If you’re running a business, you could be leaving a lot of money on the table by not accepting credit card payments. According to Intuit, not accepting credit cards can cost the typical business $7,000 in annual sales. At the same time, it’s easy to understand how the various fees and requirements of accepting credit card payments can make the prospect seem daunting and complex – and most of all, potentially costly.
A lot goes into setting your business up for credit card payment processing. Between numerous middlemen and different rate plans, there’s a lot to consider. Even with the apparent upside of being able to offer customers more payment options, it’s not hard to understand why some businesses drag their feet about enabling credit card payments.
The resistance may be unfounded. Though credit card payments are indeed a bit more complicated than cash, with lots of variability in vendors and pricing models, taking some time to understand how these payments work as well as the various processing fees involved in accepting credit card payments can help you to find a solution that will best meet your – and your customers’ – needs.
To start, let's discuss what exactly occurs when you accept a credit card payment from a customer.
Let’s start off with a scenario that we’re all familiar with. A customer visits a business to make a purchase. When rung up, she opts to pay with her credit card. Four parties are initially involved with the transaction:
We expound on this further in this article, but there are many behind-the-scenes players powering payment processing. In brief, they include:
Some of this complexity can be bypassed by working with a Payment Facilitator like Square or PayPal. These companies are ideal for small-scale businesses due to their quick setup. That said, they can also hold funds from your bank account since they don’t underwrite their customers. The funds are held in the event of a chargeback.
We know, there are many parties involved. That’s what we meant when we said credit card payment processing is more complicated than depositing cash in your bank account. Unfortunately, not accepting credit cards can be dire for a business — especially since credit cards are the preferred payment method for larger purchases, according to CreditCards.com.
Most businesses turn to a Merchant Service Provider or bank with a merchant services division for their payment processing needs. The issuing bank charges the Merchant Service Provider an Interchange fee for the transaction. The issuing bank charges the Merchant Service Provider an Interchange fee for the transaction. This fee varies greatly due to factors like credit card type and risk. This Interchange fee is passed onto the business while the Merchant Service Provider simultaneously charges the business a markup to process the transaction.
You can also choose to work with a Merchant Service Provider that provides all the services related to processing credit card payments in one. This will reduce the number of middlemen you have to deal with and can improve the clarity and transparency of your billings. The more streamlined your services, the easier it is to focus on other important aspects of your business.
How do all of these various parties interact to get you paid? Here’s a simplified version of what happens when a customer pays by credit card:
E-commerce credit card payments involve additional steps, as they require additional communication between your shopping cart software and Payment Gateway.
How much money your business is left with after a transaction comes down to the processing fees involved. The acquiring and issuing banks are both taking a risk on the transaction. From the perspective of the issuing bank, the customer could fail to pay his credit card bill. From the perspective of the acquiring bank, the customer could file a chargeback if the product is deemed insufficient, doesn’t arrive or is the result of a stolen or fraudulent credit card.
While it is understandable that these services – and the resulting risks each party takes on – will all incur fees for businesses that wish to use them, the number of different types of fees as well as the variability between providers, can make understanding credit card payment processing fees a confusing prospect.
Payment processing fees by the various providers involved in credit card payments are typically levied on individual transactions and may be flat-rate or based upon a percentage of the transaction amount. And that’s usually not the only charge associated with credit card payment processing. You may also be charged monthly service fees as well as for any hardware or equipment required to process credit cards. Lastly, you can also be billed for chargebacks and other incidental occurrences.
But did you know that some of the fees associated with credit card processing are mandatory, consistent and non-negotiable while there is a tremendous amount of variability in other types of charges? Wholesale fees reflect the processing costs imposed by credit card issuing banks and credit card associations. These are non-negotiable and are the same regardless of which Merchant Account Provider you use. Markups, meanwhile, are the fees paid to your Merchant Account Provider and Payment Gateway Provider, and vary in many ways, including the rate and fee model. Small differences in how providers bill you can amount to a big difference in the total fees you end up paying.
If this all isn’t complicated enough, even the wholesale rates that you pay to process individual transactions can vary. This is due to the variability of risk involved.
To better understand why this is, imagine that your business sells office supplies. Compare the following scenarios: in the first, a customer comes into your store and purchases about $20 worth of paper and pens. They pay by credit card, correctly entering their PIN directly into your credit card terminal to verify.
In the second scenario, a customer calls your business to place a large order of supplies, valued at $1,500, for delivery. Because they are remote, they read off their credit card number to you over the phone for processing.
As a lender, which of the above scenarios would strike you as being more at risk for fraud or non-payment? Credit card processing fees are often assessed with risk level in mind. Here are some variables that determine the risk level:
In addition to the underlying wholesale rates, the markups charged by your provider will ultimately impact your total costs for processing credit cards.
Now that you have an understanding of why credit card processors charge the fees they do, and why variability exists, it’s important to understand the types of fees to which credit card processing is subject.
Transactional fees: Each credit card transaction you process incurs a cost to your business. This is typically taken off the top of the total transaction value and may be comprised of a percentage of the transaction value or a flat fee per transaction or both. These fees are actually several fees rolled into one, including:
Scheduled fees: These are ongoing monthly and/or annual fees covering the services provided by your payment processor(s) and any equipment you use. Each and every provider you sign on with directly who is involved in credit card processing, including your Merchant Account Provider and Payment Gateway Provider, may charge its own fees (with its own separate billing and contract). But while some providers might charge for things like monthly reports or printed statements, other providers do not charge anything beyond fees associated with individual transaction. You can reduce and streamline these ongoing charges by looking for a provider that doesn’t tack on an extra service fee as well as by selecting a single vendor who offers both Merchant Account Provider and Payment Gateway services under a single billing model.
Chargebacks: Chargebacks occur when a customer disputes a charge, resulting in the reversal of the fees you were paid. When a customer disputes a transaction, the billing is removed from their statement and charged back to your business. Though in some cases, a chargeback may be due to an erroneous fraud report by a cardholder that can be quickly cleared up and reversed, the liability rests on businesses in cases where fraud did occur after a chip card was processed incorrectly. Cardholders’ banks may also initiate chargebacks – even if a transaction is approved – if a chip card is swiped and not inserted.
Incidental charges: In addition to one-off fees such as chargebacks, your credit card processing provider may charge for things like terminating your agreement mid-contract. But even contract exit fees vary from provider to provider – and some may not charge penalties for leaving at all, allowing businesses to sign on on a month-to-month basis. This again underscores the importance of comparing all of your credit card processing options before signing on with a provider.
If businesses that don’t accept credit cards are poised to lose thousands of dollars annually, but processing fees are a minefield of markups is there any way to make processing card payments more manageable?
As we’ve already mentioned, your choice of payment processor can make a big difference on the ease and cost of accepting credit card payments. Here are some things you can do to reduce your costs:
Does your business accept credit cards? What was most surprising to you when you set up your credit card payment processing? Let us know in the comments section below!
Editor's Note: This post was originally published in December 2016 and has been updated for comprehensiveness and accuracy.