SMB guide: how to reduce credit card processing fees
Discover how to reduce small business credit card processing fees, the factors involved, and how to offset costs with Paysafe.
What are credit card processing fees?
Credit card processing fees are charged every time a customer makes a purchase with a payment card. The charge is levied to cover the costs of card payments, and can be split into three parts:
Interchange fees
Interchange fees are paid to the cardholder’s bank, also known as the issuer. This charge typically makes up the largest proportion of the overall fee.
Assessment fees
Assessment fees are paid to the credit card network (e.g., Visa, Mastercard, American Express). These fees go towards maintaining the payment network infrastructure and operating costs.
Payment processor fees
The payment processor takes care of completing the transaction between the credit card network and the merchant.
Common pricing models for credit card processing
Perhaps the biggest problem with reducing credit card processing fees is the number of different charging methods used. Rates vary from provider to provider, so understanding the various pricing models is crucial to lowering credit card fees.
Flat rate pricing
The simplest of all models. Merchants are charged a set percentage plus a small, fixed fee for every credit card transaction, making budgeting very simple. However, the fixed-fee model is inflexible, meaning no discounting is allowed for high-volume businesses that will incur significantly higher charges over time.
Tiered pricing
Under this model, transactions are charged at different rates according to the card type and transaction method used. The transaction types are defined as ‘qualified’ (usually in-person transactions made with a physical card), ‘mid-qualified’ (card-not-present transactions or payments made with a rewards credit card), and ‘non-qualified’ (various factors including deferred payment, high rewards, or international cards).
Using tiers can be complicated and confusing for merchants. The pricing model can be unexpectedly expensive for businesses, depending on which cards their customers use.
Interchange plus pricing
This payment model sees merchants being charged an interchange fee plus a set markup. Interchange plus is designed to be more transparent, allowing SMEs greater visibility of their credit card processing fees. Take a look at Paysafe’s Interchange Plus pricing to see how your business could benefit.
Factors that affect credit card processing fees
As explained earlier, there are several factors that influence card processing fees. Again, understanding these factors can help you determine how to reduce credit card processing fees.
Type of card used
Debit cards are among the cheapest cards to process, with each transaction attracting a small, fixed transaction fee, plus a low percentage. Credit cards involve a higher percentage fee (typically 2-3%) on top of the transaction charge.
Business industry
Some industries, particularly those at greater risk of fraud or chargebacks, pay higher card processing rates. For instance, retailers handling a high percentage of in-person, card-present payments (low risk) typically pay lower fees than e-commerce sellers offering card-not-present payments (high risk).
Transaction size and volume
Larger transactions may attract higher fees, simply because the percentage value levied grows in proportion to the overall transaction cost. Similarly, processing a high volume of fixed-price transactions quickly becomes expensive. Some payment processors may offer discounts to high-volume traders, helping them better manage costs.
Payment method
Card-not-present and contactless/mobile payments tend to be slightly more expensive because they do not involve the physical, card present checks that take place in store. As a result, retailers processing in-person payments will typically pay less per transaction than their online-only counterparts.
Processing history
A retailer with a track record of high chargeback and fraud will be assessed as being higher risk. As a result, payment processors will typically increase charges to better cover their own costs in the future.
Location
Geographical region has some bearing on costs, which means retailers in areas with a historical trend of card fraud will be charged higher fees. For international businesses, there will also be additional fees related to currency conversion costs for cross-border transactions.
Pricing models
As mentioned above, the pricing models used by payment processors will significantly affect the total fees a merchant pays.
Strategies to lower credit card processing fees
Although a necessary evil, your business must take steps to contain and reduce credit card processing fees to protect margins. Here are some actionable steps you can take:
Pass fees on to the customer
The easiest way to reduce the impact of fees is to pass them on to your customers. SMBs could, for instance, levy a credit card surcharge on every card transaction. Alternatively, you could introduce a cash discount program that offers a slight price reduction in exchange for payment in physical currency.
Just make sure you check the relevant regulations around surcharging and discounting. Also, consider how adding surcharges may affect customer loyalty and perceptions.
Prevent chargebacks
Chargebacks can significantly add to merchants’ operating costs, so reducing chargeback rates makes total sense. Every chargeback or dispute incurs a cost, ranging from lost inventory to the refund itself, plus additional fees.
Implementing a clear, legally-binding refund and return policy will help protect against illegitimate disputes and the need to issue unnecessary refunds.
Research processors
With so many pricing models available, it is crucial to carefully assess your payment processor partnership options. Take some time to research available options and calculate potential fees against forecast sales to get an accurate idea of costs. For comprehensive small business solutions, see what Paysafe can offer.
Negotiate with the processor
Payment processors value their merchants and will often make allowances to keep them on board. SMBs may be able to negotiate lower rates and fees with their processing partner depending on transaction volume, their relationship with the processor, and low chargeback history.
Use Address Verification Service (AVS)
The Address Verification System (AVS) is a fraud prevention tool. It compares the billing address the customer provided during a transaction with the address on file with the card issuer to verify the cardholder’s identity. This is a quick and effective tool to establish transaction legitimacy, helping to reduce fraud. And every step taken to minimize risk will help to reduce credit card processing fees.
Encourage debit card transactions
Debit cards typically attract lower interchange rates than credit cards. Asking customers to pay with debit cards or refusing credit cards entirely will help reduce operating costs.
Set a minimum transaction amount
Smaller transactions can become more expensive because of fixed transaction fees, especially in high-volume businesses. Introducing a minimum purchase value per transaction when paying with credit cards can help to rebalance costs and protect margins.
Offer alternative payment methods
Although card payments are popular with customers, many are open to alternative payment methods. Offering options like ACH transfers, bank transfers, and digital wallet payments provides customers with additional convenience, and useful ways to lower your credit card processing fees.
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