Entrepreneurs in many businesses know the importance of providing customers with flexible payment options. Credit cards offer convenience to customers and make businesses more attractive to those who prefer using plastic.However, many entrepreneurs underestimate the cost of credit card processing fees, which can add up quickly. Fortunately, for Benetrends clients, there is a way to increase buying power and cut credit card processing costs.
How Do Credit Card Processing Fees Work?
Credit card processing fees vary widely, with different pricing models used by credit card companies that process transactions. To understand the models, it helps to know the types of players in the credit card business:
- Credit Card Associations. These are the companies that issue the credit cards and are familiar names; MasterCard, Visa, Discover, and American Express are the most widely used.
- Issuing Banks. Banks such as Wells Fargo and Citibank issue cards to customers and manage accounts. Discover and American Express act as both associations and issuing banks in some cases.
- Processors. These companies act as bridges between merchants and associations by passing batches and authorization requests that allow merchants to complete transactions.
- Merchant Account Providers. These companies, in tandem with processors, handle processing of the actual transactions and provide the actual tools, such as card readers, for merchants. Merchant account providers are likely where small business owners will interact the most.
Types of Fees and Fee Models
Merchant account providers have different types of fee structures but all usually charge the following:
- Transaction fees are assessed on every transaction and collectively are the greatest expense. They include interchange reimbursement fees and assessments, that usually include two components – a percentage of the total transaction plus a flat transaction fee. Assessments are often based on total monthly transactions.
- Flat fees are those that show up on monthly statements regardless of how many transactions you have. There can be multiple flat fees, including:
- Terminal fees for in-store card swiping.
- Payment gateway fees that are the online equivalent of terminal fees.
- PCI compliance fees are paid to the Payment Card Industry, a consortium of associations, banks, and merchants that sets security standards. Noncompliant merchants face higher fees.
- Annual fees.
- Early termination fees.
- Monthly fees.
- Statement fees.
- IRS report fees, charged for providing transaction information to the IRS.
- Incidental fees are triggered by certain incidents, such as chargebacks. For each chargeback, the fee is assessed. Other incidental fees could include address verification, voice authorization, information retrieval request, batch and insufficient funds charges.
Collectively these fees are packaged together by the merchant account providers in one of five models:
- Flat rate pricing. You pay a flat per-transaction percentage regardless of which card is used.
- Interchange plus pricing. Usually the most transparent model, with this pricing merchants pay a fixed dollar amount and fixed percentage above the interchange rate. Merchants get an itemized statement with the fees and markups identified for each transaction.
- Tiered pricing. This model uses different charges based on the card being processed. Most small business owners are on these plans. There are usually three categories within the plan, too – qualified, mid-qualified and non-qualified. Qualified transaction rates are usually the lowest and must meet certain criteria, defined by the merchant account provider. For example, a card that is swiped in person and settled in a batch the same day may be a qualified transaction. If one of the criteria is missing, the transaction will be downgraded and the merchant will be charged a higher rate.
- Blended pricing. These plans have the same transaction fee and percentage applied with costs blended together for one consistent fee. These transaction costs are higher for merchants but usually come without a monthly fee.
- Subscription/membership pricing. A newer pricing model, this is similar to interchange plus pricing but without the percentage markup. Merchants pay a small transaction fee which can be beneficial for merchants with large purchases.
Merchants interested in saving money on processing fees should consider the following steps:
- Require a minimum for credit card sales. If you own a business with small profit margins and small price points, setting a minimum makes financial sense so processing fees do not cut into your profit dramatically.
- Make sure to swipe. In most cases, manual entry sparks higher processing fees.
- Shop around. You want to make sure you have a complete understanding of the types of fees, models, and impact on revenue.
At Benetrends, we help small businesses save money by handling a lot of the hassle of credit card processing and other business financial services. We have negotiated low rates to make processing simple with one statement, one price, payment tracking, and easy reconciliation. To learn more about how Benetrends can simplify your credit card processing and save you money, schedule a consultation.