Understanding Credit Card Processing Fees
Confused about your merchant statement? Don’t know how much money you’re paying for your credit card processing rates? GMS can help! Over the course of 30 years, we have seen the good, the bad, and the ugly side of payment processing. More often the bad!
But no need to worry! At Gulf Management Systems, we teach our merchants all the payment processing secrets that you need to stay alert and ahead of the game. This way you don’t get burned by high processing rates, hidden transaction fees, or PCI penalties.
Is my Business over-paying on my Credit Card Processing fees?
From our 30 years of payment experience, we have found that over 90% of small businesses are paying too much on their credit card processing fees. And not just over-paying by a small amount! Many were paying as high as 4-5% on their credit card processing fees with their previous processor.
Unfortunately, many business owners don’t know where to start when it comes to calculating credit card processing fees. Therefore, many merchant processors take advantage of this and will purposely tack on hidden fees without you knowing. Don’t let that happen to you!
We believe that knowledge is power. Our goal is to educate our merchants on how credit card processing works so you can decide which payment system is most beneficial for your business. This way you can keep more of your hard-earned money!
5 reasons why you should do a Yearly Merchant Statement Review:
- See how much you’re paying in credit card processing fees: Credit Card processing fees can easily add up. If you’re not vigilant, they could cost your business hundreds, if not thousands of dollars in additional fees each year! Be on the lookout for large mark-up fees that go directly into the merchant processor’s pocket.
- Search for hidden or unnecessary fees: Unfortunately, many credit card processors are not transparent when it comes to labeling their credit card processing rates and fees. Be on the lookout for any recurring hardware, PCI security, monthly minimums, and other monthly maintenance fees. They can easily add up if you’re not careful.
- Determine if your processing fees have changed month-to-month: Processing fees can change from month to month. Check for any pricing updates or increases in your fees each year.
- Check your interchange rates: The interchange rates from the card issuers such as Visa or Mastercard can change from year to year. Although there isn’t much you can do about it, it’s always wise to stay ahead of the game and know what to expect.
- Educate yourself on the credit card processing industry and standards: Overall, you should be as familiar as possible with the payment industry, hardware, and PCI requirements. This way you don’t get billed for any non-compliance or penalized for using outdated software or credit card terminals. Knowledge is power!
How do I find my Credit Card Processing fees?
You will find your credit card fees disclosed on your monthly merchant statement or payment summary. If you don’t know how to find it, you can always reach out to your merchant service provider, and they will send you a copy.
There are two types of billing cycles that credit card processors use when they bill merchants: monthly discount and daily discount. Your billing cycle will determine how and when your credit card processing fees are billed. With the monthly discount cycle, all your credit card fees are charged at the end of the month. With the daily discount cycle, your payment processor will deduct the credit card fees from each batch at the end of the day.
What should I look for on my Merchant Statement?
Reading a merchant statement can be challenging for both new business start-ups and savvy business owners! Before you analyze your merchant statement, you will need to understand some of the basic payment terminology.
- Interchange Rate: The interchange rate is the cost of doing business with Visa, Mastercard, Discover, and Amex. All the card issuers set a unique rate for each type of transaction processed. (See Visa Interchange Rates as an example)
- Discount/Interchange Plus Fee: This credit card fee is a mark-up from your payment processor. On most merchant statements it’s labeled as a discount rate, processing fee, or Interchange Plus Fee.
- Authorization/Transaction Fees: The cost set by the merchant service provider or card issuer to process each unique transaction.
- CP Transaction – A CP (card present) transaction is accepted in person via a credit card terminal or mobile device.
- CNP Transaction –A CNP (card not present) transaction is processed online through a virtual terminal, payment gateway, or software platform.
- PCI fees – PCI (Payment Card Industry) compliance fees can be billed monthly or yearly. There are also penalty fees that could be billed if you don’t stay compliant and meet the required industry standards for protecting your consumer’s credit card data.
What factors determine my Credit Card Processing rates?
Payment processing rates can be complex. Our goal is to help simplify that process so you can better forecast your monthly processing fees. There are multiple factors that go into determining your credit card rates; including how you accept credit cards at your business, the card type used, and your merchant pricing model.
What Payment Processing Methods do you accept at your Business?
There are three basic ways to accept credit card transactions at your business. A business can accept credit cards online, in-person, or by phone. Each transaction type has a direct impact on your credit card processing rates and security requirements.
- In-Person or Card Present Transactions:
Typically, we find that accepting payments at your business (in-person) substantially lowers the risk of having fraudulent transactions. These credit card transactions include swiped, chip & pin, and contactless payments. With those transactions, your business will receive lower interchange rates.
- Online or Card Not Present Transactions:
Since keyed-in or online transactions are more difficult to verify, the interchange rates are much higher. This is because online retailers and services providers have a higher risk of chargeback fraud.
Other transaction variables may affect the credit card rate or interchange cost of a transaction. The types of products and services sold are also factors since some industries are deemed higher risk. Businesses that offer online gaming, CBD products, or nutraceuticals will be given higher processing rates compared to other retail or service providers.
Additionally, who you sell your products or services to can also play a role. A transaction can occur between a business and a consumer or from one business to another. Businesses that sell their services to other businesses could be eligible to receive lower rates and interchange discounts because the risk of chargebacks is much lower.
The next step is to determine what merchant pricing model your business has. There are 3 common pricing models offered by most credit card providers. These pricing models include a flat rate structure, tiered pricing, or an interchange plus system.
Flat Rate: A flat rate pricing model is the easiest to understand. This pricing structure is common with payment processors such as Stripe or Square. With this type of pricing, your credit card fees remain the same across the board and normally come with no contracts. This may be good for start-up businesses, but it has its drawbacks as well. So be careful! Businesses that process over $2500 in volume should look at other alternative pricing models because a flat rate of 2.6-3.5% per transaction may be costing your business hundreds or thousands of dollars in additional credit card fees.
- Example of this pricing model: 9 % +0.30 a transaction
Tiered Pricing: With a tiered pricing system, credit card processors can automatically set different pricing tiers based upon the type of transaction accepted. The pricing tiers are largely determined by the interchange rates associated with the card issuer. Normally, your credit card processor will set credit cards fees for two or three different pricing tiers including qualified, mid-qualified, and non-qualified transactions.
An example of this would be:
- Qualified rates: 2.3% +0.25 a transaction
- Mid-Qualified rates: 2.9% + 0.25 a transaction
- Non-Qualified rates: 3.5% +0.30 a transaction
Since qualified transactions have a minimal risk of fraud, those transaction types are the most cost-effective to process for your business and come with lower credit card processing rates. Debit cards and most card-present transactions would fall into either the qualified or mid-qualified rates.
On the other hand, non-qualified transactions are the most expensive to process because of the higher risk of potential fraud. Therefore, a payment accepted online (card not present transaction) has a higher processing fee than a transaction accepted in person (card present transaction). Additionally, credit cards such as business reward cards fall into this category because of the higher interchange rates associated with the card issuers. The interchange rate is higher because the card issuer needs to pay for the rewards or perks offered to the consumer.
Be careful of this pricing model because many merchant service providers will add large mark-ups into each tier which can be easily hidden!
Interchange Plus: This pricing model is beneficial for merchants that are processing over $2500 in monthly volume. It includes the interchange cost plus a mark-up from the credit processor. With card brands such as MasterCard, Visa, and Discover, interchange fees cover the cost of debt, risk, or fraud. Depending on the transaction type and industry, each interchange fee is different. We find that most interchange rates average around 1.6-2% a transaction plus the mark up fee from the processor.
- Example of this pricing model: Int+0.50% + 0.25 a transaction
What should I look for? Be aware that some payment processors will add another 1%-2% markup to your interchange rate. This could send your net effective rate to over 5%!
Your net effective rate will provide you with a basic idea of how much you’re really paying each month. The net effective rate includes your credit card processing rates, transaction fees, and any other miscellaneous fees such as monthly service fees, hardware costs, and PCI penalties.
To find your rate, divide the total charged fees by the total processed volume and multiply this amount by 100. This should be calculated before anything else because it gives you an overall starting point. You can then move forward with this relevant knowledge.
