Whether you’re running an online store or a brick-and-mortar shop, you must pay credit card processing fees when you accept credit card payments. These fees help card issuers and payment processors cover the costs of their services. On average, they fall between 1.5%–3.5% of the transaction value. While that might seem like a small amount, the fees can add up and impact your profits over time.

Below, we’ll explain where these fees come from, how to reduce them, and what other payment methods you can offer customers in addition to credit cards.

What’s in this article?

• Types of credit card processing fees
  
• Factors affecting credit card processing fees
  
• Strategies for reducing credit card processing fees
  
• Alternative payment methods
  

Types of credit card processing fees

The term “credit card processing fees” encompasses a few types of fees associated with different aspects of credit card processing.

• Interchange fees: These fees cover the cost and risk of handling the transaction. The business’s bank (acquiring bank) pays them to the cardholder’s bank (issuing bank). Card networks (e.g., Visa, Mastercard) set these fees.

• Assessment fees: The acquiring bank pays these fees to the card network, and they are generally lower than interchange fees.

• Payment gateway fees: A payment gateway processes online transactions. The gateway provider receives payment gateway fees for securing and facilitating the transfer of payment data.

• Chargeback fees: These fees cover the administrative costs of handling a chargeback, which occurs when a customer disputes a transaction and the business refunds the transaction.

Factors affecting credit card processing fees

Credit card processing fees vary depending on several factors, from the payment processor you use and the type of business you run to the volume and value of the transactions you process. Here’s what affects the fees you’ll pay:

• Type of card used: The type of credit card used in a transaction can affect processing fees. For example, rewards cards and premium cards typically have higher interchange fees.

• Business type and industry: Different industries have various levels of risk associated with their transactions, which can influence fees. Businesses in high-risk industries such as travel and entertainment might pay higher fees.

• Transaction size and volume: A business’s transaction volume and the value of those transactions can impact fees. Businesses with higher volumes often negotiate lower per-transaction fees because they process more transactions.

• Transaction method: How a business processes a transaction also affects fees. For instance, in-person swipe transactions can have lower fees compared to those entered manually or processed online, due to the latter’s higher fraud risk.

• Processing history: A business’s history with credit card transactions, including its chargeback rates and compliance with payment card industry standards, can influence the fees it is charged.

• Geographic location: Fees can also vary by location. Different countries and regions have different costs associated with credit card processing.

• Negotiation and pricing models: Some fees are negotiable. Processors also might have different pricing models such as flat-rate, tiered, or interchange plus pricing, which can affect the overall cost.

Strategies for reducing credit card processing fees

Whether you just started working with a new payment processor or you’ve worked with the same provider for years, there are often things you can do to lower your credit card processing fees. Here are some strategies to consider.

• Negotiate with your payment processor: As your business develops, your processing needs might change. This can be a reason for renegotiation. Factors such as an increase in transaction volumes, better security measures, or a consistently low chargeback rate can improve your standing as a business and help you secure lower fees. Schedule annual reviews with your provider to discuss your account and ask for better rates based on your processing history.

• Switch to a different pricing model: Different businesses benefit from different pricing structures. Common models include flat-rate, tiered, and interchange plus pricing. The interchange plus model often provides greater transparency and lower markup rates since you pay the exact interchange rate plus a small, fixed payment processor markup. This can be more economical for businesses with high transaction volumes. Analyse your transaction patterns and fees to determine whether a switch could reduce costs.

• Use address verification service (AVS): AVS checks the address provided by a customer against the address on file with the credit card issuer, which reduces the risk of accepting fraudulent transactions. Lower risk can translate into lower fees, as processors often charge less for transactions deemed lower risk. Implementing AVS can also reduce chargebacks, which are costly in terms of both fees and administrative burden.

• Encourage debit card transactions: Debit cards typically incur lower processing fees than credit cards. Encourage your customers to use debit cards by placing promotional signage at points of sale or offering small discounts for debit card use. This strategy lowers processing fees and speeds up the transaction process.

• Set a minimum transaction amount: Setting a minimum purchase amount for credit card transactions can reduce the impact of processing fees on smaller sales. This practice must comply with the guidelines set by local legislation and credit card networks. For example, US law allows for a minimum charge amount that doesn’t exceed $10. Communicate this policy clearly to your customers to avoid confusion and potential dissatisfaction.

• Fine-tune your payment gateway: Incorrectly implementing your payment gateway can lead to downgraded transactions, which are processed at a higher rate. Ensure that your gateway is configured to automatically provide all necessary transaction data to qualify for the lowest rates, and regularly audit your gateway configurations to prevent costly errors.

• Regularly update your equipment and software: Outdated equipment or software poses security risks and increases the likelihood of transactions being processed at non-qualified rates, which are more expensive. Invest in updated technology to reduce these risks, boost transaction speed and security, and decrease overall processing costs.

Alternative payment methods

In many cases, the best way to limit your card processing fees is to give customers other payment options.

Consider the following questions to determine which alternative payment methods can best serve your business:

• What are the most popular payment methods among your customers?
  Conduct surveys on customer preferences or analyse sales data to see whether your customers favour mobile payment apps, bank transfers, or other payment methods. Customising your payment options to match customer preferences can improve the customer experience and potentially reduce processing fees.

• Can you incorporate direct bank transfers?
  For some business models, such as business-to-business (B2B) models, direct bank transfers can greatly reduce transaction fees. Bank transfers are particularly useful for handling larger transactions where credit card fees would be prohibitive.

• Is there room for mobile payment solutions?
  Mobile payments can be a very effective payment method for on-the-go transactions, small businesses, and service providers. Services such as Venmo and Zelle can have more favourable fee structures than traditional credit cards.

• How can you use online payment platforms?
  Platforms such as Stripe have comprehensive payment solutions that accommodate multiple forms of payment, with rates depending on your transaction volume and the specific services you use.

• What about subscription models?
  If your business model allows you to, incorporate a subscription model where customers can pay up front. Subscription models can reduce the frequency and cost of individual transaction fees, and they might provide a better customer experience.