Published April 17, 2020
Small business owners are more pressured than ever to keep their operating costs as low as possible especially with all the major changes in the economy brought on by COVID-19. One of the new consumer trends is more online shopping, which affects small businesses in many ways, including increased credit card transactions and paying more fees.
While fixed costs may feel non-negotiable, you can reduce your business’s credit card processing fees. Some small businesses also consider charging their customers credit card processing fees, but doing so can be tricky.
To take action on reducing your credit card fees and achieving maximum savings, you first need to understand how credit card transactions are processed and how these fees are calculated.
In the simplest terms, credit card processing fees are the fees credit card companies charge to move money from a customer’s account to a merchant’s account.
Here’s how it works:
1. The customer inserts or swipes their card at the merchant’s point-of-sale (POS) terminal
2. The terminal sends the card data and transaction request across the credit card network to the customer’s bank
3. The customer’s bank authorizes or declines the transaction
4. If approved, the customer’s bank transfers the amount to the merchant’s bank
To facilitate credit card transactions, processors charge merchants multiple fees.
Some of the fees are fixed, like monthly network fees and authorization costs.
Others are variable, like the interchange fee (charges for the transfer of funds between the customer’s and merchant’s banks), discount rate, and the fee credit card companies charge to process payments.
Small business owners can reduce costs by determining which credit card processing plan makes the most sense for them. Here's a rundown:
Tiered plans charge merchants different fees based on how a credit card transaction is processed and what kind of card is used.
For instance, a Visa credit card inserted at a POS terminal is charged differently than an American Express card processed over the phone.
Typically, the promised benefit of tiered plans is that most transactions will fall under the lowest-priced tier. But the obvious drawback is that if you process a large volume of transactions outside that tier, your monthly costs can increase sharply.
Under interchange-plus plans, merchant credit card processing fees are calculated via tables issued by credit card companies.
Credit card type and transaction method are the two factors used to determine these processing fees.
For instance, to process an in-person purchase made with a Visa preferred card, the current interchange-plus rate is 2.10 percent plus $0.10. To process a $100 sale at that rate, the merchant will have to pay an additional $2.20.
Although generally more affordable than tiered plans, interchange-plus plans are not without drawbacks. The most significant is that they're vulnerable to marketplace volatility.
If Visa suddenly decides to raise their preferred card rate to 3.10 + $0.15, merchants will find themselves on the hook for that price increase.
Flat-rate plans charge merchants a flat-rate fee to process credit card transactions, regardless of card issuer or method.
The chief appeal of this fee structure is simplicity and stability. With it, owners can quickly and easily calculate their monthly credit card processing fees and budget accordingly.
Although their transparency is alluring, flat-rate plans can be problematic in two ways:
Many flat-rate plans charge monthly membership fees with volume-based escalators. So you could find yourself slammed with unexpected fees as soon as you cross the volume threshold
If your company experiences a slowdown in credit card transactions, you might end up paying a sizable membership fee for the privilege of processing only a handful of sales.
Our payment experts are ready to create the perfect payment solution for your business, built to be affordable for your business today and prepared to grow with you as your business grows.
NCR Payment Solutions has been a leading provider of vertically integrated solutions for corporations and government entities of all sizes.
By developing distinctive and innovative payment solutions for brick-and-mortar, web, mobile and cloud-based environments, NCR creates financial solutions for thousands of clients nationwide. We look forward to hearing from you, and to playing a role in your business’ success story.
NCR is committed to helping financial institutions of all sizes navigate the many challenges of the COVID-19 outbreak. For more information, contact NCR.
Our banking solutions experts are in the trenches with our customers, working hard to help provide guidance, solutions and recommendations.
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