By Seth Richtsmeier

Credit cards make it easy for your business to get paid, but they also provide a small leak in cash flow. Processing fees may seem small and can even take time to understand, but a 1.5%-3.5% cash flow reduction can quickly amount to thousands of dollars in lost revenue.

Thankfully, credit card fees are usually easy to reduce or eliminate if you know where to look. Read on to learn what goes into credit card fees and common fee structures.

How Do Credit Card Fees Work?

Most payment processing services charge a fee to process a credit card payment. But this charge doesn’t go to the credit card user — it’s subtracted from your business’s collected amount. The fee amount depends on the point-of-sale (POS) system, the amount of client information you collect, the card issuer and more.

The credit card processing fee you’re charged has three components: assessment, interchange and payment processor fees.

Assessment Fees

These fees fund the card brand (like Visa or Mastercard) and are standard with card use. These fees are relatively low, but they’re also nonnegotiable. Some brands charge higher assessment fees than others, which is why many smaller businesses simply don’t accept payments from cards like American Express.

Interchange Fees

Card networks charge these fees to help cover the costs of purchase risks, like fraudulent purchases. Interchange fee amounts can vary widely depending on several factors, such as transaction amount, if the card is swiped or if numbers are manually entered and even your industry type. These fees also are nonnegotiable.

Payment Processor Markup

The final portion of credit card processing fees is the markup from the payment processor itself. This is how POS systems make money and cover their operating costs. The processor markup fee is the only one you can negotiate.

The payment processor also may have different structures for the way they charge you, each with different risks and a total payment amount.

  • Flat-Rate Pricing
    One of the most transparent fee structures is the flat-rate model, but it may be more expensive. This model uses a set percentage (also known as a fixed rate) per transaction. Sometimes a few cents are added to each transaction as well. For example, you may pay 2.5% plus 25 cents per transaction. Flat rate is often the best route for your small business if it earns less than $5,000 monthly.
  • Tiered Pricing
    This method classifies transactions as exempt, partially exempt or non-exempt depending on criteria such as client information, card issuer and transaction amount. You’ll have a hard time finding a pattern simply by looking at your charges, so talk to the payment processor to find out. This method is also prone to hidden fees.
  • Interchange-Plus Pricing
    A more transparent fee structure is the interchange-plus model. A payment processor will send any interchange and assessment fees to you directly, and then follow up separately with their processing fee. As a result, you’ll see exactly how much you’re paying to accept credit cards, making negotiating the right credit cards much easier.

How to Lower Credit Card Processing Fees

Now that you know what’s negotiable and how you’re charged for accepting credit card payments, it’s worth trying these five ways to save money and reduce your fees.

1.   Call to Negotiate

One of the easiest ways to lower your credit card payment fees is going right to the source — the payment processor. Ask what fees they charge and if they could reduce or waive any in the future. You may be surprised what kind of deal you can get by picking up the phone and asking! However, it’s best to go into the call prepared to negotiate.

2.   Use the Right POS Processor

Certain POS portals charge higher fees than others. For example, many small businesses use Square or Stripe because they’re easy to set up. But these POS methods can have higher credit card processing fees than others. So, do a bit of research and consider getting a low-cost POS processor to help lower your fee payments.

3.   Require More Client Information

Some credit card processing fees are higher when the payment runs on only a card number. However, they’re lower when you have a client’s name, address and security code. So, you can require more information at the time of the sale to make it less expensive to process the payment. Physically swiping the card can also reduce credit card processing fees.

4.   Pass It On

Some businesses simply pass on the extra cost to their buyers, like a convenience fee. For example, if you also accept debit and ACH payments, you can promote those as free, while noting that credit card payments come with a 3% surcharge. That gives your buyers options, knowing they’re paying for the ease of using their credit card.

Many state laws govern passing on this fee to your clients. They’re becoming increasingly loose as time goes on, making it easier to stay compliant while passing on credit card processing fees. Be sure you know your local laws and maintain detailed reporting or collection methods.

5.   Use ACH Instead

Finally, you can skip using card payments altogether. ACH stands for “automated clearing house,” the method of collecting bank account information for a direct bank debit transaction. Many consumers pay their electricity, internet and mortgage bills this way. This transfer method can significantly reduce your credit card processing fees.

Know Before You Swipe

It’s worth it to know the various costs related to accepting credit cards. Having this information upfront will help you determine which digital payments make the most sense for your business, and where you can find any money left on the table.

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