Credit Card Processing Explained
Credit card processing fees refer to the rates that merchants pay for any debit or credit card sale. Also referred to as a qualified merchant discount rate, this predetermined fee, set by the merchant service provider, involves three different elements - service fees, interchange fees, and the markup by the payment processor.
However, it's not just the service provider that has a say in the processing fee. The card issuer or bank and the card network are also involved in determining what the costs will be. For every card transaction that occurs, the issuer will charge the merchant a commission for the act of accepting the card, which is generally a percentage of the transaction, plus a small flat fee.
The payment processor is the financial institution that securely processes and completes the transaction. They usually have partnerships with companies and brands that work directly with merchants and consumers to facilitate this. Similar to card issuers, the payment processors will charge a percentage of the transaction, as well as a flat fee for each purchase.
6 Ways to Save on Credit Card Processing Fees
There are some actions that companies can take to offset their credit card processing fees. The following tips allow merchants of any kind to minimize these costs in order to enjoy a more healthy bottom line.
1. Set a Minimum for Credit Purchasing
Businesses can decide how much a customer must spend before the merchant accepts credit cards for a transaction. Usually, this is a minimum of $10 or more per transaction. In these circumstances, consumers will either turn to cash or spend more. Both cases will assist with offsetting processor charges.
This strategy is simple to implement - a business simply needs to express this rule where customers can see (often on or near the point of sale) and employees must understand the importance of adhering to this policy.
2. Buy (Not Lease) a Credit Card Terminal
There are options for businesses to rent payment processing terminals, rather than purchasing them. Though it could be a tempting option, by renting a POS system, a business will be paying more over time than it would have if the system was purchased from the beginning. Credit card terminals can range from $100 to $600 on average, depending on the functionality and design.
3. Set a Policy for Non-Manual Entering of Credit Card Information
Credit card processing firms generally charge more for transactions that have had the information entered manually into the terminal. This is because there are higher incidents of fraud with manual entering.
This means that each transaction should be put through the POS system by reading the card (swiping or entering), rather than the employer typing the information in. Though the additional fee is minimal, these costs can add up, and if there is a way to avoid them, it's best to do so.
4. Negotiate with the Payment Processor
Businesses wanting to continue working with the same processor should know that negotiating a better rate is an option, as long as they have some sort of leverage for bargaining purposes.
For example, a business that has experienced an increase in transaction volumes can use this information to obtain a lower markup. On the other hand, if the contract with a processor is nearing its renewal date, businesses can use this to their advantage to lower or eliminate any additional monthly fees.
5. Understand Transaction Types
Some types of transactions will cost more than others, so optimizing the types of transactions being made is one way to offset fees. Generally speaking-
- Debit card transactions usually cost less compared to credit
- Swiped card transactions typically cost less compared to manually typed in transactions
- EMV transactions usually cost less than swiped card transactions
6. Settle Transactions ASAP
Some small businesses may put off settling transactions for a few days, which may raise the card processing rate. Generally, businesses can achieve the most affordable interchange rates if they settle the charges within 24 hours of the transactions being made.
Is it Legal for Businesses to Charge Credit Card Processing Fees?
Unless restricted by state or federal laws, charging credit card fees is legal. However, there are certain protocols that need to be followed so that consumers are treated fairly. For example, within the United States, MasterCard, Visa, American Express, and Discover require retailers to display a physical notice of the surcharge amount for customers to see at the sales point (whether in-person or online).
The receipt must also indicate the amount of surcharge that was added to the transaction. Also, surcharges for prepaid debit or regular debit transactions cannot be imposed (even when choosing "credit" on the debit card).
Another fee worth mentioning is a convenience fee, which comes under the category of credit card surcharges and is also permitted in the US. Certain laws govern how this charge can be collected, such as requiring clear signage being displayed at the sales point, or only charging a convenience fee when a merchant offers an alternative payment method.
Though it is permitted, merchants should still consider whether it is ideal to charge credit card processing fees. Customers obviously prefer not to pay additional fees, unless this practice is an industry norm. Being the only business to charge fees among local competitors, however, could dissuade customers from returning. Therefore, businesses should consider the long term pros and cons associated with either option before reaching a final decision on this practice.