With inflation on the rise, learning how to offset your credit card processing fees is more important than ever. Our tips will help save money for your business.
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Lowering your credit card processing fees is more important than ever, as inflation drives up the costs of goods and services, and credit card interchange fees continue to rise. Merchants have tried just about every trick in the book to try to keep their credit card processing costs as low as possible, but some methods are more effective than others. But rest assured that the best small business credit card processors will work with you to avoid losing you to the competition.
In this article, we’ll discuss the industry averages for credit card processing costs, which can show you how your costs compare to other businesses. We’ll also show you how to calculate your effective rate for credit card processing, which is the best indicator of whether you’re getting a good deal from your processor or if you’re paying too much. Finally, we’ll present a variety of tricks and tips that can help you lower your costs.
Read on to see how to save money on credit card processing fees.
How Your Effective Rate Affects Your Credit Card Processing Costs
The first step in figuring out how to lower your credit card processing costs is to determine how much you should be paying and compare it against how much credit card processing is actually costing you.
In analyzing your costs, keep in mind the following general principles:
- The rate you pay for a given transaction represents the sum of (1) the credit card interchange fees paid to the card-issuing bank, (2) a small network assessment fee paid to the credit card association, and (3) your processor’s markup
- Interchange fees and your processor’s markup are highly variable, with even merchants using the same processor paying different costs
- While there is little difference between Visa, Mastercard, and Discover, American Express fees tend to be a little higher
- Card-not-present (online) transactions are almost always more expensive than card-present (in-person) transactions
- Small businesses usually pay higher per-transaction credit card processing fees than large, high-volume merchants
- High-risk businesses will almost always pay significantly higher credit card processing rates and fees than comparable low-risk businesses
Here’s a brief (and very general) summary of the interchange fees charged by the major credit card brands:
||Average Interchange Fee
||1.48% to 2.83%
||1.38% to 2.73%
||1.57% to 2.70%
||2.10% to 3.39%
Your total costs for transaction processing will also include a markup charged by your merchant services provider. While the underlying interchange fees are essentially the same for all merchants, your markup costs (and, thus, your total costs) will vary quite a bit from one business to another.
Because transaction processing costs are only one part of the effective rate equation, you’ll also want to include all other recurring expenses associated with your merchant account.
Here are the most common merchant services account fees you’ll usually have to pay:
- Account maintenance fees ($0-$199/month; typically $15-$25/month under an interchange-plus pricing plan)
- Annual fees ($0-$300/year)
- PCI compliance fees ($60-$130/year)
- Equipment leasing fee ($5-$60/month)
- POS software subscription fee ($10-$100/month)
- Payment gateway fee ($5-$25/month)
The best measure of how much you’re really paying for credit card processing is called your effective rate, which is defined as your total processing fees divided by your total sales volume for a given month.
What you pay in credit card processing fees includes not only transaction processing fees but also any account fees you pay on a regular basis. For example, if you processed $10,000 in credit card sales last month and paid a total of $250 to your processor, your effective rate is 2.5% ($250/$10,000 = 2.5%).
As a very general rule, most small businesses will pay an effective rate of around 3-4%. High-risk businesses will often pay about twice this amount and possibly even more.
8 Common Methods For Lowering Your Credit Card Processing Fees
If you’ve analyzed your monthly processing statements and determined that your effective rate is over 4%, you’re probably paying too much for credit card processing. What can you do? Actually, there are a lot of steps you can take to lower the costs you pay for accepting credit cards. Here are several techniques that have proven effective in reining in credit card processing costs:
Negotiate For Lower Fees With Your Current Processor
The majority of merchants are unaware that they can negotiate a processing agreement. While it won’t always work, it never hurts to ask your processor for a lower rate or a discount on a recurring fee. Many processors will gladly offer some pricing concessions to avoid losing you to a competitor. This is true even with providers that fully disclose their “standard” rates upfront.
One important caveat: interchange fees and other charges set by outside entities like the credit card associations and issuing banks are outside of your processor’s control and cannot be lowered through negotiation.
Switch To A Less Expensive Processor
A very common practice among many small business owners is to switch to a less expensive credit card processor. While this can be an effective way to save a significant amount of money on processing costs, be aware that it’s a rather drastic remedy that can actually cost you more money if you don’t plan it carefully.
For a retail business, switching processors can require you to replace all of your current processing hardware at once. eCommerce merchants need to consider whether they’ll still be able to use their current payment gateway, especially if they’ve built up a sizable customer information database.
You’ll want to plan carefully to ensure that switching to a new processor doesn’t disrupt your business operations more than is absolutely necessary.
Avoid Keyed-In Transactions
While many merchants aren’t aware of it, manually entering a customer’s credit card details instead of swiping, dipping, or tapping their card is the least secure — and therefore the most expensive — way to accept a credit card payment. While mail and telephone order businesses have little choice but to use this method, retail businesses should avoid it whenever possible.
Fortunately, the transition to EMV cards has dramatically lowered the chance you’ll be unable to read your customer’s card with your terminal. If you’re using a virtual terminal, we strongly suggest pairing it with a compatible card reader for in-person transactions.
Use The Address Verification Service (AVS)
The Address Verification Service (AVS) compares the physical address submitted by a customer with the billing address that’s on file for their credit card, automatically rejecting transactions if there’s a mismatch. While it won’t save you money on a per-transaction basis, it will help protect you from fraudulent transactions that can be very costly.
Essential for eCommerce, AVS is also very helpful for mail and telephone order businesses. Be aware, however, that some credit card processors may charge you as much as $0.10 per transaction for this service.
Submit Transactions Within 24 Hours
You should make a point of submitting all your transactions within 24 hours of the sale. Timeliness of submission is a factor in determining which interchange fee will apply to a transaction. Submitting one more than 24 hours after it was approved will usually result in a higher interchange fee being assessed by your processor.
If you’re on a tiered pricing plan, submitting a transaction late will usually result in it being downgraded, meaning you’ll have to pay a higher mid-qualified or unqualified processing rate.
Submitting all of your daily transactions in a single batch at the end of the day is usually the best course of action.
Minimize Batch Fees
In addition to getting your transactions sent off for processing as soon as possible, it’s also a good practice to submit them in a single batch at the end of the day. Many (but not all) merchant services providers assess a batch fee (usually $0.10/batch) to accept your transactions, making it very expensive to submit them individually.
Check your merchant agreement and your monthly processing statements to see how much you’re really paying in batch fees.
Use Credit Card Tokenization
Credit card tokenization is a security method that replaces actual cardholder data with ‘tokens’ that the credit card processing network can decrypt. The use of tokenization provides an additional layer of security for cardholder data and helps to prevent fraud.
With these benefits, tokenized payments are assessed lower interchange fees by the issuing banks than non-tokenized payments. Most providers today offer tokenization at no additional cost, so there’s no reason not to use it.
Note that tokenization requires a payment gateway to function, so it’s generally best for eCommerce businesses or retail businesses that are using an integrated payments platform to process their transactions.
Avoid Leasing Processing Hardware
One of the worst ways to unwittingly pay too much for credit card processing is to lease a credit card terminal.
In the payments industry, terminal leasing contracts are typically noncancellable, meaning that you’ll have to pay every remaining monthly lease payment at once if you break your lease. The total cost for a typical four-year leasing contract is often four or five times more expensive than simply buying the equipment outright. The monthly lease payments also add to your effective rate and drive up the overall cost of your merchant account, even if you rarely use your terminal.
There are simply no advantages to leasing your processing hardware; we strongly encourage you to find alternatives to leasing credit card machines.
3 Techniques For Offsetting Your Credit Card Processing Fees
If you’ve tried all of the recommendations above and you find that credit card processing is still too expensive, you might want to consider a strategy of offsetting these costs rather than just lowering them. By offsetting, of course, we mean passing those costs onto your customers who choose to pay by credit card.
There are three ways to do this, and they’re all perfectly legal as long as you abide by all applicable laws and policies.
Here’s how to offset your credit card processing fees:
Add A Convenience Fee To Credit Card Transactions
A convenience fee is added to a sale when the customer pays with a non-preferred payment method, typically a credit or debit card. Convenience fees are usually for a specified, fixed amount and not a percentage of the sale price.
While convenience fees are legal throughout the United States, the rules for implementing them vary widely among the major credit card associations. We recommend that you contact your credit card processor to determine when you can add a convenience fee and how much the fee can be.
Implement A Cash Discounting Program
Cash discount programs pass your transaction processing fees onto your customers but do so in a roundabout way that makes it much more palatable to them than paying an additional fee directly.
With cash discounting, your advertised prices are raised by the amount necessary to cover the processing costs. If a customer pays with a credit card, they pay the advertised price and nothing more. However, if a customer pays with cash or a debit card, they receive a discount at checkout in the amount of the processing fee that doesn’t need to be paid.
We recommend cash discounting over surcharging, as it is generally well-received by customers and less likely to result in lost sales.
Implement A Credit Card Surcharging Program
Credit card surcharging has recently enjoyed a surge in popularity among merchants frustrated by the ever-increasing cost of accepting credit cards. Surcharging adds the credit card processing fee onto the bill at the point of sale, so the card-using customer will pay more than the advertised price when they check out.
While it’s legal in almost all US jurisdictions, surcharging requires compliance with a bewildering variety of state laws and credit card association policies. It’s also not very popular with customers and may result in lost sales if your competitors aren’t using it. Nonetheless, it can be a very effective method of offsetting some or all of your credit card processing fees if properly implemented.
The Bottom Line On Lowering Your Credit Card Processing Fees
It’s an unfortunate truth that the majority of business owners pay more than they really need to for credit card processing. Nonetheless, even merchants who’ve shrewdly done their research and negotiated the best possible deal with their provider still find accepting credit cards to be an expensive proposition. By implementing the suggestions we’ve outlined above, however, you should be able to bring those costs down to a more manageable level.
Be aware that not all of the ideas we’ve described will be useful for every type of business. For example, tokenization will be of little use to a retail-only business that doesn’t have access to a payment gateway. Focus on the methods that will work for your business and implement the suggestions that will actually bring your processing costs down.
Although it can be a difficult transition, sometimes switching to a different processor is the only way to really save money. For small business owners, there are a variety of cheap credit card processors that can usually offer you a much less expensive than the traditional merchant account providers. While you might have to sacrifice some of the bells and whistles, you’ll save money on processing costs and improve your cash flow in the process.
FAQs: Lowering Credit Card Processing Fees
How can I lower my credit card processing fees?
Credit card processing fees represent a combination of interchange fees (which are fixed) and your processor’s markup (which can be lowered).
Effective methods for reducing the markup you pay to your processor include switching to a less-expensive processing rate plan or simply negotiating for lower rates under your existing plan. While interchange fees cannot be negotiated, you can still qualify for lower fees by implementing security features such as tokenization and processing a credit card with a card reader or terminal rather than manually keying the information into a virtual terminal.
How can a business avoid credit card processing fees?
Unfortunately, the only way to truly avoid credit card processing fees is to not accept credit or debit cards at all. A better option is to offset those fees by passing them onto your customers through credit card surcharging, a cash discount, or a convenience fee.
Are processing fees negotiable?
Yes, processing fees are negotiable — but only to a certain degree. Because the underlying interchange fees must be paid to the issuing banks and are for a fixed amount, your processor can only offer you lower rates by reducing the amount of markup they charge you for processing your transactions.
As a general rule, processors only offer their lowest per-transaction rates to very high-volume businesses.
Why are card processing fees so high?
Despite competition between Visa, Mastercard, and the other major credit card associations, credit card processing fees have continued to rise in recent years. While the issuing banks frequently cite increased credit card fraud as the primary driver behind rate increases, the lack of a federally-imposed limit on interchange fees is also a major factor.
Processing rates in the United States are nearly twice as high as in European Union countries, where they are capped under EU law.
How do you pass credit card fees to customers?
Credit card fees can be passed onto customers through credit card surcharging, cash discounting, or adding a convenience fee. Each of these methods is subject to a variety of legal limitations and must comply with credit card association policies regarding them.
We recommend cash discounting as the best option for most businesses, as it is subject to fewer legal restrictions, is easy to implement, and is generally better received by consumers.