It is nearly impossible to operate a business in this age and accept cash payments only. People are shying away from walking in with cash because electronic forms of payment offer a better way of making purchases. The process may seem simple. You can see a customer swipe their credit card or key-in their account information and complete a payment right away. However, a lot of operations occur in one simple transaction, and they all involve the merchant, payment processor and bank in question. In this guide, we will look into some of the basics about credit card payment processing and all the fees and rates involved.
What Is Payment Processing?
This is the process that encompasses electronic payment transactions between a customer paying for goods and services and the entity selling them. The technology available today helps to process these payment requests, verify if there are enough funds to facilitate the payment, check the security of the transactions and either accept or deny the payments using hardware and software specified for that purpose.
What Are The Entities Involved In The Payment Processing?
The Issuing Bank
This is the customer’s holding bank. It issues them the credit or debit card. For instance, if you hold an account with the Bank of America, they will provide you with a credit or debit card. This makes them the issuing bank and they will receive a huge percentage of the interchange fees charged by the processing companies explained below.
Credit Card Companies
Examples of these brands include Visa, Mastercard, American Express and Discover, among others. These are international establishments that work arm-in-arm with the authorities to set the rules that govern how cards can be used and the necessary security measures that need to be applied. They also play a massive part in setting the interchange charges.
These are the entities that businesses go to apply for a merchant account. They help transmit all the relevant information to the credit card entities and banks. Your business is connected to the processor using the software and hardware provided. When they enter a transaction, the data is directed to a specified network. When a business concludes their sales for the day, the entire amount is transferred from the issuing banks to the merchant’s account. The interchange fees are then calculated and the amount deducted from these funds.
This is the channel that interconnects the payment terminals and the processing networks. It needs to be a secure channel and integrated into the merchant’s user interface. Several processors have a specified gateway that enables them to take care of the security of their transactions.
Credit Card Processing Fees
Understanding credit card processing fees can be complicated and extensive. However, you have to pay them and rather than doing it blindly; it is better to try and understand them. No single entity states out these charges, and we will begin by explaining some of the fees businesses have to pay. However, many of these fees are determined by the payment processors and card brands as listed below.
Types Of Fees
- Transactional Fees
These are charged for every instant a transaction is run from the merchant point-of-sale. They signify the most substantial chunk of the fees you have to pay when running a merchant account. They can be imposed in two forms: either a percentage or per-item dollar amount.
- Scheduled Fees
Aside from the fees charged for each transaction, you might also be charged a set fee based on an agreed flat rate. This fee can be described and applied differently based on your payment processors, but it will be visible on your statements.
- Incidental Fees
While the scheduled fees are imposed every month, the incidental charges appear when a specific event happens. For instance, if you get a chargeback, your processor may impose a certain fee. Aside from these fees, you will come across the terms “wholesale” and “markup” fees. It is easy to confuse these terms and the types of costs that fall within each category.
Wholesale vs. Markup Fees
The distinction between these two types of fees goes down to the entities that collect the fees and how fixed the charges are all over the industry. When looking at wholesale fees, you will see that they are received by the credit card issuing banks and the credit card association. These charges are not negotiable and are uniform regardless of the processor you pick. Alternately, markup fees are received by the credit card processor and payment gateway. They vary from processor to processor and you can negotiate to have them lowered. Businesses are tasked with paying for all these charges, and the credit card processor is the middleman who collects the fees and directs the whole process. They provide a way for you to pay the fixed wholesale costs while collecting their share of the markups to cover their expenses. Thus it is important to take time and find a reliable payment processor that will show you precisely how much markup you are paying.
Payment processors can use any pricing model they deem fit. Failing to know the pricing model will result in you paying for charges that you do not understand and may be unnecessary. There are four popular pricing models.
- Interchange Pricing Model
This is perhaps the most transparent model as all the fees and terms that come with it can be understood easily. The model itemizes wholesales and markups and clearly outlines them on your monthly statement. This might make the statement lengthy, but it is desirable since you can distinguish your markups and wholesale fees. They also contain both the percentage and per-transaction fee markups that are imposed on all your business transactions.
- Membership Model
This is a relatively new model to be rolled out, and it shares some similarities with the interchange-plus. You will clearly see that the wholesale costs are separated from the markups. However, you do not have to pay any percentage markup on your transactions. What is imposed is a tiny fee for each sale. After that, a flat subscription fee is charged as the additional markup. This makes the model favorable for businesses with huge transactions.
- Tiered Pricing Model
Even though the first two models are very popular, most businesses are on this plan. Statements in this model look straightforward at first, but the truth is that the plan makes it very hard to understand your rates and charges. This model groups all the transactions into three categories, which are the non-qualified, mid-qualified and qualified. The transaction rates are highest for the non-qualified type and decrease with the qualified group having the lowest rates. The qualified transactions need to meet all the requirements set by a processor, and failing to meet one of the conditions leads to the relegation of a transaction into the mid-qualified and non-qualified levels. This is a huge challenge for businesses since the processor sets the criteria and judges whether they meet them. In some cases, processors take advantage and charge businesses more markups than they should.
- Flat Rate Model
This plan is related to tiered-pricing but with no categories. All the transactions are imposed a uniform percentage and transaction fee without considering the wholesale amount. All these charges are integrated to come up with a single payment that is dubbed the flat rate. However, this makes the cost of processing transactions quite high, especially for debit card transactions. This model makes the most sense for businesses with low transaction volumes.
For long, people have been wondering whether card-not-present transactions are subject to the same processing fees as ones where cards are present. Card-not-present transactions are when a buyer and seller are not in the same location. Examples of these transactions are mobile, electronic, mail and telephone forms of payment. Usually, when such transactions happen, the information is relayed to the merchant through the internet, mail or phone. The risk involved with these types of transactions is higher than the card present ones due to obvious reasons. The merchant can verify the transaction personally in card present transactions but not for the card-not-present ones. CNP transactions are susceptible to two types of risks: credit card fraud and chargeback fraud. Credit card fraud is when people use stolen cards to make payments. Chargeback fraud involves customers paying for goods and then informing the bank that they did not authorize the payment even after receiving the commodities. The processing fees for these types of transactions vary from one payment processor to another based on their policies. Some processors see CNP transactions to be riskier, and businesses that accept this form of payment can be subject to higher processing fees.
Is There A Benefit To Long-Term Contracts With Credit Card Processing Companies?
When shopping around for a payment processor, you will find a lot of different offers. Some businesses are tempted to tie themselves down to long-term contracts, but this is not always advisable. It is important to remember that this area is dynamic and things can change in a few years. You can tie your business to a ten-year contract with a payment processor and later on find another one that offers a better pricing plan and suits your business better. As with any long-term contract, you can choose to terminate it and head to a processor with better terms, but this will force you to pay some early termination fees. Before deciding, you need to weigh the benefits and see if you will recoup your money if you switch to the other processor or if it will be a massive expense for your business.
How To Negotiate Lower Credit Card Transaction Fees?
Businesses are able to negotiate markup fees. Doing it will certainly benefit your business. To negotiate a lower rate, you need to prove to the processor that you have put in place all the necessary measures to reduce the risk of chargebacks and fraud. One possible step is using an address verification service, something that verifies the billing address of a customer and thus reduces the chances of fraudulent transactions. If you have a solid payment history, use this as leverage and ask the processor to lower the fees. If you are working with established companies that pay on time and boast huge volumes, let your processor know about this and ask them to review the rates. Have a stable chargeback solution policy in place so that any cases arising with the customers are dealt with quickly and uniformly. The bottom line is that you need to find a reliable processor who you can work with today. If you are lost for options, try checking out FeeFighters and see the fantastic services they have in store for your business.