Tuesday, January 24, 2023

What Percentage Do Credit Card Companies Charge Businesses

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Why You Should View Credit Cards As A Marketing Tool

Annual Percentage Rate vs Annual Percentage Yield

Most small business owners dont realize that payment options can be their #1 marketing tool. By making it easier for customers to pay you, youre bound to get paid more often!

And, while theres no getting around having to pay credit card processing fees as a business, you might not be so bothered by them if you begin to look at credit cards in a new light.

Instead of viewing them as an expense or a cost of doing business, why not look at them as a marketing and operations tool that will help your business grow. Once you start looking at credit cards this way, you might begin to understand and appreciate how powerful they can be as a growth driver for your business.

Consider the following benefits of accepting credit cards:

Other Fees To Be Aware Of

Note that there are plenty of other credit card processing fees to be aware of. For example, you may face initial fees when you sign up for a credit card processing company that will provide you with terminals that help you process your transactions.

Other fees you could face are all over the place but may include fees from your credit card processor each time a customer disputes a charge, fees for chargebacks, fees for non-sufficient funds to pay your credit card payment processor and more.

The Case Before The Competition Tribunal

The Competition Tribunal “is a strictly adjudicative body that operates independently of any government department” that hears cases dealing with economic and business matters such as mergers, misleading advertising and restrictive trade practices .

The argument before the Competition Tribunal was that Visa and MasterCard were engaging in anti-competitive behavior and their restrictive contracts allowed the two credit card companies to essentially dictate terms to merchants .

These terms allowed Visa and MasterCard to charge transaction fees of over three percent in some cases, fees that, according to the Competition Bureau, were among the highest in the world and rake in $5 billion for the credit card industry each year.

Wile the Competition Tribunal doesnt have the power to levy a monetary judgment against the two credit card giants it could force them to change their operating methods. The Competition Bureau wanted retailers to be able to do two things they were not allowed to do:

  • refuse to accept high-cost credit cards but still accept others from the same brand name.
  • add surcharges to counteract the higher transaction fees charged for premium credit cards.

Recommended Reading: Cabelas Credit Card Application Status

Ways To Reduce Credit Card Processing Fees

Processing fees can really eat into your bottom line. While you can’t avoid them altogether, there are some ways to reduce processing fees so you keep more profits.

  • Encourage debit card paymentsDebit cards have much lower interchange rates. For example, a standard Visa rewards credit card has an interchange fee of 1.65% + 10¢, while a Visa debit card is 0.05% + 22¢. On a $25 purchase, a debit card will cost you $0.23, compared to $0.51 for credit cards.
  • Set a credit card minimumYou are allowed to set a credit card minimum purchase amount up to $10. This helps you avoid paying high per-transaction fees for small purchases.
  • Add fraud protection toolsFor online stores, use such as CVV and AVS match. Visa and Mastercard offer lower interchange rates if you use an AVS tool.
  • Add a credit card surchargeFinally, you can pass the processing fee to your customers by way of a surcharge. This is an additional fee added to the customer’s purchase for using a credit card instead of cash. But this practice is not legal in some states. Read more here.
  • Offer cash discountsIf you don’t want to add a surcharge , you can offer a cash discount to encourage cash payments. Just make sure that the listed price is the regular price.
  • Read more in our guide on how to lower credit card processing fees.

    Business Credit Card Market

    How Much Do Companies Get Charged For Credit Card ...

    While pre-pandemic predictions reported enormous growth in the business credit card market, the pandemics travel restrictions slowed business travel and thus, business purchases. However, business credit card market forecasts indicate that business credit card spending will bounce back by 2023.5

    The corporate credit card market was estimated at $14.1 billion in 2020 for North America.6

    In 2018, the largest small-business credit card issuers by purchase volume were JPMorgan Chase , Capital One , Bank of America and Citibank .7

    Also Check: Cabela’s Club Visa Pay Bill

    Dont Forget About Support

    Gary Jackson, formerly vice president of sales at online payment processing company CCBill and now a self-employed digital consultant, warns business owners against focusing only on price when choosing a merchant account provider.

    Business owners should also consider the type of support theyll receive if something goes wrong.

    You want someone who can provide you guidance, Jackson said. Some providers give you the software and say, Here you go. If you have a bad launch, it can be detrimental to your business. You can lose customers left and right. You might want a company that provides more hands-on support.

    Interchange Fees Vs Processing Fees

    As mentioned before, interchange fees are fees charged by the credit card companies for processing transactions. These fees are usually paid to the credit card companies by a credit card processing company.

    The average interchange rate for a credit card is about 1.8%. Debit cards are lower at around 0.3%. That said, the interchange fees vary from card to card. And each processing company has its own way of factoring interchange rates into its total processing fee.

    Square, for example, charges a flat rate of 2.6% + 10¢ per transaction. That flat rate is the total processing fee for any transaction, and it covers both the interchange fees and the cut for Square for providing the platform and service. Despite the fact that interchange fees are different depending on the card provider, Square charges the same flat rate for every transaction. Flat-rate fees are more predictable, which makes it easy to plan financially, though they often cost more.

    But some credit card companies factor interchange rates into their cut for every transaction. This pricing model is called interchange-plus pricing. Take National Processing. It charges interchange cost + 0.15% + 7¢ per transaction, so the processing fee for each transaction will vary, unlike Squares flat-rate fee. Interchange-plus pricing can often save businesses money but makes monthly statements a bit more complicated because each individual interchange rate is spelled out.

    Read Also: Cabelas Visa Bill Pay

    What Are Interchange Fees And How Are They Calculated

    Definition: Interchange fees are transaction fees that the merchant’s bank account must pay whenever a customer uses a credit/debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud and bad debt costs and the risk involved in approving the payment.

    How are interchange fees charged to businesses?

    Card-issuing banks, payment processors , credit card payment networks like MasterCard and Visa, payment gateways, and the merchant’s own bank will all charge a percentage-based fee on every transaction, and these charges frequently appear as a single, bundled amount on the bills your payment processor hands you. Even this is something of an oversimplification, however, since there are actually about 300 individual interchange fees composing the “single” interchange fee you actually pay.

    Interchange fees are not static

    Based on the costs of moving money, the time value of money in terms of current interest rates, and the relative risk involved, credit card companies set and regularly adjust their interchange rates. Visa and Mastercard, for example, change rates twice a year, in April and October. While there are other fees that merchants pay for the privilege of making sales via credit and debit card, interchange fees are by far the largest, representing 70% to 90% of the total fees paid to banks by merchants.

    How interchange fees are calculated

    Transactional factors affecting interchange

    Are Debit Card Merchant Fees Worth The Cost

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    Theres no one-size-fits-all answer to the question of whether debit card merchant fees are worth the cost, but for the majority of retailers, the answer will probably be yes. Due to a combination of regulation and fraud protection, debit card transactions are frequently cheaper for merchants to process than credit cards. And even when theyre more expensive, its not a significant amount. So if youre offering credit card transactions, you may as well offer debit PIN transactions too. If, on the other hand, youre a cash-only merchant who is happy with the amount of business youre getting, the possibility that the convenience could attract more customers may be outweighed by the reduction in your profits.

    Also Check: Best Buy Credit Card Interest Free

    What Are Debit Card Processing Fees

    The most recent available data is from 2018. In that year, the average interchange fee as a percentage of the average transaction value was 0.57%, with an average fee of $0.23. For exempt transactions, the numbers were 1.16% and $0.44, respectively. These averages include both signature and PIN transaction costs.

    Exempt transactions are those from issuing banks/credit unions with assets less than $10 billion that arent subject to the rate cap outlined in the Durbin amendment .

    Lowest Fees: National Processing

    This budget-friendly service offers low prices for processing with its no-frills approach.

    • You may get hit with a early termination fee

    • No equipment prices on website

    • ACH/eCheck processing fees arent listed

    Established in 2007, National Processing earns good reviews among small to medium business owners for its reliable service and pricing transparency.

    With its $10 per month plans, you can process payments with a low fee per transaction, making it a clear winner for the lowest fees.

    National Processing is PCI-compliant. The company accepts all primary payment forms, including:

    National Processing partners with Clover to provide a full range of Clover equipment, such as:

    • Clover Go: Comes free with a contract and works with your phone
    • Clover Flex: A portable all-in-one register and printer
    • Clover Mini: A small POS system
    • Clover Station: A full-size POS system

    With no minimum monthly fees, an interchange-plus rate system, and a transparent pricing model, its easy to figure out how much credit card processing will cost. For each plan, youll pay the monthly charge, interchange rate, and transaction fees:

    • $9.95 per month Restaurant plan: 0.14% plus $0.07
    • $9.95 per month Retail plan: 0.18% plus $0.10
    • $9.95 per month e-Commerce plan: 0.29% plus $0.15
    • $59 per month Subscription plan: 0% plus $0.09
    • $199 per month Subscription Plus plan: 0% plus $0.05

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    Set Minimums For Credit Card Purchases

    To combat processing fees cutting into your profits on small-dollar items, you could set minimum purchase totals for which youll accept a credit card payment.

    The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 allows merchants to set credit card minimums of up to $10. You may not be allowed to do the same for debit cards, however credit card network rules might prevent minimums, and Dodd-Frank doesnt affect debit purchases.

    Other Strategies For Recouping Credit Processing Costs

    Can You Charge Customers a Fee for Using a Credit Card ...

    Some states that dont allow surcharges to be assessed do allow businesses to run programs that encourage customers to use other payment methods. For example, your store could offer a cash discount. Whenever someone pays with cash, they get a 5% discount on any product in your store.

    We werent able to find any instances where these kinds of discounts were expressly illegal, but you should still get legal counsel on any credit card fee or discount program.

    There are also ways to mitigate costs that dont have any legal ramifications. If you sell some of your wares online, for example, you get to control the price of your goods, so you can just make your online products a little more expensive.

    Read Also: Best Buy Credit Card Apple Pay

    How Credit Card Companies Work

    When looking at how credit card companies work, it’s important to distinguish between the different types of companies out there: credit card issuers and credit card networks.

    A is the bank or credit union that provides the credit card and lends the money used in a transaction. Chase, Citi and Capital One are three well-known credit card issuers. Co-branded credit cards like those you see from airlines or hotels are examples of issuers teaming with outside companies to create a card that offers consumers some type of specific reward.

    A credit card networklike Mastercard, Visa, American Express and Discoveris the entity that processes each credit card transaction, handling the technical aspects of electronically moving the money around. American Express and Discover are both card issuers and networks, which means that in addition to processing, they also lend the money used in their cards’ transactions.

    Card issuers and networks make money in different ways. Networks typically make their money from the merchants, who pay a fee to accept electronic payments from credit cards. The issuers make money from the consumer by charging them interest and fees according to their credit card agreements.

    Debit Cards Cost You Less

    Lets cut to the chase debit cards cost merchants less than credit cards. Heres why.

    The interchange rate merchants are charged for debit card transactions is substantially less than those for credit cards. This is due to a number of factors, chief of which is that debit cards are less of a risk.

    These rates wont change over time, either the Durbin Amendment of 2010 caps interchange rates for regulated debit cards at 0.05% + 22 cents. Credit cards have no similar cap, so their rates may go up over time.

    Given the choice, then, its to your benefit as a merchant for a customer to pay via debit card instead of credit card. It will save you money.

    Read Also: Best Buy Credit Card Apr

    How To Create A Credit Card Policy

    Defining your companys credit card acceptance policy is tough. Buyers love paying with credit cards and everyone wants to make their customers happy. But the rebates and additional lines of credit that your buyers enjoy come with costs for you: and manual labor.

    To make a cost effective credit card acceptance strategy, a company needs to first understand exactly how much theyre spending each month to process their customers credit cards.

    What Is A Credit Card Processor

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    If youre a business owner who wants to accept credit cards, debit cards, or mobile payments, then youre called a merchant. Credit card processors, also called merchant service providers or acquiring service providers, administer a service so you can accept credit card payments at your business.

    Merchant providers offer software so you can view your transactions, fees, chargebacks, and more on a single dashboard. Typically, business owners can purchase or lease hardware, including devices like card terminals or mobile readers.

    Any business that accepts credit cards, whether its a restaurant or retail shop, uses a service and devices for credit card processing. Merchant services may also integrate with point of sale systems, customer relationship management software, or accounting programs.

    Although it only takes seconds to accept a credit card payment, theres an intricate process that involves authorization and authentication behind the scenes. Various security protocols are followed, and information is transferred to both the credit card network and the credit cards issuing bank.

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    What Does Your Processing Fee Cover

    Your processing fee covers several administrative costs, including account and software charges. You will also pay transaction fees and one-time incidental fees, like chargebacks. The transaction fees always are the largest part of the total and they are charged every time you do a transaction. Most transaction fees can be divided into two categories., based on whether they take place in person or otherwise

    In-person transaction fees are charged when a newspaper vendor has their customers swipe their card or when a tailor or farmer allows their customer to pay in person by using a card. The fees for this type of transaction are between 1.5% and 2.9%, so if a customer purchases goods worth $100 from you, you can expect to pay up to $2.90 as your transaction fee.

    If the card is not present, your transaction is thought of as having a higher risk of chargebacks and fraud. For this reason, you will pay between 2.9% and 3.5% on average. Transactions that are keyed in manually are included in these transactions, as invoices. Online purchases of any size are in this category, so if you have an online store, youll pay up to $3.50 in transaction fees on a transaction of $100.

    Debit Interchange Rates Vs Markup

    By now, you understand that your debit card transactions will get routed through either a PIN debit network or a credit card network, either one of which will charge you a set of fees for the use of the card. However, these fees dont represent your entire cost. Your processor takes a cut, too, although in most cases, its a small portion of your overall cost. How your processor determines their cut, also called the , will depend on the pricing model youre using.

    As for the interchange part of the fee, the most important factors in determining your debit card fees are:

  • Card Networks: As weve mentioned above, over a dozen debit card networks operate in the United States, and they each have a different fee schedule. Interlink and Maestro are two of the more familiar networks, but there are others as well. In Canada, Interac is the most well-known debit card network.
  • Issuing Bank Size: With the passage of the Durbin amendment in 2011, banks and other financial organizations above a certain size are subject to caps on the fees they can assess for debit transactions.
  • Signature VS PIN Debit Transactions: As weve mentioned above, these two methods of verifying a customers identity as the legitimate cardholder will result in significantly different fees being assessed for the same transaction. Average ticket size is the most influential factor in determining which option is more affordable than the other.
  • Related:What Are Interchange Fees For Credit Card Processing?
  • Read Also: Do I Need My Best Buy Credit Card In Store

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