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One of the most tedious and unexciting aspects of starting a business is obtaining the basic requirements of a legitimate organization. Notable examples include business cards, a website, and the ability to accept credit card payments. This third example is a crucial step in a business’s development. Accepting credit card payments probably wouldn’t be so complicated if it wasn’t for the numerous fees associated with this service.

Yes, that’s right: Companies have to pay to allow their customers to use the world’s most popular payment method. That’s one more thing you can add to your already-massive list of expenses to keep track of. Like certain other minor expenses, credit card processing fees can add up very quickly. Making sure you don’t pay too much could have a major impact on your cash flow. No wonder so many business owners unknowingly let their finances slip out from under them.

In this guide, we’ll explain how credit card processing fees are implemented, their average cost, and what different providers charge for their services. In order to choose the right provider for your business, you must first learn how this arrangement works in general.

What are Credit Card Processing Fees?

The most important part of this phrase is the pluralization. In order to accept credit card payments, your business must pay several fees, not just one. The term “credit card processing fees” usually refers to transaction fee, flat fee, and incidental fee. Here’s where it gets confusing: Each of these three fees are made up various smaller fees. You must view the three fees both separately and collectively to determine how much a payment processor is charging you in total.

The average transaction fee ranges from 1.7% to 3.5% per transaction. Your overall fee will depend on the payment processor you choose to work with, and you have a number of options to choose from.

What are the Types of Credit Card Processing Fees?

Though there are three main fees, your credit card processing fees can include the various fees that make up the three fees as well. Here are the definitions of the three main fees along with the smaller fees they include:

Transaction fees: This is the amount you’ll pay every time you process a credit card transaction. Your transaction fee is the combination of your interchange rate, assessment fee, and the payment processor markup.

Flat fees: This is the fee for simply using the services of a payment processor. Most businesses pay this fee on a monthly basis.

Incidental fees: Your payment processor charges incidental fees for certain, fairly uncommon circumstances, like chargebacks.

Credit Card Processing Fees: Transaction Fees

Compared to the other two, transaction fees will cost you the most money by a longshot. Earlier, we mentioned that your transaction fee will consist of several fees rolled into one. This is primarily because four entities are technically involved in every single credit card transaction you process. Those four entities are:

The issuing bank: The institution that issued your customer’s credit card.

The credit card network: Most credit cards come from one of four financial services companies: Visa, Mastercard, Discover, and American Express. Other companies may enter the picture during international transactions.

The receiving bank: This bank “receives” the funds from the issuing bank and then deposits the funds in your bank account.

The payment processor: Your payment processor is the platform you use to process transactions at your point of sale. Popular processors include Square and PayPal. These companies essentially act as the middle man between the issuing and receiving banks. Issues like cardholder verification and transaction disputes are their responsibility. This portion of the transaction fee is how they turn a profit.

These are the four parties involved in your transaction fee. Now, we can get to the three actual fees that combine to make up your transaction fee. The following three fees allow each of the four parties to receive a portion of your transactions. Confused yet?

Interchange Rate

The issuing bank charges the receiving bank an interchange rate every time a transaction is processed. This is how the issuing bank turns a profit from transactions. The amount of the interchange rate that comes from you, the business, depends on a number of factors. You might have to cover some of the rate for certain sales, and the entire rate for others. These factors will also determine if you pay the interchange rate directly or through a slightly cheaper interchange reimbursement.

Interchange rates are a percentage of the total sale amount. Each credit card network has its own rates, and their criteria includes:

  • The card’s brand
  • The type of card (like a rewards, debit, or business credit card)
  • The card network’s perceived risk of the merchant’s business and industry
  • How the merchant accepts payment, i.e. a swipe, chip insertion, etc. Each method carries different degrees of risk for the network.

Assessment Fee

Credit card networks turn profits from transactions through assessment fees. Each network charges a fixed fee for every transaction. Like the interchange rate, this also fee depends on a number of factors, such as the type of business, product being purchased, and its price. There’s so many factors that each network has about 300 different percentages, and they change twice per year. One factor is the level of risk associated with certain industries/types of businesses, or the business’s likelihood of encountering a fraudulent payment. The network criteria for assessing risk is somewhat comparable to the criteria used by business lenders when assigning interest rates.

Payment Processor Markup

The previous two fees are based on factors beyond your control (unless you want to start a new business or sell new products). So, there’s nothing you can really do to lower the charges. What you can control, however, is the payment processor markup.

This fee depends on each processor’s unique pricing plan. Different plans make sense for different types of businesses. For this reason, new businesses should avoid long-term contracts, which prevent them from exploring other options as the business grows. Different plans might become more advantageous when you reach different stages of your business’s development. In summary, leaders of growing businesses should frequently look into all of their payment processing options. It’s completely understandable to switch processors multiple times.

Most payment processors offer plans in the following three packages:

Tiered Plans

Tiered plans place each transaction into one of three tiers. The tiers are based on the amount of risk associated with different types of purchases. Each processor has their own criteria for what’s considered more or less “risky.” Certain details might place an otherwise standard transaction into a processor’s riskiest tier. Performing more transactions like this could gradually make your processor markup very expensive.

Still, most tiered plans adhere to the same general principles, like in the following example:

Let’s say someone makes an in-person purchase with a standard credit card, as opposed to a reward-based card. This transaction would not be considered risky due to the low likelihood of fraud. If the transaction took place online, however, the processor would likely place it in the highest-risk tier.

This partially explains why we previously suggested looking into different plans. Certain plans work best for businesses that rely heavily on Ecommerce. So, when your business begins accepting payments online, you should probably research the more sensible options for your payment methods.

Interchange-Plus Plans

Before we explain how this fee works, it’s important to get one big terminology issue out of the way. As we established before, the three fees that make up the transaction fee are the interchange rate, assessment fee, and payment processor markup. When payment processors use the term “interchange fee,” they are not referring to the interchange rate. The interchange fee is the combination of the interchange rate and assessment fee.

With an interchange-plus plan, your payment processor markup is the interchange fee plus a set percentage of the price and/or an additional fixed fee per transaction. So, on top of the interchange fee (which depends on the credit network’s rates), you might have to pay a percentage of, say, 20%, and/or a fee of $0.10.

Some interchange-plus plans charge monthly subscription fees on top of the interchange fee and a fixed fee per transaction. Many standard interchange-plus plans charge three fees (interchange fee + percentage + fixed fee), so the only difference is that instead of the percentage, you have the monthly subscription fee.

As you can see, interchange-plus plans can get pretty complicated, and your statements will show it. But being able to view the exact components of your processor markup does provide more transparency than a tiered plan. If your top concern is saving money, however, the chances of that happening are lower when your statements take longer to understand.

Flat Rate Plans

Flat-rate plans charge the same fee for every transaction, regardless of the kind of card involved. Some flat-rate plans even charge the same fee for in-person and online purchases.

The rate itself comes from a set percentage of the transaction and an additional fixed fee. Square’s success is largely attributed to their flat rate of 2.6% + $0.10. Every business that uses Square pays this amount. They don’t have to worry about unknowingly paying more money for increasingly “risky” transactions.

These plans might charge more than others but many businesses prefer their incomparable simplicity. This makes it much easier to budget for your total monthly or annual markup expense. New businesses tend to favor flat rate plans because they don’t have the revenue or years in business to negotiate lower rates with other processors. The previous two plans can also get particularly expensive for businesses that sell cheaper products. That’s yet another disadvantage you can forget about with flat rates.

Credit Card Processing Fees: Flat Fees

Next up after transaction fees is flat fees. While transaction fees are made up of various smaller fees from various parties, flat fees are determined by one party: your payment processor. Flat fees (you’ll have more than one) are essentially the costs of using multiple elements of the processor’s services. Most businesses pay recurring monthly or annual flat fees. Some processors, however, also charge one-time flat fees for certain services.

Recurring Flat Fees

Every business that accepts credit cards pays multiple flat fees. The amount you pay depends on the processor. You’ll probably have to pay most or just some of the following flat fees:

  • Monthly or annual account fees: This represents the cost of keeping your account with the payment processor open.
  • Monthly minimum processing fee: Some processors charge extra fees for businesses that fail to meet the minimum monthly charges requirement. The fee is usually the difference between your monthly processing bill and the processor’s monthly minimum.
  • Terminal lease or rental fees: Most payment processors require businesses to lease or rent a credit card terminal. You may, however, be able to negotiate certain pieces of hardware for free.
  • Withdrawal fee: Some processors charge fees for transferring funds from their account to your bank account.
  • Payment gateway provider fee: Selling products online requires a payment gateway provider. Most processors charge a fee for this service but others offer it for free. If Ecommerce is a big part of your business, you should pay attention to this fee when comparing different processors.
  • Statement fees: Some processors charge a fee to provide financial statements (income statement, profit and loss statement, balance sheet).
  • IRS reporting fee: Payment processors are supposed to report your transactions to the IRS and provide the necessary tax reporting forms for free. So, if your monthly statement says that your processor has charged an IRS reporting fee, contact the processor immediately and dispute the charge.

Payment Card Industry (PCI) Fees

All businesses that accept credit cards must comply with the Payment Card Industry Data Security Standards (PCI DSS). These data storage requirements are legally mandated in some states, and most credit card companies require businesses to follow them.

If word gets out that you’ve violated PCI DSS, you could face legal action, penalties and federal audits. The PCI fee is supposed to cover the credit card company’s cost of ensuring your compliance. So, if your processor doesn’t take any sort of action to make sure you comply with PCI DSS, you should probably dispute this fee. Many business owners don’t even question PCI fees simply because they don’t know what they mean.

One-Time Flat Fees

One-time flat fees are usually negotiable, especially for processors that already charge more of the aforementioned fees than others. You may even be able to convince a processor to waive all of their one-time fees since an increasing amount of their competitors don’t charge them at all.

Here are the most common one-time flat fees:

  • Account setup fee: Some processors charge a fee just to open an account. They money is often used to help pay the technicians who come to businesses to set up the necessary equipment.
  • Terminal purchase fee: Purchasing a credit card terminal might be cheaper renting or leasing. But remember, you may be able to negotiate free equipment with certain processors.
  • Cancellation fee: This is a fee for early termination of your contract. Cancellation fees can be huge, so make sure to ask about it before signing a contract. You be able to negotiate your way out of this fee, as well.

Incidental Fees

The third and final credit card processing fee for your business is incidental fees. These fees are directly determined by your payment processor, and the amounts can vary tremendously from processor to processor. Businesses incur incidental fees following specific occurrences, most of which are relatively rare for the average business.

Here are the most common incidental fees:

  • Cardholder dispute fees: This fee is charged whenever a customer disputes a transaction.
  • Chargeback fees: An additional fee may apply if the customer dispute is resolved by a chargeback, i.e. a refund to the customer.
  • Non-sufficient funds fee (NSF): Your processor may charge you for not having enough funds in your bank account to pay them.
  • Batch payment processing fee: This is technically categorized as an incidental fee but it refers to something many businesses do every day: submitting a batch of credit card purchases.

What are the Average Credit Card Processing Fees?

When payment processors and financial institutions talk about credit card processing fees, they’re usually just referring to transaction fees. The rates they give do not include the remaining two: flat fees and incidental fees. But they aren’t doing this to deceive or confuse you. Most business owners they deal with are primarily concerned with how much money they’ll lose for each transaction. Unlike the other two fees, transaction fees come right out of your sales and have a direct impact on revenue.

The average business usually pays between 1.7% and 3.5% per transaction. As we explained earlier, that amount is split between the issuing bank, receiving bank, credit card network, and your payment processor. Where your business falls within this range depends on a host of factors related to your business as well as the customer. As far as dollar amounts, those percentages could come out to anywhere from $1 to $5, depending on the price. Let’s say your transaction fee is 2%. If a customer spends $50, you would take home $49. If a customer spends $200, you would take home $196.

Averages for flat fees and incidental fees are harder to calculate because they are directly based on the payment processor and the type of business involved. Two businesses could work with the same processor but pay very different fees.

Generally speaking, your business could end up paying anywhere from $5 to $100 for each flat and incidental fee. Flat fees like monthly account fees usually fall on the higher end of that range, whereas most incidental fees are much cheaper. But like we said, one business could pay a monthly account fee of $10 while another pays $50, even though they both use the same processor.

Credit Card Processing Fees: Making Your Decision

Much like small business loans and credit cards, choosing the right payment processor can be a major financial advantage. You just have to know which factors to keep in mind when researching options, like industry, sales volume, or your most common payment method. Different processors present their pricing systems in different ways, so you’ll probably have to make a few phone calls to get the information you need for comparison’s sake.

But no matter which processor you choose, credit card processing fees will likely be one of your most significant expenses. So, it only makes sense to prioritize and periodically revisit this expense when starting and growing your business.

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