In an increasingly digitized world, it would be uncommon for businesses to not accept credit cards as a form of payment. Statistics suggest that credit cards have now become the most popular method of payment. As recently as 2017, credit card transactions totaled 62.3% of consumer payments in the United States, compared with only 15.5% for cash.
Allowing customers to use credit cards as a payment method doesn't come without costs for the business itself. There are processing fees that businesses must pay for every credit card purchase made and these fees can vary. We'll examine the average credit card processing fees that businesses face and what is included in these costs.
Credit Card Processing Fees Explained
In a nutshell, credit card processing fees are the expenses associated with a credit card transaction. These costs are absorbed by business owners as a means of accepting cards as a form of payment. Depending on the payment processor a business chooses, the processing fees can range anywhere between 1.7% to 3.5% for every card transaction.
These expenses can include any flat-rate, transaction cost, and incidental fees.
1. Flat-Rate Fees
Generally, these are monthly fixed amounts attributed to using a particular credit card service provider. Think of this as the cost of using their services which can also include the usage of their payment gateway.
2. Transaction Cost Fees
As the name suggests, this fee pertains to the individual cost per credit card transaction. The transaction fee can be made up of smaller expenses and they typically include the assessment fee, interchange rate, and payment provider surcharge.
3. Incidental Fees
Incidental fees are penalty-like fees that can be charged to businesses in the event of an unusual occurrence such as insufficient funds or refunds.
Interchange Rates and Card Payments
Interchange rates are often included in the transaction fees and represent the most substantial amount of the complete processing cost a business will need to pay per credit card transaction. This expense is not fixed and is dependent on a number of different factors.
1. The Network Used
The interchange rates are different across the board for the major credit card companies including Visa, Mastercard, and American Express. This can have a profound effect on the overall transaction cost depending on which interchange rate is used and by which credit card company.
2. Type of Credit Card Used
A business' card reader will be able to process credit card and debit card transactions but the transaction rates will be different between the two. The same can be said for credit card types as well since personal (regular) and business credit cards have different rates.
3. How the Transaction is Processed
Depending on the card reader a business uses, this device will allow the customer to swipe, tap, or insert the card. If credit card payments are made online or by using mobile devices, the rates may also differ.
4. Merchant Category Code
The Merchant Category Code, or MCC, is how credit card companies classify which industry the transactions are coming from. This is important because rates are dependent on the specified industry and are different across the board. The MCC is typically identified by four-digit numbers that let the credit card company know which type of card was used for each transaction.
Average Credit Card Processing Fees for Merchants
Credit card processing fees will vary between the different credit card companies. This discrepancy can have a big impact on small businesses as this can reduce their profit margins. Therefore, merchants should proceed with caution when thinking about which card companies their business will accept.
Merchants should expect to pay between 1.5% and 3% in average credit card processing fees for swiped cards. For transactions that require the customer to insert their credit card into the reader and input their PIN number, this processing fee rises to approximately 3.5%.
To give merchants an idea of how much the major credit card companies charge in average processing fees, here are the estimates.
1. American Express- 2.5 - 3.5%
2. Mastercard- 1.55 - 2.6%
3. Discover- 1.56 - 2.3%
4. Visa- 1.43 - 2.4%
Helpful Tips to Reduce Transaction Fees
Credit card processing fees can often hinder merchants from maximizing their revenue. While accepting card payments has become an essential way to conduct business, there are a few helpful ways to reduce transaction fees.
1. Accept Credit Cards In Person
If possible, try to accept credit card payments in person since they are less susceptible to fraud. Online payments or any other credit card payments that are made without a person being present are more likely to produce fraudulent purchases. These risky purchases often come with higher interchange fees which can significantly bump up a merchant's processing expenses.
2. Minimize Chargebacks
Chargebacks are any sort of transactions that have taken place but are being retracted either due to refunds or a charge dispute from a customer. A buildup of chargebacks can have negative consequences for merchants because banks may view these transactions as questionable. As a result, banks may end up increasing processing fees.
One way for merchants to decrease the number of chargebacks is by issuing a credit card authorization form. This form is signed by the purchaser and gives the merchant the right to charge the customer's credit card on an ongoing basis.
3. Enforce a Minimum Amount for Credit Card Sales
Businesses that deal with small dollar amount purchases, such as gas stations or convenience stores, often institute a minimum amount charge for credit card users. This is to help mitigate the effects of processing fees for individual transactions. However, merchants need to be aware of if such a policy is enforceable in the state that they live in.