To get the best possible rates for your small business credit card processing, you need to know about how and whether to use the various rates types of processors. You will need to be mindful of the various fees paid by credit card processing firms, and the fees you will never have to pay.
You will analyze this important business service as a smart customer using the details in the guide and negotiate for lower prices and pay less fees. For a list of processors for credit cards, see our overview of the best companies that process credit cards.
How are rates different from fees?
By negotiating with a payment company for a credit card, you usually incur two separate types of costs: rates and fees. Prices are the prices you are charging for every purchase. Fees are the costs you pay for managing your account with the system.
Processing rates for credit cards (which, on average, range from 2% to 4% per transaction) usually consist of one of two parts: a discount rate only or a discount rate plus a per-transaction fee. The discount rate reflects the amount of any purchase. The per-transaction charge is a flat rate that you pay every time someone purchases with a credit card, irrespective of cost of payment. You need to know what’s included in the prices to understand the different pricing models and which prices are negotiable.
The following prices and markups include both the discount rate and the per-transaction fee:
- Interchange fees: This rate varies according to the type of card the customer is using. It accounts for much of the discount rate and is billed to the bank that sold it. It is a expense that the card brands set non-negotiable, and each processor pays the same price. The card brands post their tariffs on their websites.
- Assessment fees: these are extra non-negotiable costs imposed by the brands of cards, and each processor charges the same amount again. That fee will vary based on the card brand used by your client, such as MasterCard or Visa, which will be billed to the card company. Assessment fees can also include Network Access and Package Use (NABU) for MasterCard, Network Acquirer Processing Fee (APF) for Visa, and the Data Use fee for Discover.
- Processor’s Markup: It is the only negotiable discount rate section. Pricing is set by the credit card processing service, rather than being set by the card brands.
Small business processing Credit card payment pricing models
The cost of transaction fees may be tempting to pass to your customers in the form of a surcharge but it is not recommended. If accepting credit cards, overloading is not a common practice and is illegal in some jurisdictions.
Many credit card processing firms offer one or more of the following pricing models for determining the transaction rates you pay: interchange-plus, flat-rate, and tiered pricing. Your company’s best pricing model depends on the number of cards you process every month, the average ticket size of your transactions and which type of cards you most accept.
Also called cost-plus (or cost-+) pricing, interchange-plus pricing applies to each transaction a discount of a fixed percentage above the interchange rate. The processor will take the markup as their bill. This pricing model tells you exactly what percentage of your costs is going to the processor, no matter what sort of card you accept or how you process the transaction. This pricing model is recommended by industry experts as the most cost-effective alternative, and is the best pricing model for most small businesses.
While most credit card processing companies provide interchange plus (the best processors give it to all of their customers), you will have to ask for it when you call for quotes, because many companies choose to set up tiered pricing for you. In fact, certain businesses are mandating that you meet certain conditions before you can process interchange-plus pricing cards. You might have to process a certain dollar sum of transactions per month, for example, or you might have to be that processor’s customer for a certain period of time.
This pricing model is widely used by processors of mobile credit cards but is still not provided by conventional processors of credit cards. You are paid a flat percentage of each purchase, no matter what sort of card you use. That means that if a premium card, such as a rewards credit card, has a lower markup, there is a larger markup on other cards, such as standard debit cards. If you’re looking for convenience, if your tickets are thin, or if you’re processing a low sales volume every month, look for flat-rate pricing when you’re looking for a processor.
Many processors charge a flat rate plus a per-transaction fee as a flat rate price variance. The percentage rate for these programs is typically smaller than other companies that only charge a flat amount. However determine which alternative is more cost-effective for your company before you select a payment plan. If you process a large amount of small sale tickets, the per-transaction fee pricing model may be more costly, even though the discount rate is lower.
Tiered pricing, also known as bucket pricing, arranges prices in tiers on the exchange tables, and sets a premium for each tier. Processors usually have two to six thirds, often with different debit and credit card rates. The most common tier system has three tiers each for credit and debit cards and these are typically classified as “qualified,” “mid-qualified” or”non-qualified.” These words do not mean whether or not a card is eligible for processing; rather, they apply to the type of card and how it is processed and checked.
- Registered: If the customer swipes or dips the token, and then signs or enters a Code to allow the transaction, a transaction is eligible. Typically it’s a credit or debit card with no rewards attached.
- Midqualified: When you key in a transaction manually and use an Address Verification Service (AVS) to validate the cardholder’s address, it could be deemed midqualified. This tier can include credit or debit card rewards, although some processors classify rewards cards as non-qualified purchases, particularly those with premium rewards.
- Non-qualified: transactions that you manually enter without using an AVS program are considered unqualified, as are transactions made using credit and debit cards provided by multinational, corporate and government. In addition, some processors categorize credit and debit card rewards as non-qualified transactions, especially premium rewards cards.
Qualified rates are temptingly low, especially for debit cards, and this type of pricing model can be a good choice for your business if your business accepts a high percentage of regular debit cards. However, if your customer tends to use high-end rewards credit cards, or you can pay expensive non-qualified rates if you key in a lot of sales, such as for phoned-in orders. Of this reason, it is important to understand what kind of cards your customers use, and how they are classified by your processor.
Recurring payment fees for credit cards
In addition to the payment rates that you pay for each purchase transaction, most businesses charge account maintenance fees. The cheapest processors charge very few fees, and there are no extra fees paid by the cheapest prepaid credit card processors. Typical fees include a monthly charge, a PCI compliance charge and a monthly gateway fee, if you accept electronic credit cards.
Also called a declaration fee, processors charge monthly fees to prepare the statements and to provide customer support. Some processors offer monthly fees for printed statements, others charge an extra fee if you choose to submit written, mailed statements.
A gateway to payment is the electronic counterpart of a credit card terminal. Processors may have a proprietary program of their own or may operate with third party providers such as Authorize.net. If you sell your goods online via the website of your company, you’ll need access to the gateway. For this service, most businesses charge a separate monthly fee although some include it in the monthly fee.
Monthly minimum fee
Most payment processors require you to process a certain number of transactions by credit card per month. To insure that your account remains active, certain businesses allow a monthly minimum, and add the entire dollar amount of your purchases to the monthly minimum. Many processors, however, use it to ensure that they receive at least a certain amount of transaction fees from your account per month and then add the processing costs to the minimum monthly.
All that means is that you can measure a total of $25 a month very differently. If your company is small or seasonal, it’s crucial to be specific about the amount of dollars you have to process to reach the minimum. If you fail to reach the monthly minimum, processors charge you the difference rather than the full cost, so please ask your processor about this cost in advance to prevent surprises on your bill.
The payment card industry has data protection requirements that must be complied with for all retailers to accept credit cards. These regulations help to deter fraud and protect you, your customers and the credit card company from expensive breaches of security. You’re expected to complete a self-assessment questionnaire to qualify as compliant, but you may need to meet additional criteria depending on your company. This fee is paid by most conventional credit-card providers, not all. Most aggregators, or companies accepting mobile credit cards, do not charge fees linked to the PCI.
The fee can be charged on a weekly, quarterly or annual basis. Ask if there is a PCI-compliance fee, how high it is, how long it is paid, and what services the processor offers to help you achieve PCI requirements, it is not always disclosed when you call processors for quotes. If you are already compliant with PCI, or if you handle PCI compliance at home, ask for this fee to be waived.
PCI non-compliance fee
Normally you have a few months to develop PCI compliance when you sign in with a processor. Nevertheless, you can incur a monthly fine if you fail to comply or if you do not re-establish compliance annually. The size of the fine varies depending on the processor and can be very expensive; thus, review your statements regularly for reminders that your renewal of approval is due or if new fines appear on your document.
This is a nominal fee charged when a batch of transactions is released, which is usually once or twice a day. Usually it is the same rate as the per-transaction fee, varying from 10 to 25 cents.