With business transactions involving credit cards, processing fees take a bite out of the total profits made. Credit card processing fees can be somewhere around 2% of every purchase. Businesses have some power to minimize their costs by shopping for payment processors that are more affordable. In order to shop around for processors, you need to know what you are looking for, and be aware of what credit card processing fees.
What Are Credit Card Merchant Fees?
When you accept credit cards as a payment, you are charged a few for processing (as mentioned above). This fee is known as credit card merchant fee and is sometimes referred to as discount rate. The fee is set by the merchant account provider and this fee is typically a combination of three factors: interchange fees, assessment (or service) fees, and the payment processor’s mark-up.
While your payment processor is the one that sets the merchant fees, the card issuer and the card network each play an integral role in determining the fees that are ultimately taken from the transactions you process.
Everything You Need To Know About Merchant Account Fees
The credit card industry lacks competition and this is why they can get away with their exorbitant costs. One of the best ways to see where these upstream costs are being added is to understand how a payment card transaction works. This way, you can see where a charge might get tacked on to a particular transaction.
When a credit card processor gives you a quote, you’ll usually see a percentage and a flat fee. Let’s start with why you’re being charged in this manner.
Why Merchants Pay A Percentage & A Flat Fee
Once you start accepting credit card payments in your business, the first thing you might notice is that you are being charged in a peculiar way: Your cost for processing a payment card is a joined percentage together with a flat fee. The reason for this is to do with the upstream providers’ fix business (e.g., equipment) costs and financing risk.
In order to process a transaction, the credit card industry uses a lot of computer technology, all connected to form a private computer network. Each player in the industry has costs to maintain their part of this network, including paying for hardware, software, and network connection. This maintenance cost is stead and the upstream providers pass it down to you as a flat access/usage fee.
Additionally, to the computer network, there is a financing aspect to the fee for each card. A credit card is actually a mini loan that the bank makes to the credit card holder, so there’s an ever-present risk that the bank won’t get paid back. Debit card transactions also involve a bit of financing risk in the form of an overdrawn bank account. That’s why the banks want more money for sustaining the risk of a greater loss.
Thus, for each payment card transaction, the merchant pays:
Processing charge = financing risk charge + fixed business costs
What Parties Are Involved In Payment Processing
To understand the fees that merchant processors charge, you also need to know about the parties involved in the industry.
Credit Card Associations: These are the companies that create credit cards, such as Visa, Mastercard, and American Express.
Credit Card Issuing Banks: These are financial institutions, such as Chase, Citi, and Wells Fargo, that issue credit cards to consumers.
Credit Card Acquirers: These are also known as acquiring banks, though they don’t all have to be a bank in the traditional sense; they could be financial institutions with bank-like characteristics.
Credit Card Processors: These are the one-stop-shop companies a merchant deals with to set up payment card processing.
Payment Gateways: These are distinct portals that route transactions to an acquirer, usually in the case of an online shopping cart.
When looking at credit card transaction fees, you now have insight of what you are paying for and this will help you understand whether you really are paying too much or a fair price.
