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Deciding to accept credit cards as a form of payment is a key step for business growth. After all, you likely pay for most of your own expenses with your credit card, and you should let your customers do the same. But learning how to accept credit cards at your point of sale can get complicated, and you’ll need to understand the various business credit card fees involved in this process.
We’ll admit that learning about business credit card fees—by which we mean the fees you, as the merchant, need to pay when you process credit cards—isn’t the most exciting aspect of owning a small business. But those business credit card fees can add up, and become a crucial component of your overall finances.
There’s a lot more to understand about this part of our financial system than you might think. We’ll guide you through the business credit card fees you’ll encounter as a merchant, so you can make the financial choices that best suit your enterprise.
It may seem that accepting credit cards simply involves your customer’s credit card and your payment processing system. In reality, there are four major players at work whenever your customer swipes, dips, or taps their card at your on- or offline store. (We did warn you that this process is more complicated than it seems, right?)
It’s important to understand what these four players do, so that you can better understand when and why business credit card fees arise.
Now that we’ve identified the four major parties involved in credit card processing, let’s walk through a typical credit card transaction:
As with most financial systems, each step in the process comes at a cost—many of which are passed down to you, the merchant. We’ll examine each of these business credit card fees in detail.
Unfortunately, some of the expenses involved in becoming a credit card merchant is unavoidable—and non-negotiable. Expect to pay the following two fees when you process credit cards, without exception.
The interchange rate is a fee that the issuing bank charges the receiving bank every time a customer uses their credit card. Basically, it’s how the issuing bank makes a profit off credit card processes.
You, the merchant, will pay some or all of the interchange rate, either directly or through an interchange reimbursement—which might be slightly less than the entire interchange rate. Either way, you get stuck with the bill on this one, and there’s no getting out of it.
Interchange rates or reimbursements are typically calculated as a percentage of the total sale amount. The network for each card determines their own rates, which vary based on a few factors, like:
The interchange rate explains how the issuing bank profits when customers use a credit card. But what about the card network itself?
That’s where the assessment fee comes into play. The network charges a fixed fee, on top of the interchange rate or reimbursement, for every transaction. Collectively, the assessment fee plus the interchange rate or reimbursement is also known as the interchange fee.
According to Paypal, there are almost 300 different interchange fees. The calculation model is extremely complex and somewhat shrouded in mystery, but we do know that the card network uses certain codes to help them network determine how much of a risk any given seller poses—that means the likelihood of nonpayment or fraud, for the most part. Much as lenders assign higher interest rates on business loans for risky enterprises, the businesses that the network deems more of a threat are assessed with higher interchange fees.
While you can’t avoid paying the interchange rate and assessment fee, you do have some control over the following business credit card fees.
While the card network sets the interchange fee in stone, you can (and should!) shop around for payment processors and processing pricing plans, which vary across brands.
Whichever processing plan you choose, try to avoid long-term contracts. That way, you can compare plans at any time and switch processors when you’ve become large enough, or when it’s otherwise advantageous. And always do your research. If you know what other companies charge, you can use that information to fuel your negotiations.
Typically, payment processors sell their services in three packages:
With these plans, the cost of processing a credit card transaction falls into one of three tiers. Each tier is associated with the amount of risk that the processor assumes with each purchase. For example, in-person purchases made with a standard (not a reward-based) credit card are considered the least-risky transactions, since these transactions pose the least likelihood of fraud. Online sales, on the other hand, are placed in the highest-risk tier (and highest-rate) tier. So, if you run an online-only business, you may want to steer clear of a tiered pricing plan.
While tiered plans can be easier to understand than other arrangements, the processor itself determines which tier a particular sale falls into. You can never be totally sure which tier your customer’s transactions will fall into, which can prove expensive in the long run.
With these processing plans, you’ll pay the interchange fee plus a set percentage and/or additional fixed fee per transaction. While this setup provides more transparency into your future costs than a tiered plan, the downside is that your statements are more complicated and you may or may not end up saving money.
Flat-rate plans are just as they sound: The processor charges the same fee regardless of the type of card your customer uses—and in some cases, regardless of whether the customer is physically present for the purchase or not.
Flat-rate plans may cost more than others, but they’re easier to understand and simpler to budget for, as you know in advance exactly how much the processor will charge. Processors calculate that flat rate as a percentage of the full transaction, or as a percentage of the purchase price plus an additional, fixed fee.
A flat-rate plan is a good choice for the brand-new small business owner who doesn’t yet have the volume necessary to haggle with payment providers. And since flat rates are mostly based on a percentage of the larger transaction, the extra expense shouldn’t matter too much if your transactions are on the smaller side.
The following fees are often open to negotiation, or you might convince a payment process to waive them entirely.
You may have to pay the payment processor to open a merchant account with them. This might cover a technician that comes to set up the necessary hardware, or who provides customer support for the setup over the phone.
You can purchase your credit card terminal—which may be a good investment compared with renting or leasing equipment—but you might convince the payment processor to include a complimentary terminal with your contract.
This is a penalty charged by the payment processor for early termination of your contract, and it can be costly. Ask if the processor will waive this fee, and be sure the contract you sign reflects such a waiver.
Depending on which payment processor you use, you may need to pay some combination of the following fees. (Some are negotiable, though.)
This is a recurring charge by the payment processor for the privilege of keeping your account open.
Some processors have a monthly minimum fee. If you didn’t reach the required minimum amount of charges each month, you may have to pay the difference between how much you incurred in processing fees and their monthly minimum.
Some payment processors might require you to lease or rent a credit card terminal. See if you can negotiate to receive this equipment for free.
A processor may impose a fee if you move funds from your payment processor account into your business bank account.
Remember that if your sell products or services online, you’ll need a payment gateway provider. Many processors charge for these services, but some don’t—it’s always wise to shop around.
A processor might tack on a fee to provide statements, whether on paper or online.
Some payment processors levy a fee to report your transactions to the IRS, and to provide you with the requisite tax reporting forms. If you see this fee on your monthly statement, you should dispute it. Best practices demand that the processor provide this service for free.
The Payment Card Industry Data Security Standard (PCI DSS) is a set of data storage requirements that applies to all entities that accept credit cards. Although not federally mandated, most major card companies insist that any business affiliated with them adhere to these standards, and some states have adopted them into law. Failure to comply with PCI DSS leaves a company open to penalties, legal action, and even federal audits, so your payment processor might charge you a fee to cover the cost of compliance.
You should pay this fee only if your payment processor provides support to ensure that you remain in compliance with PCI DSS. Most of the time, though, these are throwaway fees that merchants don’t even realize are on their statements.
If you see this fee on your statement, ask about it. And request assistance to become compliant, if you’re not already, so that you don’t actually need to pay this fee.
Finally, your payment processor might charge fees for certain occurrences.
Processors may charge you a fee each time a customer disputes a transaction.
You may need to pay another fee if the customer dispute results in a chargeback, or a refund to the cardholder.
Your processor may charge a small fee every time your business submits a batch of credit card purchases, which might be as often as once or twice a day.
As you can see, payment processors can be pretty ruthless about business credit card fees—so get ready to be a tough negotiator, and factor these fees into your overall business budget.
These days, accepting credit cards at your business is essential. But you can still consider incentives for customers to pay for purchases in cash (in exchange for a 2% discount, for instance)—you’ll still come out ahead, and you’ll avoid all the headaches that come from haggling with a payment provider for a few cents here and there.
And don’t forget to use a business credit card that provides perks to make purchases for your own business. That way, your own business can benefit from our current system of credit—complicated though it may be.
See Your Business Credit Card Options