These days, plastic is the rule of law in customer transactions. Almost no one carries cash anymore, so if you’re going to find success as a business, you’re going to need a credit card processing company. The problem is credit card processing contracts come with lots of fees.
It can be grating to have to give a percentage of your profits away to a credit card processing company. But knowing the different options for credit card processing can help you get the lowest credit card processing fees. Read on to learn more about how processing fees work and how you can find the best fit to save your business money.
70% of Americans carry at least one credit card.
Source: Shift Processing
Transaction fees are one of three types of credit card processing fees you’ll see. These are fees that you pay on every transaction you run, and they usually take the form of a percentage of your transaction. Transaction fees are made up of three parts that we’ll discuss more in-depth later.
There are generally four parties involved in transaction fees: the issuing bank, the credit card network, the receiving bank, and the payment processor. The issuing bank is your customer’s bank, and the receiving bank is your bank. The credit card network is Visa, MasterCard, Discover, or American Express, and the payment processor is the company who handles the transaction, such as Square, Stripe, or PayPal.
Each of these entities takes a cut of your transaction fees, which is why they can get so high.
Flat fees are the fees you pay to your payment processor for the privilege of using their service. As the name suggests, these fees are usually the same every month or year. There may also be one-time flat fees that your processor charges you for certain services.
You may pay monthly account and minimum processing fees to keep your account running. You might also pay a rental fee for your credit card processing terminal. And your processor might charge you one-time account setup or terminal purchase fees when you open your account.
Unlike transaction and flat fees, incidental fees won’t come up every month. These happen on a per-transaction basis and vary depending on your provider’s policies.
If you have a cardholder dispute a charge, your processor may charge you a fee, and they may charge you an additional fee if that dispute results in a refund to the customer. Like any bank account, if you overdraft your account your processor may charge you a non-sufficient funds fee. And your processor may charge you a small fee every time you submit a batch of credit card purchases.
Transaction fees are composed of three main charges: the interchange rate, the assessment fee, and the payment processor markup. The interchange rate is the price an issuing bank charges the receiving bank for a credit card fee. It’s how issuing banks make money off credit card transactions.
The only trouble is the receiving bank passes that charge on to you instead. This fee will depend on a few factors, such as the brand and type of the card you’re charging, how risky the bank considers your business and industry, and how you accept payment. But these fees will not change from processor to processor.
Assessment fees are how credit card companies like Visa and MasterCard get their cut. These are fees that get tacked onto every transaction to make up that overall transaction fee. Sometimes the assessment fee and the interchange rate together are also called the interchange rate.
Like interchange rates, assessment fees vary depending on your business’s industry. Businesses that are considered riskier get higher assessment fees, and those charge amounts are updated twice a year. These fees will also remain the same with any payment processor.
Payment Processor Markup
The last piece of the transaction fee is the payment processor markup. This piece does vary from processor to processor, and it’s the way that the processor makes their money. Payment processor markups will also depend on which payment plan you choose with a particular service.
There are three basic styles of markup most processors will use: tiered plans, interchange-plus plans, and flat-rate plans.
Tiered plans rank your customer transactions into three different tiers from least to most risky. Purchases made in-person with a popular credit card brand such as Discover or American Express are considered least risky and so have the lowest markup. Purchases made online are considered the riskiest and come with the highest markups.
When you’re looking at a tiered plan, you need to look at how most of your transactions occur. If you don’t have an online store, you may be able to save some money using one of these plans since all your purchases will be made in person. But if you operate mostly online, this may not be a good option for you.
Interchange-plus plans are closer to a flat-fee model for payment processor markups. With these plans, you pay a set markup on each transaction, no matter the price. These markups do vary by type of transaction – in-person with a recognized credit card company vs. online, for instance.
Determining whether this model will work well for you will depend a lot on the price tier you’re selling in. If you have mostly high-dollar sales (say for original art pieces or massages), this flat fee policy might save you from paying a percentage of each sale. But if your sale prices vary, you may lose money on smaller sales.
Flat-rate plans are what they say on the tin – set prices that you pay on every transaction, no matter what. The upside is you can know specifically what fees you’ll pay each month and you can save some money on riskier or higher dollar transaction. The downside is these fees tend to be higher than most other processor markups.
If you have a lot of online transactions, a flat-rate plan may help you save money on what many processors consider to be riskier transactions. These plans can also be a good idea for new business owners who don’t have the transaction volume to negotiate better prices with providers.
Since flat fees and incidental fees will vary among processors and businesses, when we look at average credit card fees, we’re looking at the transaction fees. These fees will vary based on the factors we discussed, but in general, you’re looking at transaction fees between 1.7 and 3.5 percent. This means that for every $100 a customer spends at your store, you’ll get between $96.50 and $98.30.
It may seem like the best practice is to go for the provider who offers the lowest transaction rate. But keep in mind that you’ll be dealing with much more than just the transaction fees. A processor who offers a 1.7 percent transaction fee is likely to have a lot for conditions, hidden fees, and secret markups than someone offering a 2.3 percent fee.
Payment Service Providers vs. Merchant Account Providers
Another way to get the best deal on your credit card processing fees is to look into the differences between payment service providers and merchant account providers. Payment service providers aim to simplify credit card processing for small businesses. You don’t have to buy expensive processing hardware, train on complicated systems, or sign long-term contracts.
Merchant account providers generally have better prices than payment service providers, but those prices come with more strings attached. You may have to sign a long-term contract that you’ll be stuck with if the fees aren’t working for you or you go out of business. But they can work well for companies that process high volumes of credit card transactions.
How to Choose the Right Company
Choosing the right credit card processor is a matter of knowing your business’s needs. If you run a small online store, you’re going to lose a ton of money working with a tiered plan with a merchant account provider. But you’ll probably do very well with a flat-rate plan from a payment service provider.
Take a look at what form most of your credit card transactions take and the average amount you accept in credit card payments every month. Shop around to several different providers and look closely at their terms for those hidden flat fees we mentioned. It’s a good idea to avoid companies who want you to sign long-term contracts right off the bat.
Get the Lowest Credit Card Processing Fees
Getting the lowest credit card processing fees is a matter of knowing all your options. You know best what your business needs, and with all the options in front of you, you can find the plan that will suit your needs best. Getting the right plan for your business can save you a ton in processing fees.
If you’d like to get the lowest credit card processing fees for your company, check out the rest of our site at iPayment Systems. Honoring your trust in us is our number one commitment, and we are all about your bottom dollar. Check out our credit card processing solutions to start saving money today.