Accepting credit card payments offers numerous advantages. They're faster than checks, they give customers more options, and you can improve your cash flow since you can receive deposits in hours to days. However, due to credit card fees, many businesses hesitate to use this payment option.
There's no getting around fees—they're simply part of the cost of doing business. Therefore, it's essential to understand them so you can know what to expect, mitigate their negative impacts, and maximize profits.
Here, you'll learn more about the different types of credit card fees and get some practical tips for decreasing this cost of doing business. You'll also discover how to offer a branded payment gateway that reduces credit card fees.
Who pays credit card transaction fees?
You'll be concerned primarily about the credit card fees you pay as a merchant, which can depend on the type of card, the processor, transaction volume, and other factors. But it's important to remember that the cardholder is also responsible for several fees.
Cardholders must pay these fees for the privilege of maintaining their accounts and using their cards. In exchange, they can tap into the benefits of credit card payments and rewards programs. Some standard consumer fees include:
- Balance transfer fees: When consumers move a balance from one credit card to another.
- Cash advance fees: Consumers pay an extra charge, typically 3–5%, when they withdraw cash from their credit cards.
- Returned payment fee: A fee of around $25–$40 that's charged when a payment is rejected.
- Late payment fee: An extra charge, usually between $25 and $40, that's issued when consumers don't make their minimum payments on time.
- Foreign transaction fee: The fee charged by card issuers when consumers make purchases from merchants in a different country.
- Over-the-limit fee: A charge issued when consumers exceed their credit limits.
It's important to note that the over-the-limit fee is far less common than it once was. Today, a card issuer will usually deny a transaction if a consumer attempts to make a purchase over their credit limit.
Some fees are flat-rate, whereas others, such as foreign transaction fees, are a percentage of the transaction. For instance, a balance transfer fee is usually 3–5% of the transfer amount. If a consumer transfers a balance of $1,000 from a different card and their balance transfer fee is 3%, they'll be charged $30. A cash advance fee is also percentage-based.
Just as consumers want to avoid cash advance and late payment fees, you should also strive to minimize processing costs.
Common types of credit card fees
Do you ever feel your payment processors charge credit card fees for everything? That's because they do. All these costs can quickly add up and negatively impact your bottom line. The most common credit card fees you'll encounter may include:
Interchange fees
Credit card payment, banks, card brands, and payment processors—they all collect a fee. Typically, the bank that issues the credit card gets the largest fee—around 1% to 3% of the transaction. The fee banks collect from merchants is called an interchange fee.
The interchange fees may seem small at first, but they quickly add up. The fees vary based on multiple factors, which makes it all the more complicated. They vary depending on the type of card (credit vs. debit), how the card is inputted (keyed or swiped), how it is collected (online, by phone, etc.), and the perks offered by a credit card (with cash-back cards commanding larger fees).
Imagine an interchange fee of 3%. It's a small percentage, but it can quickly add up depending on the number and amount of transactions.
Suppose your company collects a card payment for an invoice totaling $4,500. An amount of $135 would be deducted from that payment. If that is a regular monthly payment, that amount rises to $1,620 yearly. Now, extrapolate that across multiple payments from multiple customers, and you can see how small interchange fees have a significant impact.
Assessment fees
Card networks like Visa and MasterCard usually charge assessment fees. These are typically a small percentage of the transaction amount and represent one of the most common credit card fees. An assessment fee is pretty much unavoidable, regardless of which credit card companies and payment processors you do business with.
Markup or transaction fees
Payment processors don't facilitate transactions out of the goodness of their hearts. They need to get paid. One way they do that is by charging markup credit card fees, which they add to interchange and assessment fees.
Monthly fee
Many payment processors charge a monthly or annual fee to maintain your account. The yearly fee covers customer support, account statement generation, and other services. Before choosing a provider, compare the annual or monthly fee to determine which offer makes the most sense for your business.
Look at more than just the annual fee, however. A higher yearly fee might be beneficial if the provider offers lower per-transaction rates and you engage in a large volume of credit card transactions.
Batch fees
Payment processing companies also charge an additional fee for processing transactions in a batch. Batch processing involves sending all your credit card and debit card transactions to the processor in one large group at the end of the day.
Chargeback fees
If a customer disputes a transaction, credit card companies have to investigate it. The credit card company that receives the complaint will bill you for these costs via chargeback fees. While you shouldn't run into many of these issues, they are much higher than monthly fees or other recurring charges.
PCI compliance fees
Credit card processors must comply with the Payment Card Industry Data Security Standards (PCI DSS). You are also obligated to uphold these standards when processing card payments. Your payment processor will probably address PCI compliance for you. The bad news is the payment processor will also charge a PCI processing fee.
Equipment fees
Most credit card fees are non-negotiable. Equipment costs are one of the few credit card processing fees you may have a say in. These are the fees that processing companies charge you for renting or buying point-of-sale systems and card scanners. A credit card processor will typically bill you for this equipment monthly or annually.
If you operate entirely online, you won't need any equipment and can avoid annual fees associated with leasing processing machines. However, you won't be able to accept any in-person payments either.
Keyed transaction fees
That's right. Your per-transaction payment fee will be higher if you manually enter users' credit card details. Credit card issuers view keyed transactions as "higher risk," so they add expensive fees to these charges.
Online transaction fees
Processing cards for online purchases involve additional fees. A card issuer views these types of transactions as riskier than in-person purchases. They bill the extra fees to offset the risks they face and cover the cost of fraud protection efforts.
Cross-border fees
If a customer's bank is in a different country than where your business is based, you may incur a foreign transaction fee. Foreign transaction fees can be high, depending on the credit card surcharges your processor applies to your account and the country in which the card issuer is located.
Early termination fees
Early termination charges are among the most common credit card fees. If you terminate your contract with a processing company before the end of your contract, you might incur a termination fee. Make sure to carefully review the terms of your agreement so you can avoid hidden fees and keep your costs to a minimum.
How you can reduce credit card fees
You can reduce credit card fees through rate negotiation, shopping around and adjusting how you make transactions,
Here are a few tips to cut down on processing fees:
Negotiate rates
Popular payment processors are usually willing to negotiate rates and provide some pricing flexibility. Discuss your transaction volume and history with your processor to see whether they will offer better rates. Remember, of course, that you have to generate enough money for the deal to appeal to the processor.
Also, determine whether they offer discounts for paying annually instead of issuing monthly payments. Some providers may let you pay your recurring fees on a yearly basis in exchange for a discount. Once you pay the annual fee, you'll know your account is in good standing for the rest of the year.
Shop around
Don't partner with the first processor you speak to. Compare the per transaction fee, convenience fee, and other terms offered by a few different processors. Carefully weigh your options and choose the partner that best aligns with your company's needs. For instance, paying higher interchange fees in exchange for lower monthly charges may be beneficial if you have a low transaction volume.
Increase transaction volumes
Most processors assess finance charges on a per-transaction basis. If you can increase your transaction volume, they might offer discounts. However, you'll have to show you are generating enough money to justify a discount.
Minimize keyed transactions
Avoid keyed transactions whenever possible and opt for card-present transactions or automatic payments via POS systems. Processors generally charge lower fees for these types of transactions due to the reduced risk of fraud.
Batch transactions
Some processors charge lower fees if you batch your transactions at the end of the day. Link your system to your business bank account and implement batching rules to reduce recurring processing costs.
Research payment gateways
Payment gateways like BILL help companies set up branded payment portals that accept credit card, ACH, and PayPal payments. You can also allow your customers to pay as a guest without requiring a login.
When activated, the process looks like this:
- Your customer receives their invoice electronically via BILL.
- They click on a link in the invoice to pay it.
- The link takes them to your company's branded portal and payment gateway, where they can input their credit card information.
- You potentially unlock savings via your vendor and card issuer, which may include early pay discounts, tax write-offs, and cash-back opportunities).
Set up recurring payments so funds arrive quickly and regularly. Some card issuers may provide lower processing rates for automated payments. However, be sure to confirm that with your institution.
To learn more about what BILL can do for your business payments, schedule a personalized demo.