0.0195. Whereas, for debit card transactions, it is $0.0155. This fee only applies to debit card transactions that are approved by signature, as PIN entries are not eligible for this cost.

Calculating Credit Card Processing Fees

The first step to calculating your credit card fee is to determine your effective rate. You must first take out your credit card statement and then the entire amount withheld for processing must then be divided by the total amount of your monthly sales that were made with credit cards. Your effective rate, or the entire amount your credit card company charges you, is the outcome.

Credit card processing companies consider the following factors while calculating the fee –

• In-Person – A customer inserts, taps, or swipes their credit card to make a payment in person.
• Card Not Present – A business can charge a customer remotely by manually entering the credit card information or by accepting payments online.
• Alternatives – Customers can use contactless apps like Apple Pay or QR codes.

Strategies to Lower Credit Card Processing Fees for Small Businesses

Businesses frequently use tactics to prevent or reduce the cost of credit card fees because they represent a significant expense for many merchants: payment processing costs. Although it is not possible to avoid paying credit card fee for merchants, there are steps you can take to reduce expenses.

a) Set Up a Minimal Purchase Amount

Excessive transaction costs for credit card fees for merchants might reduce small businesses’ profit margins. Businesses can reduce their fees for merchant credit card stats along with processing expenses by setting a minimum amount below which credit card payments are not accepted. For instance, if a customer spends less than $5 or $10, the firm might not accept credit card payments.  

• Customers are required by this practice to either increase the size of their purchase or use other payment options, including cash or debit cards, which have minimal or no processing fees.

b) Encourage Cash Transactions

Companies can reduce credit card costs by actively promoting the usage of cash or debit cards for all types of purchases. Debit card payments are a more affordable option than credit card purchases because they don’t incur any processing costs for cash transactions.

• In addition to educating consumers about payment methods that minimize overhead, merchants can think about providing prizes or discounts to customers who decide to pay with cash.

c) Minimize Chargebacks

Credit card processing fee rates may rise in response to chargebacks of credit cards brought on by fraud, miscommunication, or customer disputes. Reduce the amount of chargebacks you receive to minimize the expense of processing credit cards.  

• Keep clear refund and return guidelines, respond quickly to client complaints, and handle customer issues before they become severe enough to warrant a chargeback to avoid chargebacks. To further reduce the possibility of a chargeback, use fraud prevention tools and keep an eye out for any unusual activity in transactions.

d) Pass Credit Surcharges on to the Customer

Merchants may pass the expense forward to customers to reduce credit card costs. Merchants have two options for doing this. Merchants might incorporate the additional charge into the price of their goods or services. The fee won’t be visible to customers, but pricing will account for the vendor’s increased costs.  

• Adding a credit card premium that is apparent to clients who prefer to use credit cards is an additional choice available to merchants. Merchants who select this option must make sure they are abiding by local and federal regulations, which control surcharge costs and how companies must disclose fees to customers.

e) Choose Payment Processors Wisely

The cost of processing credit cards is something that each payment processor charges differently. To select the fees and payment plan that best suits their line of business, merchants can compare rates offered by different payment processors and bargain with payment processors about their fees. Remember, Interchange and assessment costs are typically non-negotiable but, payment processor rates could be.

How to Offset the Cost of Credit Card Processing Fees?

If you have already tried minimizing the credit card processing fee using payment processors and all others, but still the fee won’t go down, offset credit card processing fees might help you here. Offsetting means charging your credit card-paying clients for those expenses. As long as you follow all relevant rules and regulations, here are a few legitimate ways to do this – 

💡 SIDESTEP AVOIDABLE FEES: Working with a processor that doesn’t impose PCI compliance costs, statement fees, minimum monthly processing fees, or terminal lease fees is a better choice. If, however, you see these different processing fees on your bill, you can call your payment processor and inquire if any of the costs can be eliminated or waived.

💡 KEEP YOUR CHARGEBACK RATE LOW: The percentage of transactions customers dispute due to unapproved card use, billing problems, or unresolved concerns regarding the quality of the things they purchased is known as your chargeback rate. In addition to refunding the transaction amount, chargeback fees can be expensive, typically ranging from $20 to $100 for each dispute. If you have a high chargeback rate, providers may raise your transaction fees. Hence, it is advisable to keep your chargeback rate low by using contactless and chip card readers. These will reduce your liability due to fraud. It also provides return policies, excellent customer service, and prompt handling of consumer complaints.

💡 SKIP FLAT-RATE PRICING: New businesses usually process credit card payments using processors like PayPal, Square, or Stripe. In the early stages of your firm, these are frequently the easiest to set up. However, this typically indicates that you will be on a flat-rate price plan, which seems to be an expensive choice. Thus, it is advisable to use a processor that offers membership-based or interchange-plus pricing. 

💡 COLLECT QUOTES: You can reach out and ask for quotations from different credit card processors. Once you find any better option, take quotes to your present processor, and ask if they could match the price or lower the current processing credit card fees for merchants. If they don’t do that, you can use the quotes to determine whether the savings will be significant enough to make switching processors worthwhile.

💡 SWITCH PROCESSORS: Changing payment processors can be challenging. But if it lowers your credit card, it will be worth it. So, it is better to change your processors if you are unable to lower the fees of credit card processing. For example, membership-based pricing may be the most economical choice for a high-volume business.

Bottom Line: Credit Card Fees for Merchants

Understanding how credit card processing fees work can help you understand the cost of the business, which in turn will help you run your business smoothly. Hence, it is important to choose the right payment processor that offers transparent services like Square or Clover. This will help you save money, gain more insights into your business data, and manage your company well. So, whenever you are looking for a payment processor, always check the credit card fees they charge. 

Q1. What is the transaction fee for credit cards?

Ans. The average credit card processing fee per transaction is 1.3% to 3.5%. The processing fee depends on the bank and the network card company you choose. 

Q2. Why do merchants charge for credit cards?

Ans. The fee charged on credit cards is known as convenience fees, which help cover the cost they incur to process card payments. It is a flat fee and not some percentage. 

Q3. How can I avoid credit card surcharges?

Ans. You can accept cash or debit payments instead of credit cards to avoid any surcharges. 

Q4. How are merchant fees calculated?

Ans. Merchant fee is calculated by dividing the total processing fee by the total credit card sales volume. 

Q5. Which providers offer membership pricing?

Ans. Square offers membership pricing, which is suitable for different businesses such as restaurants and retail stores. For restaurants, it charges $40 a month for each POS device, $60 for a 24*7 customer service fee, and $50 for each region using the POS. On the other hand, for retail, it charges $60 for barcode label printing and reporting. 

Q6. Are credit card fees negotiable?

Ans. Not you can negotiate fees with credit cards, especially assessment and interchange fees. This is because the bank and card networks set them and remain the same on all payment processors.