Thursday, August 11, 2022

How To Calculate Credit Card Convenience Fee

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How To Use Effective Rate To Compare

Accept credit cards? Can you charge a convenience fee to accept credit cards?

Calculating the effective rate will help you compare among credit card processing providers.

You can’t just look at individual fees. One processor may have lower transaction markups but higher service fees. Another one may have higher markups but no miscellaneous fees. It’s hard to know without comparing the effective rate.

Take this example. Let’s assume you have $10,000 in sales each month, with $50 average ticket size. That’s 200 sales total per month.

If you’re comparing between these 3 providers, here’s what you would get:

Processor 1
2.74%2.7%

In this example, Processor 1 has the lowest overall effective rate. Because each processor has a different pricing structure, you wouldn’t know that unless you took everything into account.

Note: We used an average interchange rate of 1.81% in our example. Your rate may differ, though, depending on what type of cards you usually accept.

How To Lower Processing Rate

If your effective rate is over 3.25%, then you’re most likely paying too much.

If you like your current provider, you can try negotiating with them first. Remember that the interchange rates and assessment fees are not negotiable. BUT you can negotiate anything the provider has control over. This includes:

  • The processor’s markup
  • Payment gateway / virtual terminal fee
  • Equipment fee / setup costs
  • PCI compliance fee

Reducing any of these fees will help lower your effective processing rate. Ideally, you want your provider fees to be no more than 20% of your entire processing cost.

The key to negotiating is to be a valuable client. The more sales you have, the more negotiation power you have.

It’s also important to have a good history. This means always making payments on time and having fewer chargebacks. By being a good client, the provider is more likely to work with you to cut down fees.

Here is the general rule of thumb:

  • If your business has a small average ticket size, negotiate the fixed fee.

For example, if your processing rate is Interchange + 0.2% + $0.10, getting it down to + 0.2% + $0.05 will save you 5 cents each purchase. That can add up to a lot of savings if you’re processing thousands a month.

  • If your business has a large average ticket size, negotiate the percentage markup. For instance, you can cut it down to 0.15% + $0.10.
  • Also see our 8 ways to lower credit card processing fees for more practical tips.

    Importance Of Effective Rate

    Knowing the effective rate for different payment processors is the easiest, most straightforward way to compare the competitiveness of rates from different providers. Many providers will advertise their lowest rates available and merchants often find themselves paying more in actuality.

    Thats because processing companies set their own processing rates based on the type of transaction: qualified, mid-qualified, or non-qualified. This rating system for credit card transactions makes certain purchases susceptible to higher processing fees than the ones companies lure merchants in with.

    If youre already set up with a payment processor, you can also use the effective rate to make sure youre not being scammed. It can help merchants identify if a processing provider is overcharging them, says Shirshikov. Business owners should understand how much they are paying for the service and if its worth it for them.

    Remember, there are other fees to consider too. But the effective rate is a great way to evaluate your particular payment processing provider.

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    How Does A Convenience Fee Work

    The CLEVER Ways People Earn Millions Of Credit Card POINTS ...

    Lets start with an example that most people are familiar with. Movie theaters usually sell tickets at the box office. Customers can pay by credit card and that cost is absorbed as a cost of doing business. But the movie theater owner can offer an alternate way to buy tickets via online sales that requires customers to pay with a credit card. The theater can then charge a convenience fee for online purchases because those who do not wish to pay the convenience fee can always buy in person at the box office.

    As a practical matter, convenience fees seem to be most commonly applied to payments such as utilities, rent, tuition, government fees , and even taxes. All these fees tend to be traditionally payable by check or in person, so payment online by a credit card is very obviously an added convenience.

    There are rules on how you can charge a convenience fee, and they differ with every card. Visa has the most thorough policy on the subject, while Discover and American Express are rather vague and rely on broader rules that apply to how merchants accept card payments, period. We will explain these rules below and show you how to properly charge a convenience fee.

    First, though, lets clarify the difference between convenience fees and surcharges.

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    Journal Entry For Credit Card Purchases: Immediate Payment

    In most cases, you receive funds from a credit card purchase immediately. When you do, you must make a compound journal entry .

    So, how much should you debit and credit each account? To find out, subtract the credit card merchant fees from the total sale amount. This represents how much money your business actually made from the sale.

    In your journal entry, you must:

    • Debit your Cash account in the amount of your Sale Fees
    • Debit your Credit Card Expense account the amount of your fees

    Remember that the sum of your debits to the Cash and Credit Card Expense accounts must equal the amount you credit your Sales account.

    When you receive immediate payment, your journal entry for credit card purchases should look like this:

    Date
    500.00

    Also Check: Td Aeroplan Visa Signature

    Average Credit Card Processing Fees: 13% To 35%

    Note that debit cards have a different pricing model, and they usually cost less for merchants. This is why you may only see a convenience fee for a credit card and not a debit card purchase.

    Here are the average credit card processing fees for the four payment networks :

    Payment network Average credit card processing fees
    Visa 1.29% + $0.05 to 2.54% + $0.10
    Mastercard 1.29% + $0.05 to 2.64% + $0.10
    Discover 1.48% + $0.05 to 2.53% + $0.10
    American Express 1.58% + $0.10 to 3.45% + $0.10

    Those ranges include the two types of fees that payment networks charge for each transaction: interchange fees and assessment fees. They don’t include payment processing fees, because fee structures vary considerably depending on the credit card processor you choose.

    Now, let’s take a closer look at the fees that get taken out of every credit card transaction.

    Average Credit Card Assessment Fees: Around 014%

    Add a Surcharge or Convenience Fee to Credit Card Processing Sales
    Visa
    0.15%

    The assessment fee is the payment network’s cut, and it’s a much smaller portion of each transaction.

    American Express is once again the most expensive payment network, but this time around, Discover has the lowest rate, at least for transactions under $1,000. For transactions of $1,000 and over, Mastercard is the clear winner. That being said, the differences in assessment fees between each payment network are minuscule.

    Recommended Reading: Cabelas Credit Card Requirements

    Tip : Leverage Ar Automation To Eliminate The Manual Work Of Processing Emailed Virtual Credit Cards

    Many buyers transmit their virtual card payment information by email or phone. This not only exposes sensitive payment data, but it requires AR professionals to open emails, key in payment information and manually match payments to invoices.AR automation like Billtrusts Business Payments Network eliminates the manual work of processing emailed virtual credit cards and the security risks. BPN retrieves payment data directly from your customers payment sources, whether it be card numbers emailed to a secure inbox, pulled from a supplier-hosted self-service portal or an accounts payable provider portal.

    And BPN ensures that Level 2 or Level 3 payments are realized on every transaction to help bring down your payment costs even further.

    Reducing credit card processing fees with automation

    Automation removes the resources needed to process emailed credit cards, adds Level 2 and Level 3 interchange savings and youll be able to see the value of automation each month in your credit card statement as your effective rate decreases over time.

    Virtually any automated process will be faster, more efficient and cost less than the manual alternative. This is especially true for your accounts receivable teams payment acceptance process.

    How To Avoid Credit Card Convenience Fees

    Not surprisingly, many consumers are unhappy with convenience fees and believe merchants should eat the costs.

    In one famous example, Verizon felt the wrath of its customers when it announced in December 2011 that it would charge customers a $2 convenience fee if customers paid with credit or debit cards through the companys website or via telephone. The company quickly reversed its decision after a flood of complaints.

    Heres what you can do to avoid credit card convenience fees:

    • Link your bank account using the account number and routing number to opt for ACH transactions. Since this is a payment directly from your bank account, no credit card payments are processed, thus there are no fees.
    • Try to pay in person, if possible.
    • Avoid merchants and businesses that apply card processing fees.

    Remember that surcharges and credit card convenience fees are different. While processing fees are allowed by most issuers and state governments, surcharges are not. If youve been issued a surcharge, contact your card issuer and give them the name and location of the merchant.

    If you live in one of the states where surcharges are illegal, file a complaint to the Consumer Financial Protection Bureau.

    Recommended Reading: Cabelas Visa Club Points

    Choose A Credit Card Processing Company That Will Truly Be There For You

    Now that you know all the main points, youre ready to look for a reliable merchant services provider who can help you reach the next level. As weve highlighted above, as they provide you with the hardware and software necessary to get the transaction through.

    Since merchants services rates will play such a big role in your enterprise, youll do well to opt for professionals who can take the weight off your shoulders and who want you to understand what youre paying for. Its possible to find that are easy to set up, affordable, trustworthy, and versatile . Just take your time and dont settle for less.

    What Influences The Interchange Rate

    Credit Cards

    Interchange rates are based on a number of factors:

    Network

    Each of the four major credit card networks charges a different interchange rate and these rates are subject to change.

    Merchant Category Code

    MCCs are four digit numbers that classify the types of transactions a cardholder is making. These classifications can be influenced by the category of the suppliers business.

    Data levels

    Card transactions submitted with Level 2 and Level 3 information can command lower interchange rates because credit card issuers have more confidence in the transaction being legitimate. But it can be challenging to submit Level 2 and Level 3 data with each transaction.

    Each card type that supports Level 2 defines its own standards for the additional information required. Potential fields include:

    • Purchase order number
    • Destination city
    • Destination state

    Level 3 payments require all of the information of Level 2 along with additional information. These additional fields may include:

    • Item ID or SKU
    • Line discount

    Recommended Reading: Cabelas Online Credit Card Payment

    Always Notify Your Customer As Clearly As Possible And Allow For Cancellation

    Not only would it be illegal not to, but youre also jeopardizing your rapport with the customer because nobody is eager to see additional charges after theyve paid a bill. Visa Rules stipulate that you should prepare a clear text or sign that explains this charge regardless of where you stand on the spectrum of different types of businesses. That is a valuable suggestion for everybody as it vouches for transparent and honest dealings.

    Besides, before you think about small business tax deductions, you should ensure you dont have chargebacks due to customer dissatisfaction. In case you werent open about the final price and didnt give them a choice to cancel, your clients might file refund claims and complaints.

    What Is A Good Effective Rate

    A fair effective rate is between 2.5% and 3.25% . If you’re paying any more than that, your processor provider markup is likely too high.

    In general, physical stores where you swipe credit cards in person will have the lowest effective rate. You want your rate to be on the lower end of that spectrum.

    Online stores will have higher rates closer to 3.5%. This is because there’s higher risk of fraud when the credit card is not present during transactions.

    There are unique situations where your effective rate may be higher than 3.5% and is still considered normal. We’ll get into that later.

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    Why Do Employers Perform Credit Checks

    Employers use credit checks to gauge your trustworthiness and aptitude at managing money. A hiring committee may think employees who can skillfully oversee their own finances would do the same for high-stakes projects at work. Companies that run credit checks see a limited version of your credit report.

    Convenience Fees And Surcharges: Common Fees Businesses Charge

    Credit Card Surcharge Rules, Convenience Fees, and Fee Reductions

    In short, merchant fees are legal in most states as long as the business follows the necessary protocols. But before diving into the specifics, its important to distinguish between the two kinds of fees that a business can charge: convenience fees and surcharges.

    A convenience fee is charged when a customer uses a form of payment that isnt customary for the business. For example, a business that typically accepts online payments may offer the option to pay by phone for a fee. Convenience fees are legal in all 50 states but have to be clearly communicated at the point of sale. Additionally, a convenience fee can only be imposed if theres another preferred form of payment as an option.

    When a business charges a fee for a form of payment, whether in person, online or by phone, its called a surcharge. Credit card surcharges are applied when you use your credit card to make a payment. In states where surcharges are legal, they have to be clearly displayed at the point of sale and on your receipt. Regulations for surcharges are U.S.-specific, and merchants are prohibited from imposing surcharges on card payments abroad .

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    How To Lower My Effective Rate

    You can lower your effective rate and total credit card fees by defining a smart credit card acceptance policy along with implementing technology that will lower your monthly fees and costs associated with credit card transactions such as cash application.

    A smart credit card acceptance strategy combined with innovative automation can help you slash those fees up to 1%.

    Breaking Down The Fees

    Credit card fees can be broken down into interchange, markup, dues and assessments.

    Interchange: Makes up the largest portion of the fee. Goes to the issuer to fund cardholder operations and rebates.

    Goes to the merchant processor which the supplier uses to accept card payments.

    Assessment: Goes to the network for allowing the issuer to transmit the payment from the cardholder to the merchant.

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    Are There Other Ways To Lower The Impact Of Credit Card Processing Fees

    Suppliers can improve their margins on credit card payments by lowering the costs associated with applying the funds received from cards.

    This is most easily achieved by automating their payment acceptance and cash application processes. Even though credit card payments come with remittance advice attached, most ERP systems cannot automatically apply the cash to open invoices. An automation vendor can help suppliers achieve straight-thru-processing of virtual credit card payments and save resources that would otherwise be diverted to the manual task of matching VCC payments to open invoices.

    To learn how accounts receivable automation can help lower your costs to accept credit card payments, connect with Billtrust.

    Fee #: Cash Advance Fees

    Credit Card Convenience Fees vs. Surcharges, and How to ...

    What is a cash advance fee? A cash advance fee is the fee a bank charges you for withdrawing cash from an ATM or through a bank teller . The transaction, a cash advance, functions the same as withdrawing money using a debit card, but with additional fees involved.

    What credit cards charge cash advance fees? Again, nearly every credit card, with very few exceptions, charges cash advance fees. The Navy Federal card mentioned above that doesn’t charge balance transfer fees also doesn’t charge cash advance fees, but that’s the exception rather than the rule. That said, Discover cardholders are able to receive cash back at the point-of-sale with dozens of retailers. It works similarly to using a debit card when you buy something and requesting cash back from the cashier. There are, of course, terms and conditions, but it’s a fee-free option.

    Fee range: Cash advance fees usually range from 3%-5% of the amount of each transaction with a $5-$10 minimum. In some cases, the fee is different depending on how you choose to withdraw the money whether via ATM or bank teller, directly with the card-issuing bank or through another bank, etc.

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