SMB guide: understanding payment processing costs
Discover the full costs of payment processing for small businesses, from visible fees to hidden expenses. Learn how they impact your bottom line.
What are payment processing fees?
Payment processing fees are the fees paid by a business for the cost of processing electronic payments, such as transactions made by credit card, debit card, digital wallets, or cryptocurrencies.
Electronic payments typically involve several parties, including the card issuing bank, the card payment network, and the merchant’s chosen payment processor. Fees can be complex and multi-tiered, covering elements such as a percentage-based transaction fee, the costs of providing regular statements and reports, and compliance fees.
Why understanding payment processing costs matters for SMBs
Payment processing fees directly affect the bottom line, so it’s crucial that merchants understand the different parts of these costs and the impact that any changes could have on profit margins. If increased costs aren’t absorbed by the business, then the only other option is to raise prices, which may result in lower sales.
Unfortunately, payment processing fees are not necessarily straightforward. While a percentage cost may be applied to each transaction, this rate may vary depending on factors like transaction type or the risk level associated with the industry or transaction.
Even so, customer attitudes tend to show a growing preference for electronic payments, including contactless options. One survey suggests that as many as four in five global consumers now use contactless payments. As such, a business may risk losing sales if it does not provide a range of payment options.
Types of payment processing fees
Payment processing costs comprise several different fee types. Understanding the various fee types means businesses can anticipate expenses and avoid nasty surprises.
Interchange fees
Interchange fees are charged as a percentage of the transaction amount by the bank that issued the credit or debit card. Banks may vary these fees depending on factors such as the type of card, the transaction risk level, and whether the payment was made online or in person.
Assessment fees
In addition to interchange fees, assessment fees are charged by card issuing networks, like Mastercard or Visa, also as a fixed percentage.
Payment processor fees
The payment processor charges fees for processing payments on behalf of the merchant. These fees are set by the provider and may be charged as a transaction percentage, a monthly fee, a flat fee, or a combination of these models.
Monthly fees
Most payment processors charge a minimum monthly fee to maintain the service, even if the business doesn’t process any transactions. These costs typically cover services such as account maintenance or monthly statements.
Payment gateway fees
A payment gateway is the digital portal that intermediates online transactions between parties. The payment gateway may charge fees per transaction, monthly, or both.
PCI compliance fees
Payment Card Industry (PCI) security standards apply to any company that stores, processes, or transmits credit card data. Compliance fees cover the costs of applying these data security standards to payment transactions.
Address verification service (AVS) fees
Address verification can serve as an additional layer of fraud protection by verifying the customer’s billing address for a per-transaction fee.
Chargeback fees
Consumer protection laws and credit card terms allow customers to dispute transactions under certain conditions, such as fraud or if the goods received were faulty. The chargeback fee is charged to the merchant to cover the cost of processing the chargeback.
Early termination fees
If a business wishes to terminate a service agreement with its payment processor early, termination fees may apply, as stipulated in the contract.
Incidental fees
Incidental fees cover miscellaneous services or penalties. For instance, the provision of one-off reports, or if a business fails to take the necessary precautions to comply with PCI rules.
The hidden costs of payment processing
A business can also incur hidden operational and compliance-related payment processing costs beyond the fees shown on monthly statements. Some of these costs can be substantial but may also be avoidable.
Time and labor costs
Managing disputed payments, chargebacks, and the associated administrative efforts with reconciliation can take up significant staff hours, which ultimately impacts operational efficiency and the bottom line. Businesses may take measures to avoid chargebacks where possible, such as offering replacement goods. Another alternative, if available, is to use chargeback protection services provided by the payment processing provider.
Lost sales due to limited payment options
Customers expect to be able to pay using a variety of methods, depending on their needs and preferences, so while adding more options may seem like an unnecessary cost, the cost of lost revenue from not offering their preferred payment method may be greater.
Technology and integration costs
Setting up the necessary hardware and software to enable payments can also incur hidden costs. Point-of-sale (POS) terminals, software licenses, payment gateway integrations, and ongoing updates can potentially all result in direct or indirect costs. For instance, if an upgrade requires downtime or if the payment provider goes offline, the cost of lost sales can be substantial.
Take control of your payment processing costs
Paysafe aims to make it easier for small business owners seeking clarity and control over their payment processing costs. The Paysafe Interchange Plus payment program (IC+) allows US business owners who meet eligibility requirements to take advantage of standard rates and fees, which may also be discounted depending on factors such as business category, processing volume, and risk score.
Learn more about reducing payment processing costs via the Interchange Plus payment program.
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