Guide to Credit Card Processing Fees
December 11, 2018
Whether you’re just getting your company off the ground or you’re the owner of a thriving franchise, one of the keys to your success is keeping costs down.
One of the best ways to control those costs is by reducing your credit card processing fees. To do that, however, you’ll first need to empower yourself — and your business — with an understanding of how those fees are calculated.
To that end, and in the interests of saving you thousands of dollars in recurring expenses, we’ve assembled this guide to the ins and outs of credit card processing.
How Credit Card Processing Works
Every credit card transaction, regardless of how it’s processed, involves four parties; issuing banks, acquiring banks, card brands and credit card processors.
Issuing banks are the financial institutions that hold the checking, savings and credit accounts maintained by consumers. They issue the payment cards that allow their customers to shop on the go. Bank of America, Wells Fargo and J.P. Morgan Chase are among the biggest issuing banks in America.
Conversely, acquiring banks are those financial institutions that maintain the accounts held by merchants. After a transaction is approved, money is transferred from a customer’s bank account to the merchant’s account. Citigroup, Wells Fargo and HSBC Bank are among the largest acquiring banks in the world.
Card brands, such as Visa, MasterCard and Discover, are responsible for facilitating transactions between merchants, consumers, issuing banks and acquiring banks via global computer networks. Card brands set the rates that businesses pay to accept payment cards.
Lastly, credit card processors are the companies that provide merchants with the equipment and services necessary to accept credit cards.
Let’s say you own and operate a café. When a customer comes up to settle their bill, you use your point of sale (POS) system to send a request to the customer’s issuing bank via the card’s brand network. If the sale is approved, the issuing bank will then transfer those funds to your business bank account. Once the transaction is complete, your POS system will indicate approval.
How Credit Card Processing Fees Work
Every time a credit card transaction is processed, a merchant has to pay a fee to every entity involved save their own bank. These fees include:
- An interchange fee which is paid to the issuing bank.
- An assessment fee which is paid to the card brand.
- A surcharge which is paid to the credit card processor.
The interchange and assessment fees are flat and non-negotiable. The surcharge, on the other hand, is variable. Therefore, is the most important criteria to consider when selecting a credit card processor.
Interchange fees, which are set by card brands but imposed (and collected) by issuing banks, are made up of a flat fee plus a percentage of the volume of the transaction. The percentage amount and flat fee vary based on different factors, including the type of business, the transaction threshold, the size of the transaction and how the card transaction is processed.
For example, Visa currently charges merchants a fee of $0.15 + .80 percent to process a standard card present transaction. Therefore, to process a Visa purchase totaling $100, a merchant would be charged $.95. E-commerce transactions are not exempt from this fee either. The same transaction processed online would incur a fee of $.80 ($0.15 + .65 percent). As they are non-negotiable, interchange fees are quite literally the cost of doing business.
Similar to interchange fees, assessment fees are a non-negotiable charge paid by merchants to the card brands for the privilege of using their processing networks. These fees also consist of a flat per transaction fee plus a volume percentage charge, with the addition of a flat monthly fee. Currently, Visa’s assessment fee is .13 percent by volume, $.0195 per transaction and a variable monthly fee. It’s crucial that owners become very familiar with these fee structures. Unethical processors will often inflate these rates to pad their invoices.
The last fee merchants have to pay in order to process credit card transactions is the processor’s surcharge. The processor’s invoice can include per transaction charges, equipment rental and annual or monthly fees. As processors set their own rates, the surcharge is the one credit card processing fee owners can negotiate by comparison shopping.
Most commonly, processors will bill merchants in one of two ways: pass-through and bundle. With pass-through, interchange, assessment and processor fee are expressed individually on the merchant’s bill. In bundle pricing, each of the merchant’s credit card transactions is billed within three escalating rate tiers: qualified, mid-qualified and non-qualified.
Qualified transactions represent the majority of a merchant’s credit card transactions, while the mid-qualified and non-qualified tiers represent irregular transactions. For example, a coffee shop’s qualified tier would be in person transactions that involve a consumer swiping their standard credit card. A coffee shop’s mid-qualified tier would cover transactions where the card number has to be keyed in, or the card is specialty type, such as an airline rewards card. Finally, the coffee shop’s non-qualified transactions would be those where all the required card data is not captured or where the merchant’s daily transactions are not settled within an agreed-upon timeframe, such as 48 hours.
How to Pick the Best Credit Card Processor
As they represent an essential ongoing cost that is not fixed, credit card processing fees can be an issue for small businesses. To maximize their profitability, small business owners should partner with a processor that is ethical and affordable. To determine whether or not a processor measures up to those criteria, owners should look for processors that offer transparent pricing.
Owners should also consider partnering with a credit card processor that utilizes innovative pricing models.
JetPay is able to accomplish this by providing merchants with secure and user-friendly equipment that assess a fee for each transaction at the point of sale. This amount covers interchange and assessment fees, meaning merchants pass along the bulk of their processing costs to the consumer. Best of all, customers who prefer to pay cash can purchase merchants goods at a discount, a benefit that studies show can increase business by more than 17 percent.
If you’re an owner that wants to drastically cut down on your credit card processing fees, contact JetPay and let us get you started with a free quote.
Sign up for more from the blog.
Get weekly updates and summaries.