To be successful, small business owners need to keep their operating costs as low as possible. Fixed costs may feel non-negotiable, but it is within your power to reduce your business’ credit card processing fees. To take action and achieve maximum savings, however, you first need to understand how credit card transactions are processed and how these fees are calculated.
How Credit Card Processing Fees Work
In the simplest terms, credit card processing fees are the fees credit card companies charge to move money from a customer’s account to a merchant’s account. In a physical retail space, the process begins when the customer inserts or swipes their card at the merchant’s point-of-sale (POS) terminal. The terminal sends the card data and transaction request across the credit card network to the customer’s bank. The customer’s bank will then authorize or decline the transaction and, upon approval, transfer the requested amount of money to the merchant’s bank.
To facilitate credit card transactions, processors charge merchant’s multiple fees. Some of these fees, like monthly network fees and authorization costs, are fixed. Others — such as the interchange fee, charges related to the transfer of funds between the customer’s and merchant’s banks, the discount rate, and the fee credit card companies charge to process payments — are variable.
It’s in those variable costs that merchants can find savings. Small business owners can do so by determining which credit card processing plan makes the most sense for them. To that end, here’s a quick rundown of the most popular types of credit card processing plans.
Tiered plans charge merchants’ different fees based on how a credit card transaction is processed and what kind of card is used. For example, a transaction processed with a Visa credit card that has been swiped or inserted at a POS terminal will be charged at one rate. However, a phone transaction involving an American Express card will be charged a different rate.
Typically, merchants are sold on tiered plans under the premise that most of their transactions will fall under the lowest-priced tier. However, the obvious drawback with tiered plans is that if a merchant processes a large volume of transactions outside that tier, their monthly costs can increase sharply.
Under interchange-plus plans, merchants’ credit card processing fees are tabulated via tables issued by credit card companies. The type of credit card used and the transaction method employed are the two factors used to determine these processing fees. For instance, to process an in-person purchase made with a Visa preferred card, the current interchange-plus rate is 2.10 percent plus $0.10. To process a $100 sale at that rate, the merchant will have to pay an additional $2.20.
Although generally considered to be more affordable than tiered plans, interchange-plus plans are not without their drawbacks. The most significant of these is that they are vulnerable to the volatility of marketplace. If Visa suddenly decides to raise their preferred card rate to 3.10 + $0.15, merchants will find themselves on the hook for that price increase.
True to their name, flat-rate processing plans charge merchants a flat-rate fee to process credit card transactions, regardless of card issuer or method. The chief appeal of this fee structure is its simplicity and stability. With it, owners can quickly and easily calculate their monthly credit card processing fees and budget accordingly.
Although their transparency is alluring, flat-rate plans can be problematic in two ways. One is that many flat-rate plans charge merchant’s monthly membership fees with volume-based escalators. As such, a merchant could find themselves slammed with unexpected fees as soon as they cross their established volume threshold. Similarly, if the company experiences a slowdown in credit card transactions, they might find themselves paying sizable membership fees for the privilege of processing only a handful of sales.
Interested in powering your small business with the help of the JetPay’s payment processing? Contact JetPay and let us get you started with a free quote. For over 45 years, JetPay has been a leading provider of vertically integrated solutions for corporations and government entities of all sizes. By developing distinctive and innovative payment solutions for brick-and-mortar, web, mobile and cloud-based environments, JetPay creates financial solutions for thousands of clients nationwide. We look forward to hearing from you, and to playing a role in your business’ success story.