When a customer makes a purchase from your business using a credit card, how much does that transaction cost you? A few cents? A few dollars? Sure, it might not seem like a big deal when a single $100 transaction costs you $3, but those costs add up quickly, especially when you run many transactions every day. By the end of the year, you could pay thousands of dollars just in card transaction fees — and a lot of that money could stay in your pocket or go back into your business.
Anatomy of a Credit Card Transaction
Most consumers don’t think about how much it costs a business to accept their credit and debit cards. They just swipe, enter a PIN or sign, and go about their day. They don’t realize that it actually costs a merchant a portion of the value of the transaction to accept the card.Image source: shutterstock
As a merchant, you know that you’re paying to take cards — but do you know what you are paying for? Let’s look at where the costs come from in the typical transaction. A transaction can involve up to seven different players, including the customer, the merchant (you), the bank that issued the card, your bank, and payment processors and gateways. Each of the banks and processors charges a fee for their service, and those fees add up. Fees vary, but we’ll use some average fees in this scenario. For example, your favorite customer Sally comes in and buys $100 worth of merchandise. She swipes her card, and the transaction immediately goes to the payment gateway, which routes the payment to the appropriate processer. The gateway charges 10 cents for this service, and the processor charges 8 cents. The processer then sends the payment to the credit card interchange, which determines how much the cardholder and merchant banks will pay in order to accept the transaction; this service costs about 9 cents. Then the transaction is routed to Sally’s bank, which charges about $2.00 to send the money to your bank, which charges you about 60 cents to accept the money. The entire process takes less than 10 seconds — and costs you $2.87. Now, normally, you won’t see your transactions broken down as such, but will pay a flat fee to your credit card processor plus a percentage of the transaction amount. In addition, some credit card processing companies charge merchants to lease the equipment necessary to process transaction, as well as startup, cancellation, and other fees.
Keeping Fees in Check
Most businesses look at credit card processing fees as a cost of doing business, and write them off on their taxes at the end of the year. Most would agree, though, that keeping that money in their pocket to start with would be better. Yet many make mistakes that lead to higher costs, including: Allowing credit cards for any transaction. If your card processor charges a per-transaction fee, you could lose money on small transactions. Many businesses require a minimum purchase amount to avoid such fees. Entering card information, not swiping. Credit and debit card magnetic strips are coded with security information that can help deter and detect fraud — and help prevent losses to your business. If you enter cards manually, you lose those features, and the risk of fraud increases, as do your costs. Establish a “swipe only” policy. Not shopping around. It’s easy to find credit card processing companies — it’s not always easy to find the one that’s best for your business. It’s important to evaluate not only the fee for each transaction, but also fees for equipment, customer service, account maintenance, and cancellation. Negotiate for lower costs; in some cases, for example, you may be able to get a fee reduced if you process a certain number of transactions each month.Image source: shutterstock
Many experts recommend that you do not use your bank to process cards. Despite the perceived convenience, most banks do not manage their own processing, and instead just markup the costs from another provider. In short, unless your bank provides its own merchant services, you’ll be paying extra for the middleman, and can find a better deal elsewhere. In addition, unless your credit card processor offers free equipment, do not lease terminals and equipment; it’s far more cost effective to buy your own equipment. Credit card processing fees are a part of doing business, but they don’t have to take a huge bite out of your bottom line. Do your homework, understand what you’re paying, and develop smart policies, and you can keep more money in the coffers.
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