Understanding Credit Card Processing Fees

Dimitri Raziev11 Jan 202310 mins
Understanding Credit Card Processing Fees

Key Points

– In our world today, paying for credit card processing fees is frequently a necessary expense that merchants need to incur as part of doing business.

– Credit card processing fees can be defined as fees that a company needs to pay each time it accepts a credit card made by its customer or client.

– There are several forms of credit card fees related to each transaction, and these fees may differ based on the type of credit card that the business accepts.

– Small firms that accept credit card payments in person would usually pay appropriately 2% per transaction in credit card processing fees, whereas the average cost of accepting digital payments may be estimated to be circa 3%.

– Higher credit card processing fees are typically incurred by certain sellers as well as new businesses. In the meantime, larger corporations may be able to negotiate for a lower processing fee due to their sheer volumes of transactions.

– There are a few areas that can influence the amount charged to a company in terms of its credit card processing fee. In particular, factors such as the credit card type, the bank issuing the credit card, and the service provider for the merchant are some noteworthy examples.

In short, credit card processing fees can be generally defined as the amount that payment processors charge whenever a credit card is made for a sale transaction between a merchant and a buyer. For companies, this processing fee may accumulate into a large corporate expense as it is nearly impossible to run a business without accepting any form of credit card payment.

On average, credit card processing fees would usually range between 1.3% to 3.5% per transaction, and this would be largely dependent on a multitude of factors, including the type of credit card, the specific payment company by which the transaction is being completed, as well as the merchant category code (MCC). For instance, should a business accept US$1,000 in payment from a customer, they could expect to be paying between US$13 and US$35 in credit card processing fees.

To help companies better manage their accounts receivables, Kolleno is a smart credit control platform equipped with sophisticated data intelligence features and analytical tools to gain insights into client payment behaviours as part of aiding companies better mitigate credit risks.

What Are the Different Types of Credit Card Processing Fees?

Generally speaking, it is extremely vital for merchants to consider the industry vertical in which their business is operating as well as their company’s respective sale profile so that they would be able to match it with the appropriate payment processor. At the end of the day, the main objective amongst companies, whether big or small, is to get the most out of your credit card processing fee to make the payment worthwhile.

In essence, there are three key types of credit card processing fees that every company ought to be aware of:

Assessment Fees

To begin with, assessment fees are also commonly known as card brand fees, network access and brand usage (NABU) fees, or card association fees. In the majority of cases, assessment fees are established, charged, and collected by major credit card players as the merchants would be using their credit card brand to facilitate the transaction. These fees, as a result, would be added to the individual transactions together with the interchange expenses. 

All notable credit card providers charge a minimal assessment fee from the enterprise client. For instance, should the merchant own a Mastercard credit card, they will have to pay an assessment fee of 0.13% for every transaction below US$1,000 and 0.01% for transactions above US$1,000, respectively. On that note, the assessment fees charged by different credit card networks could vary largely, such as those listed below:

– Visa: 0.14%

– Discover: 0.13%

– American Express: 0.15%

Payment Processing Fees 

Also known as the merchant services mark-up cost, these are the fees that companies will have to pay to the payment processor (i.e., the firm that handles the merchant’s card payment process) for each credit card transaction that has been made. In specific, these fees would be based on the percentage of the merchant’s total monthly transactions. Not to mention, it is the only type of fee that businesses would be able to initiate a negotiation as part of reducing the expenses associated with payment processing. In the meantime, some of the well-known payment processing firms across the world would include Helcim, PayPal, and Square.

In certain cases, the credit card network might also charge several add-on payment processing fees such as a per-transaction fee, a monthly service fee, and the cost of the credit card payment.

Interchange Fees

The interchange fees are essentially the fees charged for the transactions made by the bank that issued the merchants their credit cards, whereby this fee differs between various merchants. The typical range is usually between 1.5% and 3.3% as a result of several factors. For instance, some of these factors are, namely, the current interest rates, the relative amount of risk involved, the merchant’s credit history, as well as the amount of money that has been transferred for that transaction.

How Is the Credit Card Processing Fee Calculated?

In general, the most optimal way for one to determine their credit card processing fee is to calculate the effective rate. To briefly elaborate, the effective rate percentage is the total amount that the credit card company will be charging the merchant as part of enabling them to accept payments made using credit cards. This figure may be calculated by dividing the total amount of money deducted for the payment processing by the total sales per month, followed by multiplying the result by 100. 

Under most circumstances, companies running a business-to-business (B2B) operating model would have an effective rate ranging from 2.5% and 3.0%. On top of that, there are a number of types of fees within the effective rate percentage, including the interchange rate, the payment processing fee, as well as the assessment fee.

Pricing Models for Credit Card Processing Fees

Due to the specific range of credit card processing fees for each of the leading credit card companies, the processing fees would be bound to fluctuate. As a matter of fact, the mean credit card processing fee could change over time due to the dynamic pricing models. Consequently, all merchants are strongly advised to accept the credit cards that are best suited for their business needs and operations.

To briefly elaborate, a few of the most prominent credit card processing pricing models would include the following:

Tiered Pricing

As its name suggests, credit card transactions might be available for businesses through different pricing tiers or buckets. For example, some transactions could be charged at a lower or higher percentage in credit card processing fees. Therefore, merchants who tend to process the majority of their credit card-based transactions in the cheapest price tier would most likely be able to benefit the most from such a pricing model.

Flat Rate Pricing

In some instances, the credit card company will charge businesses a fixed or flat rate for every transaction made with their credit card in addition to a small fee (e.g., 20 to 30 cents per transaction). On that note, merchants operating with a flat-rate pricing model may have a greater probability of estimating their credit card processing fees over time.

Interchange Plus Pricing

In essence, the interchange plus pricing model typically includes the merchant paying the interchange rate for every credit card transaction that has been made on top of any predetermined additional charges or add-on percentages.

Best Practices for Companies to Lower Their Credit Card Processing Fees

Even though the majority of small- and medium-sized enterprises (SMEs) accept credit card payments from their customers, the high credit card processing fees may eat into the companies’ profitability margins despite its seemingly minute amount. Although it is practically impossible to completely eliminate credit card processing fees at the point of writing, there are still a handful of strategies that every companies could consider adopting to save themselves a few thousand dollars every month and year:

Utilise Address Verification Services (AVS)

As a credit card holder, the merchant could attempt to use customer fraud-fighting software known as address verification services (AVS) to verify their customers and safeguard the efficiency of the business’s operations. The moment a customer’s address has been properly verified, the bank would then send an AVS code to the company, which may, in turn, use it to authorise or reject a credit card transaction. All in all, credit card networks like Visa usually encourage firms to utilise AVS, with some even offering a lower credit card processing fee for every transaction to incentivise a greater uptake.

Ensure The Proper Set-Up of The Credit Card Terminal

Simply put, even the smallest of mistakes may eventually accumulate into higher additional expenses and credit card processing fees if the errors were not rectified as soon as possible. Taking that into consideration, it would thereby be extremely imperative for companies to set up their credit card terminals the right way from Day One itself, as the credit bank company could charge more if any of the staff enters incorrect information.

Avoid Credit Card Fraud

Put simply, one of the most straightforward strategies merchants could employ to prevent credit card fraud is to enter the correct security details. This thereby protects them from any unauthorised transactions since the PIN should have verified the legitimacy of the customer’s purchase.

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

Moving forward, one of the most challenging yet effective approaches by which merchants could save on their credit card processing expenses is by negotiating for a certain fee with the payment processors themselves. On that note, one of the most powerful pieces of data that firms could showcase would be their high total transaction volume if they hope to increase the chances of receiving a reduced credit card processing fee.

Leverage Automation

In a nutshell, merchants could consider lowering their credit card processing fees through the use of automated accounts receivable software. In particular, automation greatly eliminates the time and human resources required to process credit cards, and this virtually accelerates any manual processes. As a result, the payment acceptance process may be much cheaper and more efficient, and it may occasionally introduce Level 2 and 3 interchange savings that aid the business in sidestepping avoidable fees in the long run.

Having mentioned that, Kolleno is a smart credit control platform designed to help businesses get paid sooner by automating all the manual credit control processes. As a result, by making the achievement of healthy accounts receivables part of its core value proposition for customers, Kolleno aims to eventually help merchants elevate their financial health and unleash the firm’s full potential.

Concluding Thoughts

All in all, a credit card processing fee is a payment that financial services providers and credit card companies charge merchants as part of helping to verify and permit credit card-based transactions. Although it can be nearly impossible for merchants to operate a business without accepting credit cards, there remains a wide range of strategies that they could adopt to minimise the number of fees incurred from such transactions.

With that in mind, Kolleno is a smart credit control platform that can be integrated with over 30 different accounting software to streamline a firm’s entire credit control process. In essence, Kolleno offers a single centralised hub to aid finance professionals in staying on top of communications, invoices, and payments.

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.