Where Do My Fees Go?
Many merchants incorrectly believe that all the fees they pay go to their credit card processor. If that were the case, there would probably be a lot more credit card processors out there today! The truth is, your processor keeps a very tiny portion of the transactions. It’s important to have a clear understanding of how those fees work, what they do for you, and how you can avoid additional fees. Here’s how fees are calculated for most merchant accounts.
The transaction begins the moment your customer swipes, taps, keys, or inserts their credit or debit card to pay you for goods or services. Fees are usually based on the amount of the transaction. This amount is determined by important factors: your merchant services provider, such as Chosen Payments, your bank, the customer’s bank, and the card brand, such as MasterCard, Visa or Amex, that issued your customer’s credit card.
Some processors charge a fixed price per transaction without charging you any additional fees. Others charge a little more than what the credit card issuer would charge directly. Some processors have a tiered pricing system that depends on the type of card presented and other variables not within your control. These include rewards cards, government cards, corporate cards, and non-rewards cards.
Different Types of Fee Pricing
Fees are based on one of three different pricing models. A flat rate is the simplest to understand but likely the most expensive of the three. The processor charges your business either a flat fee or a per transaction rate. For example, Square charges 2.75% of each transaction processed using a Point-of-Sale system. Square also adds a flat fee of $0.15 for each manually-keyed transaction. If you have low-volume sales and are looking for convenience as opposed to savings, this price model is probably okay for you.
Interchange Plus pricing is the model Chosen Payments uses for most merchants. Card brands such as Visa and MasterCard charge a processing fee for each transaction, which is called an Interchange rate. The Interchange rate is set by the card brands and is the same for all processors. Consider this the wholesale cost of accepting a credit card. A processor using Interchange Plus pricing will mark this amount up a little bit and charge you the increased amount. As an example, you might see a fee of 2.75% + $0.10. The 10 cents is the marked up price, and the 2.75% is the Interchange rate that goes to the card brand, not your processor. The processor only gets to keep the dime.
The Tiered Pricing model is a more diverse array of cost structures. The interchange rates fluctuate based upon the type of card being used, whether it is credit or debit and whether or not it is a rewards card. Someone has to pay for those rewards, and that someone is the merchant. A rewards card has a higher cost to process and will factor into the fee you are charged for accepting the card. A small business may not find tiered pricing useful because it can get complicated. However, if you accept a lot of corporate cards, government cards, and business cards, this structure is probably perfect for you.
Negotiating Your Fees
The amount of money you are charged for each transaction isn’t necessarily set in stone. If your processor only offers a flat-rate pricing model, then you are stuck and there is no negotiation process. For merchants using the interchange-plus or tiered pricing model, negotiating your card processing fee is possible. Negotiating involves talking to your processor and asking to get either the credit card processing percentage reduced or getting a lower markup on the plus plan. If your sales volume is high but your charges are small, ask about a lower per transaction fee. Remember, if your processor is already at rock bottom and earning a dime per transaction, there isn’t a lot of wiggle room. We see rates as high as $0.25 per transaction when doing comparison quotes for merchants using other processors.
One last thing to know about credit card processing fees is that fees will vary based on how you process payments. Your payment gateway is either a Point-of-Sale system in the store, a mobile phone reader, or an online portal. Fees vary based on the risk of fraud posed by each type of gateway, with online transactions being the riskiest and therefore the priciest.