Understanding Credit Card Processing Fees

Credit card processing fees are charges imposed by payment processors for each credit card transaction between a merchant and a buyer. These fees are charged to a company each time it processes a credit card transaction from a customer or client.

The average processing fee typically ranges from 1.3% to 3.5% per transaction, varying based on factors such as the type of credit card used, the specific payment company handling the transaction, and the merchant category code (MCC). For small businesses, in-person credit card transactions usually incur fees of around 2%, while digital payments often cost about 3% per transaction. Certain sellers and new businesses may face higher processing fees, whereas larger corporations can often negotiate lower rates due to their high transaction volumes.

This blog will cover everything you need to know about credit card processing fees, how to calculate them and the best practices for businesses for businesses to lower their costs.

In this blog:

• What Are the Different Types of Credit Card Processing Fees?
• How Is It Calculated?
• Pricing Models
• Best Practices for Companies to Lower Their Credit Card Processing Fees

To assist companies in managing their accounts receivables more effectively, solutions like Kolleno have emerged. Kolleno is a smart credit control platform that leverages sophisticated data intelligence features and analytical tools. These capabilities provide businesses with valuable insights into client payment behaviors, helping them better mitigate credit risks and optimize their payment processing strategies.

What Are the Different Types of Credit Card Processing Fees?

Merchants must carefully consider their industry vertical and sales profile when selecting a payment processor to ensure they maximize the value of their credit card processing fees. Regardless of company size, the goal is to optimize these fees to make payments worthwhile. There are three primary types that businesses should be aware of:

Assessment Fees

Also known as card brand fees, network access and brand usage (NABU) fees, or card association fees, these are established, charged, and collected by major credit card companies for the use of their brand in transactions. These fees are added to individual transactions along with interchange expenses/interchange fees. All major credit card providers charge a minimal assessment fee. For example, Mastercard charges 0.13% for transactions below $1,000 and 0.01% for transactions above $1,000. Assessment fees vary among credit card networks:

• Visa: 0.14%
• Discover: 0.13%
• American Express: 0.15%

Payment Processing Fees

Also called merchant services mark-up costs, these fees are paid to the payment processor handling the merchant’s card transactions. They are based on a percentage of the merchant’s total monthly transactions and are the only type of monthly fees that businesses can potentially negotiate to reduce expenses.

Well-known payment processing firms include Helcim, PayPal, and Square. Credit card networks may also charge additional fees such as per-transaction fees, monthly service fees, and credit card payment costs.

Interchange Fees

These fees are charged by the bank that issued the merchant’s credit card and vary between merchants. They typically range from 1.5% to 3.3%, influenced by factors such as current interest rates, transaction risk, the merchant’s credit history, and the transaction amount.

Understanding these fee types can help businesses make informed decisions about their payment processing strategies and potentially negotiate better terms with their service providers.

How Is the Credit Card Processing Fee Calculated?

The most effective way to determine a credit card processing fee is by calculating the effective rate. This rate represents the total percentage a credit card company charges a merchant for accepting credit card payments. To calculate it, divide the total amount deducted for payment processing by the total monthly sales, then multiply the result by 100.

For businesses operating under a business-to-business (B2B) model, the effective rate typically ranges from 2.5% to 3.0%. This rate encompasses several components, including:

1. The interchange rate
2. The payment processing fee
3. The assessment fee

Understanding this calculation and its components allows businesses to better evaluate their payment processing costs and potentially identify areas for optimization. It’s crucial for merchants to regularly review their effective rate to ensure they’re getting the most value from their payment processing arrangements and to identify any unexpected increases in fees.

Pricing Models for Credit Card Processing Fees

Credit card processing fees can fluctuate due to the specific ranges set by leading credit card companies and dynamic pricing models. As a result, merchants should carefully select credit cards that best align with their business needs and operations. Here are some of the most common pricing models for credit card processing:

Tiered Pricing

This model categorizes transactions into different pricing tiers or buckets. Some transactions may incur lower or higher percentage fees based on their tier. Merchants who process most of their credit card transactions in the cheapest tier are likely to benefit most from this model.

Flat Rate Pricing

Under this model, the credit card company charges a fixed rate for every transaction, plus a small additional fee (typically 20 to 30 cents per transaction). This model allows merchants to more accurately estimate their processing fees over time.

Interchange Plus Pricing

This model involves merchants paying the interchange rate for each credit card transaction, along with predetermined additional charges or percentage add-ons.

Understanding these pricing models is crucial for businesses to select the most cost-effective option for their specific transaction patterns and volumes. Regular review of these models and their impact on overall processing costs can help businesses optimize their payment acceptance strategies and potentially reduce expenses.

Best Practices for Companies to Lower Their Credit Card Processing Fees

While it’s nearly impossible to eliminate credit card processing fees entirely if you choose to accept credit card payments, small and medium-sized enterprises (SMEs) can adopt several strategies to reduce these costs and protect their profitability margins:

Utilize Address Verification Services (AVS)

Address Verification Services (AVS) are customer fraud-fighting tools that verify customer information and protect business operations. When a customer’s address is verified, the bank sends an AVS code to the company, which can be used to authorize or reject transactions. Credit card networks like Visa often incentivize AVS usage by offering lower processing fees.

Ensure The Proper Set-Up of The Credit Card Terminal

Even minor errors can accumulate into significant additional expenses over time. It’s crucial for companies to set up their credit card terminals correctly from the start, as incorrect information entry can lead to higher charges from the credit card company.

Avoid Credit Card Fraud

One of the simplest ways to prevent credit card fraud is to ensure correct security detail entry. This protects merchants from unauthorized transactions by verifying the legitimacy of customer purchases through PIN verification.

Initiate a Credit Card Processing Fee Negotiation with The Credit Card Processors

While challenging, negotiating fees with payment processors can be highly effective. Companies with high total transaction volumes are in a stronger position to negotiate reduced processing fees.

Leverage Automation

Automated accounts receivable software can significantly reduce credit card processing fees. Automation eliminates manual processing time and resources, making payment acceptance more efficient and cost-effective. It can also introduce Level 2 and 3 interchange savings, helping businesses avoid unnecessary fees in the long run.

Kolleno, a smart credit control platform, is designed to help businesses get paid sooner by automating manual credit control processes. By focusing on achieving healthy accounts receivables, Kolleno aims to improve merchants’ financial health and unlock their full potential.

Final Thoughts

Credit card processing fees are charges imposed by financial services providers and credit card companies on merchants for verifying and authorizing credit card transactions. While it’s nearly impossible for modern businesses to operate without accepting credit cards, there are numerous strategies merchants can employ to minimize these transaction fees.

Kolleno offers a solution to help businesses manage these financial processes more efficiently. As a smart AI-powered accounts receivable management platform, Kolleno integrates with over 30 different accounting software systems, streamlining a company’s entire credit control process. It provides finance professionals with a centralized hub to manage communications, invoices, and payments effectively. By leveraging such tools, businesses can not only better manage their credit card processing fees but also optimize their overall financial operations, potentially leading to improved cash flow and reduced administrative burden.

Frequently Asked Questions (FAQs)

What Are Credit Card Processing Fees?

Essentially, credit card processing fees can be defined as the fees that a company has to pay each time it accepts a customer payment made via credit card. There are a number of fees associated with every transaction, and such processing fees may differ based on the type of credit card that the merchant accepts.

Can Businesses Avoid Paying Credit Card Processing Fees?

Generally speaking, companies can opt to pass on the credit card processing fee to their customers by implementing a surcharge on each credit card transaction that has been made to cover the related expenses. However, this surcharge is typically capped at 4%.

On Average, How Much Does a Credit Card Firm Charge for a Transaction?

The mean credit card processing fee for a single transaction ranges between 1.3% and 3.5%, whereby the absolute percentage will be largely dependent on the associated credit card network.

Are Credit Card Processing Fees Negotiable?

In short, yes. Credit card processing fees can usually be negotiated with the payment processor, whereby large corporations may initiate such a discussion by leveraging their high transaction volume to showcase a strong economy of scale against the cost incurred per transaction.