Published By
Mike Sorrentino
Published On
September 2024
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Intro
The 3 main fees are Interchange fees, Assessment fee, and payment processor fees. The interchange fee is paid to the card issuing bank. This fee can vary depending on type of card, industry, transaction type and transaction amount. Typically it's a percentage and dollar amount per transaction. For example 2% plus 5 cents per transaction. This fee is meant to cover the costs of risk and fraud. The assessment fee, also called the card brand fee or the card network fee, is meant to cover the operating costs of card networks. The way in which this fee comes varies as well depending on card type and volume. For example Amex has a flat 0.15% rate, while Mastercard is $.0195 per transaction plus 0.1275% of total volume for transactions below $1000 or 0.1475% of total card volume over $1000. The assessment fee sometimes is able to be negotiated down a bit. The final main fee is the processing fee. This comes from the credit card processor. They charge a fee for each and every transaction. These fees could be fixed or a percentage or a combination of both. The fees may vary depending on volume and/or transaction amounts. On the positive side this fee is probably easiest to negotiate down depending on the processor and deal struck. Thankfully there are a lot of processors out there and if you're not locked into a contract you can shop around for the best deal.
There are always associated costs and fees. The processor could also charge you a Terminal or Equipment fee. This fee is meant to cover the cost of the credit card processing device or it could be a fee to use a leased POS system. This fee could be a slippery slope… Some processors use it to get their hooks in. They offer terminals or whole POS systems free of charge or a minimal fee to have total control of credit card processing. At the end of the day it will be a business decision that each merchant will have to make, but be sure to weigh all the options. Depending on the POS there could all be a gateway fee. These usually come up when you are trying to process with a POS that is not payment agnostic. There are also PCI-compliance fees, these are to keep your business safe. These fees could range from $300 to multiple tens of thousands a year, so it is important to understand the fee and what it is specifically for. If you're thinking about skimping this is NOT the place. Leaving your data unsecure could cost you much, much more in lawsuits and settlements. Another fee that is somewhat common are chargeback fees. It comes when customers dispute their credit card charges. The fees, anywhere from $20 to hundreds of dollars, can depend on transaction total and/or the amount of chargeback the merchant receives. These fees can also be forgiven if you ask the processor or they can be progressive if your business received a lot of chargebacks.
There are many factors that affect how credit card fees are determined. One factor is Industry. Some industries typically have more than their fair share of fraud and chargebacks. Another factor is sales volume and transaction amounts. Large sales volume and large transaction amounts generally get lower fees. Then there is the payment method. Same transaction could have different fees if it's a debit card or credit card. Also if it was a digital transaction or card not present, or swipe these will also have impacts on processing fees. Since Online, swipe and card not present introduce higher levels of risk the fees reflect that.
There are 3 main pricing structures: interchange-plus, Tiered pricing and Flat Rate pricing. Flat rate pricing is self explanatory, when the credit card processor charges a fixed percentage rate of transaction. This option is not the best for merchants with a high volume of small transactions like a convenience store. Next is Tiered, this will give you different percentage fees depending on type and amount of transaction. While more cost effective than flat rate it is sometimes hard to follow the breakdown on the statement. Interchange-plus will show a clear breakdown of interchange fees and processing fees. Here another business decision will have to be made to determine what is best for your individual business. Each business is different and is hard to fit in one box so you will have to weigh all the options and pick the best fit.
There are a few ways to try to reduce processing fees, some could work for you but make sure to do your due diligence first. I would be cautious about processors who give POS systems away for free but hold all the cards for processing rates. You can easily be paying more in processing fees than what the POS would cost plus processing with a different processor. Another way to reduce fees is by mitigating chargebacks; the best way I have seen is having lots of easily available channels of communication. If it's easier to call the credit card company than your business, that's what will happen. If the lines of communication are available and open you can solve the problem yourself instead of getting a chargeback. You can also limit the amount of high risk transactions such as ‘card not present’ or swiping cards. ‘Card Not Present’ transactions are one one taken when a card is not actually chipped or tapped or swiped on a payment terminal. A best practice is to review your monthly statement regularly, sometimes you can spot spikes of higher rates. You can also try to negotiate with the processor for lower rates.
There are a few other ways to mitigate fees but they are not as widely adopted but some are growing in popularity. One is requiring a minimum purchase, but that sometimes angers the merchant's guests. After Covid one ever growing trend is to pass the fees to the customers. Some businesses use a cash discount and others use a surcharge. It is pretty much the same thing with a different name, depending on that state's law. Either they add a surcharge to the total due if you pay with a credit card or the merchant raises all its prices and if you pay with cash you will get a discounted price. It seems like everyone is doing it currently but will that trend continue, will you anger guests that way? Time will tell.
Conclusion
Now with the knowledge of what the credit card fees and how they are determined you can make the best decision on who to use for processing. For a newly opening business going with the free POS options might make sense for year 1. But as your business grows and evolves, shop around and find the best solution for your business. The one caveat to that theory depending on your business switch Point of Sales Systems can be tricky. Sometimes they make it difficult to export your old menu, or item inventory if you're a retail site. Also it's important to keep records of old sales that will not follow a different POS system. Knowledge is power and if you do your due diligence you should be able to navigate the Credit Card Processor land.