Understanding Credit Card Processing Fees
At its core, credit card processing fees are the costs a business owner incurs to accept payments via credit card. These fees include transaction fees, flat fees, and incidental fees. The average processing fees range between 1.7% and 3.5% per transaction, representing a significant aspect of your overall financial picture as a business owner.
While accepting credit cards is essential for business growth, understanding the associated fees can be daunting. To simplify the process, this guide breaks down what these fees are, how they’re calculated, and what to expect when working with different providers.
Types of Credit Card Processing Fees
Transaction Fees: Transaction fees are charged for each credit card transaction. They comprise:
Interchange Rates: Paid to the issuing bank by the acquiring bank.
Assessment Fees: Paid to the credit card network.
Processor Markups: Added by your payment processor.
Flat Fees: Flat fees are recurring charges (monthly or annually) from your payment processor. Examples include:
Account fees for maintaining your account.
Terminal lease or rental fees.
Payment gateway fees for online transactions.
Incidental Fees: These fees arise from specific events, such as:
Chargeback Fees: Applied when disputes result in refunds.
NSF Fees: Charged for insufficient funds.
Batch Fees: For processing a batch of transactions.
Breaking Down Transaction Fees
When a customer taps, swipes, or dips their card, several parties are involved:
Issuing Bank: The bank that issued your customer’s card.
Card Network: Visa, Mastercard, Discover, or American Express.
Acquiring Bank: The bank receiving the funds and depositing them into your account.
Payment Processor: The intermediary managing the transaction.
Each party takes a portion of the transaction fee, which includes:
Interchange Rate: Determined by the card network, this rate varies based on card type, merchant category, and risk factors.
Assessment Fee: A non-negotiable charge by the card network, added to the interchange rate.
Processor Markup: Negotiable fees charged by your payment processor.
Payment Processor Pricing Models
Processors typically offer three pricing plans:
Tiered Plans: Simpler but less transparent, with costs varying by transaction category.
Interchange-Plus Plans: More transparent but complex, showing the markup over interchange fees.
Flat-Rate Plans: Ideal for small businesses with low transaction volumes.
Flat Fees
Flat fees can include:
Recurring Fees: Monthly account maintenance or gateway provider fees.
One-Time Fees: Setup costs, terminal purchases, or cancellation penalties.
Choosing Between PSPs and Merchant Accounts
Payment Service Providers (PSPs) like Square and PayPal offer simplified, flat-rate pricing with no long-term contracts. They’re often more accessible for small businesses compared to traditional merchant accounts, though they may not always be the cheapest option.
In Summary
Credit card processing fees are an essential but often complex part of running a business. By understanding the components of these fees, you can better budget for them and negotiate where possible. Choosing the right payment processor tailored to your business’s needs can significantly impact your bottom line. Providers like Square and PayPal have made these costs more transparent, helping you manage your expenses effectively.