For many businesses, accepting credit card payments is a necessity in today’s economy. However, with every swipe, tap, or click, a portion of the sale is paid out in credit processing fees. While these fees are a standard cost of doing business, they can significantly eat into a company’s bottom line.
What Are Credit Processing Fees?
Credit processing fees are the charges a business pays to a payment processor to handle credit and debit card transactions. These aren’t just a single charge but a complex amalgamation of various fees collected by different parties involved in the transaction.
The primary components typically include:
Interchange Fees
This is the largest portion of the fee and is paid to the card-issuing bank (e.g., the bank that issued the customer’s Visa or Mastercard). These fees are non-negotiable and are set by the card networks (Visa, Mastercard, etc.). Factors influencing the interchange fee include the type of card (debit, credit, rewards, corporate), the transaction method (in-person vs. online), and the size of the business.
Assessment Fees
These are paid directly to the card networks (Visa, Mastercard, Discover, etc.) for using their network. They are a smaller percentage of the total fee and are usually a fixed rate based on transaction volume.
Payment Processor Markup
This is the fee charged by your payment processing company for their services, which include providing the POS system, handling the transaction, and offering customer support. This is the only component of the fee that is negotiable and can vary significantly between providers.
The impact on your profit margin
Every dollar spent on these fees is a dollar that isn’t available for reinvestment in the business, employee salaries, or operational costs. For a small business operating on tight margins, a seemingly small percentage can make a substantial difference.
Consider a retail store with an average profit margin of 10%. If credit card fees take 2.5% of each sale, the effective profit on those transactions is reduced to just 7.5%. This can be the difference between a profitable month and a month where the business just breaks even.
Practical tips to reduce your credit processing fees
While you can’t eliminate these fees, there are several strategies that SMEs can implement to significantly lower their costs.
Understand your pricing model
Payment processors offer different pricing structures. Understanding which one you’re on and whether it’s the right fit for your business is the first step.
Tiered Pricing: This model bundles all fees into a few tiers. It’s simple but often not transparent, as many transactions get pushed into the higher-cost tiers.
Interchange-Plus Pricing: This is considered the most transparent model. The processor charges the interchange fee directly, plus a small, fixed markup (e.g., Interchange + 0.25% + $0.10). This allows you to see exactly what you’re paying to the card networks versus your processor.
Flat-Rate Pricing: You pay a single percentage and a fixed per-transaction fee (e.g., 2.9% + $0.30). While it’s predictable, it can be more expensive for businesses with a high average transaction value.
Implement surcharging or cash discounts
Some businesses choose to pass a portion of the processing costs onto the customer.
Surcharging: This involves adding a fee to the customer’s bill when they pay with a credit card to cover the processing cost. A surcharge cannot exceed the actual cost of processing and is capped at 4% by card networks (Visa, Mastercard, etc.).
Cash Discounts: This encourages cash payments, which have no processing fees, and can be easily implemented with a clear pricing policy.
Optimize your transaction process
Small changes in your daily operations can also lead to savings. Here are some advices:
- Use EMV chip readers.
- Batch out daily.
- Implement level 2 & 3 processing.
Negotiate with your provider
Providers like Brava POS are increasingly focused on helping businesses grow, which often includes offering transparent pricing and, in some cases, special discounts. While the ultimate goal is to find a provider that offers the best blend of features, reliability, and support, it’s worth exploring all options to ensure you’re getting the most competitive rates available for your business volume.
Be mindful of extra fees
Beyond the main processing fees, be aware of other potential charges, such as:
- Monthly fees
- PCI compliance fees
- Chargeback fees
- Statement fees
- Early termination fees
Review your monthly statements carefully to identify all charges and inquire about any that seem unusual or unnecessary. A good payment processor will provide a clear, detailed statement that breaks down every fee.
Credit processing fees: modernize your business
Taking a proactive approach can significantly reduce these costs. The money saved can be reinvested directly into your business, helping you to grow, improve your services, and ultimately, increase your profit margins.
Frequently Asked Questions (FAQ)
Yes, in most cases credit card processing fees are tax-deductible. Credit card processing fees are considered a business expense and are typically tax-deductible. However, it’s crucial to consult with a tax professional or accountant to ensure you are following the proper procedures for your specific jurisdiction and business structure.
Generally, no, you can’t refuse to accept certain types of credit cards to avoid higher fees. When you sign a contract with a credit card network (like Visa or Mastercard), you are usually required to accept all cards from that network.
A chargeback occurs when a customer disputes a transaction with their bank, leading the bank to reverse the payment. While this can be for legitimate reasons (e.g., fraud), it also often comes with a penalty fee from your payment processor. These fees can range from $15 to $100 or more per chargeback, in addition to losing the sale amount. Implementing security measures and clear return policies can help reduce chargebacks.
