Defining Credit Card Processing Fees

Jim Luff
Posted on July 30, 2019

(LCT image)

(LCT image)

Many merchants falsely believe all of the fees they pay go directly to their credit card processor. If that was true, there would probably be many more credit card processors today.

The truth is, your credit card processor, no matter who, actually gets to keep a tiny portion of your transactions. We will guide you through how those fees work, what they do for you, and how you can avoid additional fees you really don’t need to pay.

A transaction begins the moment your customer swipes, taps, keys, or inserts their credit or debit card to pay you for services. Fees are usually based on the amount of the transaction.

The amount is determined by important factors such as your merchant services provider, your bank, and your customer’s bank, as well as the card brand, such as MasterCard, Visa, or Amex that issued your customer’s credit card.

Some processors charge a fixed price per transaction without any additional fees. Others charge a little more than what the credit card issuer would charge directly. Some processors have a tiered pricing system that determines the rate based upon the type of card presented and other variables outside your control. These include rewards cards, government cards, corporate cards, non-rewards cards, etc.

Different Types of Fee Pricing

Fees are based on one of three different pricing models.

1: Flat Rate: The flat rate method is the simplest to understand, but likely the most expensive. The processor charges either a flat fee per transaction such as 2.75% of each transaction processed. A flat fee of 10 cents to 25 cents is likely added on. If you have low volume sales and are looking for convenience as opposed to savings, this price model is probably acceptable to you.

2: Interchange Plus pricing is the model used for most livery merchants. Card brands such as Visa and MasterCard charge a predetermined processing fee for each transaction. This is called an interchange rate. The interchange rate is set by the card brands and is the same for all processors. You can consider this the wholesale cost of accepting a credit card. A processor using Interchange Plus pricing will mark this amount up a little bit and charge you the marked-up amount.

As an example, you might see a fee of 2.75% + $.10. The 10 cents is the marked up price, and the 2.75% is the Interchange rate that goes to the card brand, not to the processor. The processor only gets to keep the dime.

3. The Tiered Pricing model is a more diverse array of cost structures. The interchange rates fluctuate based upon the type of card being processed, whether it is a credit or debit card, and whether or not it is a “rewards card.”

Someone has to pay for those rewards and that would be the merchant. A rewards card has a higher cost to process and will affect the fee you are charged. A small business may not find tiered pricing useful because it can get complicated. However, if you accept a lot of corporate, government, and business cards, this structure is likely best for you.

Negotiating Your Fees

How much money you are charged for each transaction isn’t set in stone. If your processor only offers flat-rate pricing, then you are stuck without a negotiation process. For merchants using the interchange-plus or tiered pricing model, negotiating your card processing fee is possible. That involves talking to your processor and asking to get either the credit card processing percentage reduced, or a lower markup on the plus plan. If you have a total high sales volume with small transaction charges, ask about a lower per transaction fee.

Remember, if your processor is already at rock bottom and earning a dime per transaction, there isn’t much wiggle room. Credit card processing fees will vary based on how you process payments. Your payment gateway is a reservations system such as FASTTRAK or Hudson Group, a mobile phone reader, or an online portal. Fees will vary based on the risk of fraud posed by each type of gateway, with online transactions being the riskiest and therefore the priciest.

Great Ideas provides a broad range of information focused on new ideas and approaches in management, human resources, customer service, marketing, networking and technology. Have something to share or would like covered? Contact LCT contributing editor and California operator Jim Luff at [email protected]

Related Topics: cost efficiencies, cost savings, credit, credit card processing, finance, How To, Jim Luff, saving money, smooth operations

Jim Luff General Manager
Comments ( 2 )
  • See all comments
  • John

     | about 12 months ago

    Good job Jim. Way to break it down for people. Now if people could just understand what PCI compliance is all about.

More Stories