During holidays, we are all out there retailing and indiscriminately swiping credit cards. Ever find yourself curious about what actually happens each time your credit card gets swiped?
For customers and entrepreneurs alike, it is necessary to understand how credit card processing operates and where in the world those teeny tiny fees are going.
If you are a business owner who accepts credit or debit cards, you have likely heard of credit card processing fees. But what are they, exactly? And how do they operate?
Don’t panic—let us inform you precisely what you are paying for and in which way you might even be able to pay less!
What Are Credit Card Processing Fees?
Credit card processing fees are the payments that companies make to accept payments by credit or debit cards. There are a number of individuals that get involved when the buyer buys a product, for instance, the payment processor, the card network, and the consumer bank.
These fees should be viewed as the price you pay for making it safe and easy for the consumer to pay with their cards.
The 3 Main Components of Processing Fees
These fees are typically divided into three components:
1. Interchange Fees
This is the largest part of your commission. Not only does it go to the bank that issued your customer a credit card, but it also goes towards helping them pay for things like fraud protection and ensuring the payment is processed quickly.
Interchange fees vary depending on:
- Card type: Credit, debit, or rewards cards
- How it is done: Swiped, tapped (NFC), chipped (EMV), or manually typed in.
- Type of transaction: Online, retail, or phone orders
- Type of business: Retail, gas stations, healthcare, nonprofits, etc.
2. Assessment Fees
These are imposed by card networks such as Visa, Mastercard, Discover, or American Express. These companies enable the system to function so that transactions can occur securely.
This charge is typically a tiny percentage of every sale. As opposed to interchange fees (which are paid to the bank), assessment fees are paid to the card networks. These are unavoidable, meaning you can’t negotiate them away.
3. Payment Processor Fees
This is the additional charge from your payment processor—the business that allows you to accept card payments (like Stripe, Square, or PayPal). This component of the fee can also differ quite significantly from company to company and from one type of pricing model to another.
Other Fees You Should Be Aware of
In addition to the normal credit card processing fees, there are a few additional fees that may appear. They can catch you off guard if you don’t know what to expect, so it helps to know about them.
Monthly Fees
Some of the credit card firms charge a monthly fee for simply using their service. These might be things like statement fees, account maintenance, or perhaps some other little fees.
Each individually might not be much, but when added together, they can be substantial over time. Make sure to check your contract so you understand what you are paying every month precisely.
Batch Processing Fees
At the end of the day, when you send all of your credit card purchases over to your processor, you may be charged a small fee. This is known as a batch processing fee. It’s not usually too expensive, but it is still part of your cost and must be accounted for.
Chargeback Fees
A chargeback occurs when the customer complains that he or she did not approve the creation of a charge or when they are upset and want their money back.
If you do lose the case, you could be charged a chargeback fee, and this can be anywhere from $25 to more than $100. Avoid this by having clearly written refund policies, being upfront as to what you are selling, and letting customers know upfront what they can expect.
Non-Qualified and Downgraded Transaction Fees
Every now and then, if you process a payment the “wrong” way—like typing in card information rather than swiping the card—your fee can be higher. These are called non-qualified or downgraded transaction fees. Try to avoid them using secure and accepted means of taking payments, like chip readers or contactless touch.
Small Ticket Transaction Fees
If your business likes to process small payments, i.e., less than $10, then there may be a special rate available to you. Some processors offer reduced rates on those small payments, so they are not that costly. If you sell a lot of low-cost items, contact your processor to see if there is small-ticket pricing available to you that and save you money.
How To Calculate Credit Card Processing Fees
It may sound complicated, but if you work through it, it is not bad. Here is how you can calculate your processing fees step by step:
Step 1: Know the Transaction Amount and Your Rate
Suppose a customer purchases something for ₹1,000. Your payment processor may charge 2.9% + ₹2 per transaction. So you know your rate.
Step 2: Do the Math
Multiply ₹1,000 by 2.9% (i.e., ₹29), and then add the ₹2 fixed charge. So the overall fee for this single payment is ₹31.
Step 3: Add Them All Up
If you receive a lot of card payments daily, simply repeat the above step for each one, and sum up all the fees to know how much you’re paying in aggregate per month.
How To Lower Your Credit Card Processing Fees
No one likes to pay more than they have to. Good news—you can decrease your credit card processing fees! Here are some wise and easy ways to do so:
1. Negotiate With Your Payment Processor
If your business processes a lot of card transactions, you may be able to negotiate lower fees. Don’t be shy!
2. Select the Right Pricing Model
There are different ways processors charge you. Some charge one flat rate, while others use interchange-plus pricing, which could be cheaper in the long run. Take some time to compare and pick what works best for your business.
3. Encourage Debit Card Use
Debit cards usually have lower fees than credit cards, especially if customers enter their PINs. Let your customers know this if it makes sense to them.
4. Use Safe Payment Methods
Using EMV chip cards or contactless (tap) payments is more secure and even occasionally less expensive than swiping or keying card numbers.
5. Reduce High-Risk Transactions
Online or manually keyed payments are riskier and tend to be more expensive. When possible, promote face-to-face payments to conserve funds.
6. Avoid Fraud and Chargebacks
When customers challenge charges (referred to as chargebacks), you lose money. Implement tools and systems to keep fraud levels low so you do not have to pay unnecessary fees.
7. Batch Your Transactions
Discounts for batching are offered by some processors, where you send all your payments in bulk at the end of the day rather than individually.
8. Use Surcharging (If Permitted in Your Jurisdiction)
You can also pass on the credit card charge to your customers by charging them a little extra when they pay with credit cards. Just ensure it is legal in your jurisdiction and that your customers are aware of it.
9. Promote ACH Payments
ACH is short for Automated Clearing House—a method of having customers pay out of their bank account directly. These charges are typically much cheaper than credit card charges. You can even provide small discounts to customers who pay by this method.
Conclusion
So the next time you swipe your credit card, keep in mind—there are a couple of different components to the fee that is charged. Some of it goes to the bank that issued you the card, some goes to the card company (such as Visa or Mastercard), and some goes to the company that processes the actual payment.
Even though the majority of these charges can’t be adjusted, the processing fee is the only charge companies can discuss and potentially reduce. All this information makes customers and companies aware of where their money is headed each time they make a credit card transaction.