How Small Businesses Can Save on Credit Card Processing Fees
Whenever a customer pays for a purchase with a credit or debit card, the seller must pay a credit card processing fee. Credit card processors, also known as merchant account providers, facilitate credit card transactions and charge a fee for doing so.
These fees can significantly reduce the bottom line. According to The Nilson Report, a payments industry newsletter, the weighted average processing fees for Visa, Mastercard, American Express and Discover credit card ranged from 2.09 to 2.33% in 2017.
It’s important to carefully consider these costs, especially if a large number of your customers pay with plastic, says Gerri Detweiler, director of education for Nav, which helps business owners build credit. “These costs may seem small on individual purchases, but they can add up quickly.”
Fortunately, there are ways to save on credit card processing fees.
Credit card processing fees
There are a number of costs factored into credit card processing fees:
Interchange fees. Credit card issuers collect these fees, which are usually the highest cost associated with processing. These fees are usually a percentage of the transaction plus an additional fixed amount. Interchange fees vary depending on several factors, including the network behind the card, the type of card (such as business cards or rewards cards), how payment is processed and how you categorize your business.
Assessment or service fees. These lower fees are paid directly to the credit card network, such as Visa or Discover. Rates are often lower for debit cards than for credit cards, says Jeremy Layton, CEO of Verisave, a credit card processing consulting company. You can also pay other fees as part of this type of fee, such as overseas transaction fees.
Payment processor markup. The credit card processor itself makes money by charging a small fee.
Credit card processing fee models
Choosing the right credit card payment processor can help you get the service you need at the best price. Merchant account providers use several different types of models to charge fees. The main models include:
Package. With a flat credit card processing fee, the small business pays a flat fee, such as 2.75%, for all types of credit card transactions.
Exchange-more. If your business pays interchange plus pricing, sometimes referred to as pass-through interchange, you’ll pay both the interchange rate and an amount greater than that rate on each transaction. Robert Livingstone, president of credit card processing company Ideal Cost, said this model “takes the individual wholesale rate from Visa, Mastercard, Discover – and in many cases now American Express – and applies a small markup. “.
On several levels. When a business pays a tiered credit card processing fee, the cost will vary depending on the type of card the business is processing in a given transaction. Credit card processors that use tiered pricing divide transactions into a handful of levels and charge merchants based on which level a transaction belongs to. A common example is a three-tier system with skilled, medium-skilled and unskilled levels.
Choosing the right payment structure depends on your needs and the type of transactions you are doing. Livingstone and Layton both praise the interchange-plus model, saying it offers transparency. “You pay exactly what Visa and Mastercard charge based on the type of card your customer is using,” says Layton.
However, another model might make more sense for some business owners. Layton notes that a flat rate lets a business know the exact percentage it will pay in monthly credit card processing fees. “It’s not going to go up and down – it’s not going to be 3% one month, 2.5% the next month,” he says. “You can budget around this in a pretty easy way.”
Choose a credit card processor
Choosing a processor with the right payment structure, fees, and service for you is one of the most important factors in saving on credit card processing fees. And while the price is important, it’s not the only thing to consider when choosing a processor. In fact, many companies think other factors are more important. In a study conducted by Nav that looked at what small business owners like about a credit card processor, preliminary results revealed that “most small business owners want an easy-to-use payment processing system.” , explains Detweiler.
This makes sense, because a “cumbersome and time-consuming” treatment system can impact bottom lines if it frustrates clients and forces them to go elsewhere, she says.
“Make sure it’s easy for you and your customers to use,” says Detweiler. She adds that it’s worth paying a little more if you want a system that meets your needs, has strong security features, and is state-of-the-art.
Detweiler is also urging small businesses to ask credit card processors to carefully explain any fees they charge and disclose what your options will be if you decide to end the relationship.
This last point is something Layton also insists on. He says some processors charge early termination fees that can make it difficult to switch to a new processor. Check the terms of any agreement to make sure you won’t be forced to pay significant early termination fees that outweigh the cost benefits of such a change.
Layton also recommends speaking to other businesses for feedback on their credit card processing. And you could work with a credit card processing consulting company to try and get a better deal.
Negotiating credit card processing fees
Detweiler says many small businesses also fail to negotiate lower fees. She recognizes that it can be difficult. However, negotiation can be a source of savings, whether you’re just signing up with a credit card processor or revising an existing relationship.
While negotiating credit card processing fees can be confusing and complex, she suggests reviewing your costs once a year. Take a close look at your transactions and make sure they’re categorized correctly – and at the lowest possible cost.
If you are a high volume, or even growing, business, your increased value for the processor could give you more negotiating room. Layton says many processors are willing to negotiate a fee because they know they will make money by having loyal customers for a long time.
Detweiler says early results from the Nav Credit Card Processing Survey found that less than a quarter of businesses surveyed tried to negotiate their processing fees. But of those who did, nearly 80 percent were successful.
“Most business owners don’t bother to negotiate merchant processing fees, but when they do, they are often successful,” she says, noting that it never hurts to ask. “If you think you’re not getting a good deal, shop around.”
Ongoing Ways to Save on Credit Card Processing Fees
Choosing the right processing company isn’t enough to keep credit card processing fees low.
Layton recommends keeping the fees you pay under control by reviewing the statements you receive each month, although he admits they can be confusing. He also urges small business owners to keep an eye out for changes in fee structures. For Visa and Mastercard, these changes occur in April and October of each year.
The way you accept payments can lower your credit card charges. For example, swiping a credit card at the point of sale costs less than entering information manually, as the latter is considered riskier and less secure.
If your business frequently receives chargebacks, you may need to pay higher fees. So, try to avoid falling into this situation too often.
Finally, you may be able to reduce the cost of your fees by adding a small surcharge on each transaction. However, some states prohibit this practice, so make sure it’s legal to do this first.