Small-business guide to credit card merchant fees

The costs for accepting credit card payments can be some of the most confusing and frustrating fees small-business owners face.

This isn’t surprising: Business owners don’t pay just one fee when closing a sale with a credit card. Instead, business owners pay fees to three different parties whenever customers make purchases with plastic.

• The credit card network associated with the card a customer uses, either Visa, Discover, Mastercard or American Express.
• The bank that issued the card, be it Capital One, Wells Fargo, Chase, Bank of America or any other.
• The merchant account provider, which is the company that provides the equipment and software businesses use to scan and process credit card payments.

The challenge here? Credit card payments can be costly — and shopping around for the lowest processing fees can be tricky.

What makes up credit card fees?

Most small-business owners struggle to understand just how much their merchant account fees will cost them each month. That’s because the pricing plans that these companies offer can be confusing.

They offer pricing models that can be very complicated, and that’s especially true if you’re a small business that doesn’t have an accounting staff to really look into these fees.

What if you as a business owner don’t have the time to fully research credit card processing fees? It might make sense to take a closer look at what is known as your merchant discount, the final rate that you’ll pay to accept credit transactions.

Base costs

Understanding base costs is important for business owners. The first thing to understand is you can’t negotiate these costs no matter which credit card processing company you choose.

Base costs are made up of interchange fees and assessment fees.

Interchange fees

These are the fees paid to the banks that issue credit cards.

• This fee is paid out every time business owners accept card payment.
• Visa, Mastercard, Discover and American Express each charge their own interchange fees.

Interchange fees vary depending on:

• They vary depending on whether customers swipe their cards in person or make purchases online or by phone.
• Fees will vary, too, depending on the type of card — Visa, Mastercard, American Express or Discover — that consumers are using.

These variables are why the interchange fees published by the major credit card companies are so long and complex and why it’s so difficult for business owners to estimate how much they’ll pay each month for credit card transactions.

For example:

• Visa charges businesses 1.51 percent of the sale plus 10 cents for credit cards swiped in some stores.
• But Visa might also charge 1.65 percent plus 10 cents if you use a Visa Signature in that same store or 2.10 percent plus 10 cents if you use a Visa Infinite card.
• Mastercard charges businesses 1.90 percent of the sale for certain credit card transactions for gas but 1.58 percent and 10 cents for lodging and auto rental credit card purchases.

Assessment fees

Interchange fees are annoying for small business owners, but credit card companies don’t earn any money from them.

The four big card networks — Visa, Mastercard, Discover and American Express — make their money from assessment fees, which they charge on every transaction made by their cards.

• Visa charges a 0.14 percent assessment fee for every charge made with its credit cards and a 0.13 percent fee for transactions made with its debit cards.
• Mastercard charges 0.1375 percent for credit transactions of $1,000 or lower and 0.1475 percent for those of $1,000 or higher.
• Discover also charges 0.13 percent as an assessment fee on its credit cards.
• American Express charges 0.15 percent.

Markup fees

If you want to negotiate fees, markup fees are the ones to target.

These are the fees charged by a business owner’s credit card processing company. While you can’t negotiate with Discover, American Express, Visa or Mastercard to reduce interchange or assessment fees, you can negotiate with your credit card processing company on the fees they charge you.

Which pricing model should you choose?

You can typically choose from two main pricing structures when selecting a merchant account provider.

• Interchange plus: In this model, business owners will be charged the interchange fee and assessments that the credit card company charges for each transaction, plus a single wholesale fee or markup fee charged by their merchant account provider.
• Tiered pricing: Tiered pricing, in which merchant account providers assign different transactions to cheaper or more expensive tier levels, is the worst type of arrangement for business owners.

A business owner might process a transaction that is classified in a lower tier, and now that owner is paying more. Or, the processor might make a mistake and incorrectly classify a purchase in a lower tier. Basically, you’re giving your credit card processor the authority to determine exactly what they want to charge you.

Several factors, then, determine what you’ll pay each month for a merchant account.

• What industry your business is in
• How much you sell in an average month
• How you accept cards: different fees if you accept cards in person, over the phone or online
• Pay less if your business only accepts card transactions in person

Although costs will vary, a fair effective rate each month — what business owners would actually pay in total to process credit card payments, including base costs and markup — would be equal to about 2 percent of their credit card transaction volume when dealing with in-person purchases and 2.3 percent to 2.5 percent for credit transaction volume registered through online purchases.

How can you reduce credit card processing fees?

Want to reduce your credit card processing fees but not interested in spending too much time researching merchant services accounts? Here are some options for paying as little as possible:

• Rate locks: Require that your provider offers a lifetime rate lock on fees. This way, your fees will remain the same every month. Service providers often tempt business owners with low initial costs. But over time, these rates can slowly creep up. Before long, business owners are paying far more than they expected.
• No cancellation fees: Never sign with a merchant account contract that charges cancellation fees. Without these fees, business owners can cancel their accounts and go with a lower service provider without having to pay a hefty cost.
• Tiered or bundled is a no-no: Under these pricing packages, merchant account providers classify certain purchases as qualified and others as nonqualified, with qualified purchases costing less per transaction.

Merchant account providers have too much discretion when determining what is considered a qualified credit card purchase. Some providers might only consider a debit card transaction that requires a PIN to be a qualified purchase. Those purchases would cost less, but all others would cost more, an expensive proposition for business owners. If the merchant account providers don’t feel they are making enough money, they can send more transactions to the non-qualified rate.

Institute a minimum

Small-business owners can also institute a minimum amount for credit card sales. The Federal Reserve says merchants can require that consumers make a purchase of at least $10 before they’ll accept a credit card payment for that buy.

Be sure to follow the Fed’s rules, though. For instance, you must assess this minimum limit for all credit card types. You can’t have a $10 minimum for Mastercard purchases but no minimum for Visa payments.

Having this minimum might persuade more consumers to use cash for smaller purchases, saving you money, and it will also save the fees for each of these smaller transactions.

What other factors should you consider?

Price isn’t the only factor you should consider when deciding on a merchant services provider.

Simplicity might be important

Credit card processing fees are confusing, so it’s not surprising that some providers — such as Stripe or Square — promote themselves as a simpler solution, charging a monthly flat fee for credit card processing services.

It’s typically small businesses with transactions that average $10 or less, such as coffee shops, that benefit from working with providers such as Square or Stripe. Businesses with larger transactions will generally pay more each month.

Consider accepting a wide variety of payments

It’s important for business owners to accept a wide variety of payments, even if some of these payments, such as credit cards, will cost more. The goal is to convince more customers to make more purchases. By offering more payment options, you can reach this goal.

Don’t forget about support

Business owners should be wary against focusing only on price when choosing a merchant account provider — and they should also consider the type of support they’ll receive if something goes wrong.

Some providers give you the software and that’s about all. If you have a bad launch, it can be detrimental to your business, and you can lose customers left and right. You might want a company that provides more hands-on support.

Bottom line

As a small-business owner, you’re busy. Navigating the confusing world of credit card processing fees is both tedious and time-consuming. But this research can pay off: Every bit of savings can help a small business meet its yearly financial goals. By reducing the amount you pay in processing fees you could provide a financial boost to your small business.