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Any small business owner who accepts credit cards should understand how credit card processing fees work. Credit card processing typically costs businesses between 1.7% and 3.5% per transaction. At the end of the day, that means that if a customer spends $100 at your store, you’ll only end up with between $96.50 and $98.30. When you add up these credit card processing fees over time, they can really eat into your bottom line.
Companies like Square, PayPal, and Stripe are trying to simplify credit card processing, but they often turn out to be more expensive than traditional merchant account processors. To find out what works best for your business, you’ll need to compare the features, services, and costs of different providers.
Here, we’ll break things down on a per-provider basis, so you know exactly what amount you’re being charged, why, and by whom. Next time you receive your merchant credit card statement, there won’t be any surprises.
Before we dive into credit card processing fees, let’s review the basics of how credit card processing works. This is a complicated topic, which is why we have a whole separate guide about how to accept credit card payments.
To explain it simply, there are four main parties involved with credit card processing:
Each of these parties has to make a profit, so they all end up with a portion of the credit card processing fee. Credit card processing fees are expressed as a percentage. For example, if you end up paying 3.5% per transaction in credit card processing fees, this means that $3.50 of a $100 payment gets divided among these four players. Your bank will deposit the remaining $96.50 in your business bank account.
Some credit card processing companies, called payment service providers, try to simplify credit card processing as much as possible and charge a flat rate for every transaction of the same type. Examples include PayPal, Square, Stripe, and Shopify. Traditional merchant account providers have a more complicated pricing structure, with a fee that varies per transaction. Examples include Payline, Dharma, and Helcim. Next, we’ll provide fee details for each of these providers.
Companies like Square and PayPal aim to simplify credit card processing for small business owners. They’re sometimes called payment service providers (PSP). You don’t have to purchase expensive merchant processing hardware to use a PSP, and you don’t have to sign a long-term contract or worry about hidden fees. You’ll pay the same flat-rate fee on every transaction of the same type.
PSPs charge a different fee for card-present payments, card-not-present payments, and online payments. For example, you’ll pay a lower fee when you accept a credit card at your retail shop. You’ll pay a higher fee if a customer wants to shop online on your website, or if you’re using information from a card that’s stored on file. Some providers also charge merchants additional fees for disputes and returns.
Square has quickly become one of the most popular credit card processing companies. The company facilitates $50 billion in transactions every year. In large part, Square is so popular because they offer one standard rate—2.75%—to any business that signs up, no matter how big or small the company and no matter what their payment volume is. Although business owners appreciate this simplicity, Square is costlier for most businesses than a traditional merchant account provider.
The only difference is that fees are slightly lower for brick and mortar merchants who use one of Square’s point of service solutions, such as Square Register or Square Terminal. Like most credit card processors, Square charges a higher rate to process manually entered card payments (e.g. with phone payments) and invoice payments. The invoice fee comes into play when you send your customer an invoice via Square that they pay online.
PayPal is another popular credit card processor. They charge almost the exact same fees as Square, except for a slightly lower rate on swiped, inserted, or tapped cards. Another difference is that PayPal doesn’t have their own point of sale solutions. They do, however, partner with various point of sale systems.
Stripe takes a different approach from Square and PayPal, charging 2.9% plus 30 cents on every type of transaction. Stripe is primarily designed for online businesses, so if you’re a brick-and-mortar shop, you will save money by opting for a different processor.
Shopify rounds out the most popular payment service providers. On top of credit card transaction fees, Shopify charges a monthly fee. The monthly fee ranges from $29 to $299 depending on which Shopify plan you sign up for. Given the monthly fee, Shopify ends up as a good deal really only if you’re doing enough volume to justify the monthly price. Businesses that accept a high volume of payments will pay a higher monthly fee but lower per-transaction fees. If you already have a credit card processor, then you can use Shopify just as your ecommerce solution, but they’ll charge an extra 0.5% to 2% per transaction.
Merchant account providers are traditional credit card processors that have a more complicated, variable pricing structure. Although it is more complicated, merchant account providers provide the best deal on pricing, particularly for businesses that process a high volume of credit card payments.
To understand merchant account fees, you have to start with the interchange fee and card association fee (also called card brand fee or assessment fee). These are fees that the credit card companies—like Visa, Discover, and Mastercard—charge. Issuing banks receive the interchange fees, and credit card companies keep the card association fees. Interchange fees and card association fees typically change twice per year. For more information, check out the current interchange fees and card association fees. Note that Amex assesses fees a little differently.
The interchange rates and card association rates don’t vary among processors. The credit card companies decide what they are, and you don’t have any room for negotiation here when shopping around for a credit card processing company.
On top of the interchange rates, merchant account providers assess a markup. There are two common types of fee structures for markups:
Markups are negotiable based on volume, industry, and other factors, says David Bakke, a finance expert at Money Crashers.
“One great way for small business owners to save on credit card processing fees is to negotiate with the vendor. Mention the volume of transactions you plan on doing to get them to lower their rate a bit. You could also put together a plan to reduce fraud, which is costly to providers and therefore raises your rate. Make sure you rarely if ever manually input card numbers—always swipe or insert the chip. And make sure your account and terminals are properly set up. Make this basic mistake, and you might be paying more in fees.”
Whenever possible, small businesses should avoid tiered pricing and opt for a provider that uses the interchange plus pricing model. Many providers that use tiered pricing don’t tell you into which tier different cards fall. The end result is that your merchant account fees are unpredictable, and your monthly statement becomes very confusing to interpret.
Dharma is a popular merchant account provider that uses an interchange plus pricing model. On top of the per-transaction fees shown below, they charge a small $10 monthly fee. Businesses that process more than $100,000 in credit card payments per month can earn a discount. Dharma also provides discounted pricing for restaurants because food service businesses rely so heavily on affordable credit card processing.
Dharma is a small business-friendly option—there are no long-term contracts or monthly minimums required. The company also provides an app called MX Payments, which allows you to easily run reports, accept online and phone payments, and store customer credit card information. There’s no credit card terminal that comes with Dharma, but they recommend Clover POS.
Payline is another well-known credit card processor. Their credit card transaction fees are slightly lower than Dharma’s. However, unlike Dharma, they don’t offer special pricing for restaurants or businesses that accept a large volume of credit card payments. But if you have a non-restaurant small business, you might be able to save money by going with Payline. Payline doesn’t require a long-term contract or any minimums. They charge a $10 monthly fee.
Small business owners who prefer the interchange plus pricing model should also consider Helcim. The interesting thing about Helcim is that pricing changes on a sliding scale based on your type of business and monthly payment volume.
The rates are as low as 0.10% + 5 cents above interchange for a retail business that processes more than $5 million monthly in volume. And the rates are as high as 0.45% + 25 cents above interchange for an online business that processes less than $25,000 monthly in volume. Helcim offers a rate guarantee, which means your rate won’t change as long as you have an account with the company.
If you compare just the per-transaction fees, Helcim is less expensive than Square and PayPal. However, Helcim charges a monthly fee of $15 to $50. There are also chargeback fees if your customer disputes a charge and fees for changing your bank account. Square and PayPal don’t charge these types of incidental fees, so they usually work out to be less expensive.
When comparing credit card processing fees, it’s not enough to compare monthly fees and per-transaction fees. You should also evaluate what providers charge when your customer refunds a product or disputes a charge on their credit card statement.
Refunds are designed to encourage businesses to maintain standards of quality and customer service. And disputes, also known as chargebacks, are designed to prevent unauthorized transactions on a customer’s credit card account.
However, sometimes customers abuse the process or return an item for a reason that isn’t your fault (e.g. they no longer needed the item). Refunds and chargebacks will inevitably make up a small portion of your total transactions, and their impact to your bottom line depends in part on your credit card processing fees.
Payment service providers generally provide greater business protection from chargebacks. Square, for instance, provides $250 in chargeback coverage each month. PayPal provides unlimited chargeback protection as long as the sale meets certain eligibility requirements. Traditional merchant processors typically charge a small fee per chargeback. Payline charges $25 per chargeback if the dispute is decided against you, and Dharma charges $20.
You can take certain steps to lower the incidence of disputes and returns, and save on credit card processing fees. For example, you should use a business name that people recognize on their credit card statements. It’s also important to develop a clear return policy, and ensure that all your employees understand and implement that policy.
Credit card processing fees can be notoriously difficult to understand. But, if you break down the different elements that go into cost, the task becomes easier. Companies like Square and PayPal have significantly simplified credit card processing fees, forcing traditional merchant account processors to be competitive and keep up. The result is more affordable, clearer credit card transaction fees across the board—a win for any small business that accepts credit card payments.