The world of payments is quite elaborate. Business owners now have the option of sending and receiving funds through cash, ACH solutions, online banking, paper check, debit and credit card processing, etc. Without proper guidance, you can easily get lost in technical jargon and end up losing a lot of time and money.The following FAQs will help you understand credit card processing basics for your business.
Questions About Credit Card Processing Fees
Question #1: What is a credit card processing fee?
You can look at processing fees as convenience fees charged by the credit card companies for letting you pay for a product/service without really having to dip into your savings/checking account. Instead of paying the entire amount through debit (where banks instantaneously deduct the funds from your account), you can pay it through a credit transaction. With credit card payments, you get about 30 to 60 days of a grace period during which you can pay the amount back to the credit card company/bank without any additional fees.
Simply put, you can think of it as a fee for the “buy now, pay later” facility offered by a credit card transaction.
Question #2: What is the standard credit card processing fee?
The average credit card processing fee is about 1.5 to 3.3% of the total transaction amount.
Question #3: Who decides the credit card processing fees?
The exact amount of the fee depends mainly on three factors:
- The total amount of the transaction
- Your credit card network provider
- Your credit card issuer
Question #4: What are the other types of fees associated with credit cards?
Apart from the processing fees, some of the other costs associated with credit cards include:
- Annual fee
- Late-payment fee
- Interest charges
- Balance transfer fee
- Foreign transaction fee
- Over-the-limit fee
- Cash advance fee
- Returned payment fee
Question #5: What is a credit card interchange fee?
Interchange fee, aka swipe fee, is a component of the processing fee that goes towards risk management. It is a “per swipe fee” charged by the financial institution for accepting the credit risk. The credit card companies usually set this fee. Some components that decide the interchange rate include:
- Type of transaction (debit/credit)
- Network provider (Visa, Mastercard, etc.)
- Place of the transaction (Supermarket, airline, fuel, etc.)
Question #6: What are assessment fees?
The assessment fee is another small component that makes up the overall processing fee on credit cards. It is the fee that directly goes to the card network provider (Visa, Mastercard, Discover, etc.). This fee is usually fixed for all networks. However, one can get a discount on these fees if they use bundled pricing while processing payments.
Question #7: What is a discount rate?
Discount fees are a common term used to denote the combination of assessment and interchange fees.
Discount Rate = Assessment Fee + Interchange Fee.
Question #8: What is a flat rate?
Flat-rate pricing is a type of credit card processing fee used by small business owners. It is simpler to understand and process compared to the discount rate. The flat rate is a fixed rate that the merchant must pay on every transaction.
Important Note: Flat rate does not suggest the “same fee” on each payment. Instead, it means a “same rate.” The flat-rate fee structure still considers the overall amount of transaction while calculating the final fee amount. Therefore, more amount to be transferred = More flat fee.
Question #9: What is a tiered fee?
In the tiered fee structure for credit card processing, individual transactions are grouped into different tiers, each with a separate pricing model. The pricing model for each tier (qualified, mid-qualified, and non-qualified) is fixed by the concerned payment processors.
Question #10: What is an effective rate?
An effective rate is basically a method of calculating the total % of processing fee that you give up when you accept credit card payments. It is calculated by dividing the total processing fees by the net credit card sales volume.
For example, if
Total processing fee you paid = $3000
Total sales volume through credit cards: $100,000
Effective Rate = (3000/100000)x100 = 3%.
Now that we have understood the essential components of credit card processing fees, let’s discuss a few things you should know about them from a business owner’s point of view.
QnA for Merchants
Question #11: What is a markup fee?
Markup fee is another critical component of the processing fees. It is paid by merchants who choose to process credit card payments. Merchants typically include this fee as part of the overall cost of the products and services. This fee is generally negotiable and not fixed. It typically comprises of 20 to 25% of the total credit card fees.
Question #12: What is a merchant credit card fee?
Merchant credit card fee is just another term for discount rate fee. Refer to the answer to Question #7 to understand the discount rate.
Question #13: What is the average credit card processing fee for a small business?
There is no single definitive fee for small businesses. The average fee that you pay depends a lot on the following factors:
- Merchant category (Type of business)
- Type of credit card used (American Express, Visa, Mastercard, etc. Some cards offer more benefits in terms of reward points and lower processing fees)
- The processing method used (Was the card used online or swiped at a POS card reader?)
Although each case is different, the average fee can range between 1.5 to 3.3% of the total transaction amount.
Question #14: What is a scheduled merchant account fee?
This is an additional fee charged by the merchant services providers on top of the processing fee charged on every transaction. This fee is usually collected on a monthly or annual basis. It is generally negotiable, so do not hesitate to reach out to your service provider and ask for a discounted rate.
Question #15: What is a chargeback fee?
A chargeback fee is charged by the acquiring bank (your bank that is accepting payments) in case your customer cancels a transaction or raises a dispute to void the sales. Chargeback fees are common in certain lines of business that have a high return/refund to sales ratio. Problematic customers who purchase several items to use for a couple of days, and return them, often cause such problems.
Question #16: How can I reduce the credit card processing fee?
Some components of the credit card processing fee, like the markup fees, are negotiable, so you can negotiate for a lesser rate. Other tips to reduce the processing fee include:
- Accept cards in-person – Online payments through a credit card attracts additional charges.
- Reduce chances of a chargeback – Refer to Question 24 on how you can do this.
- Set a minimum amount for sales with credit card payments – You do not want customers paying for small amounts through credit cards.
- Realize the difference between Card Present and Card Not Present fees. Make appropriate decisions to save on fees by choosing Card Present when possible.
Question #17: Which credit card merchant fee is best?
The choice of a credit card merchant is highly subjective.
- Flat-rate pricing with a highly-rated merchant is the best option for small business owners. You can save money by opting for a no monthly fee and no long-term contract plan.
- If you are a medium or large business owner, compare the processing fee (and other maintenance charges) before choosing the correct merchant.
Question #18: Can I charge a fee to the customers if they choose to use a credit card?
Yes, you can opt to allow the customers to choose to pay a higher rate if they decide to pay through credit cards. You can give them a discounted price if they pay with ACH online on a hosted payment portal or paper check and cash if they pay in person.
Question #19: What is a surcharge fee?
Question #20: What is a cash discount?
If you are a business owner, you should consider accepting credit card payments for your business. By opening up a new payment method, you can attract a new set of customers. Here’s how you can start accepting payments made through credit cards.
Question #21: What types of businesses accept credit card payments?
All small and large businesses can accept credit card payments. You can set up a POS where your customers can swipe their credit cards or accept payments through hosted payment pages. By partnering with a reliable payment processor, you can start accepting payments within days.
Question #22: How do I set up credit card processing?
To set up a new payment method, you need to first partner with a reliable payment processor like iCheckGateway.com. The best partners act as service providers for all your payment processing needs. iCheckGateway.com can help you set up both ACH and credit card payment processing for your customers.
Question #23: How do I choose a payment processor?
Some of the essential traits of a good payment processor include:
- Excellent customer relationship services – The best payment processors assign a dedicated relationship manager for all their clients. You can reach out to this dedicated individual to get the best resolutions for all your payment-related problems and customization needs. They also use the latest technologies to ensure you face no downtime.
- Single point of contact for multiple payment processing needs – Instead of relying on different payment processors to activate various payment modes, look for one that can act as a single point of contact.
- Hassle-free and seamless setup – These payment processors offer a seamless customer experience by integrating with your website directly.
- Strict regulations – They also follow strict Nacha and credit regulations and conduct timely audits to ensure that you get the best services.
Question #24: What can I customize?
One of the best ways to reduce chargeback on your card is by creating custom forms. iCheckGateway.com can help you develop data collection forms that act as a critical piece of evidence while handling chargeback disputes. These forms can also be used to collect essential information for data analysis and reporting.
Setting up a new payment method can seem like a daunting task, but with the right partner, it is a cakewalk. The top payment processors will help you set up new, seamless payment methods and also answer any payment-related questions that you may have. They do an excellent job educating their customers while providing the best-in-class services.
Want to know how to set up your own business for accepting credit card payments? Schedule a consultation call with one of our experts at iCheckGateway.com today!
Date originally published: 22 December, 2021
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