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Business owners can give potential customers more payment options by choosing to accept debit and credit cards. If you run an online business, it’s basically a necessity.
Before you can accept cards, you typically need to open a merchant account and sign a payment processor agreement. The merchant account lets you accept electronic payments, while the payment processor helps process purchases.
Often, a company will offer your business both services at once.
For example, you can open a merchant account with Bank of America and receive point-of-sale hardware and payment processing services.
Some merchant services providers, such as Chase Paymentech™, handle both the account services and payment processing in-house.
What happens after a customer pays with a card?
There’s a lot going on behind the scenes when a customer makes a purchase with a debit or credit card.
But first, there’s some terminology you need to know to understand the process.
The issuing bank is the financial institution that issued your customer’s credit card. The issuing bank sends the money, and then the customer repays the issuing bank.
An acquiring bank can accept the funds and deposit them into your business bank account.
The payment processor, such as Vantiv or First Data®, helps work out the details for (or as part of) the acquiring bank, including verifying cardholder information, creating secure connections and handling disputes.
A payments network or association — such as Mastercard®, Visa® or Discover® — helps connect these parties (the issuing bank, the acquiring bank and the payment processor) and facilitates the processing of the payment.
In short, the process may work like this:
1. The customer swipes or inserts his or her card.
2. Your terminal sends the card’s information to the acquiring bank.
3. The acquiring bank asks the credit card network to authorize the transaction with the customer’s issuing bank.
4. The issuing bank sends the authorization or denial response back to your terminal.
5. If the authorization is approved, the customer’s issuing bank sends the money to your acquiring bank.
All the moving parts come at a cost, and some of the costs get passed on to the merchant.
But what are the different fees and are there ways to minimize them?
Non-negotiable interchange and assessment fees
The largest portion of your credit card processing fees often depends on the interchange rate.
The interchange rate is a fee that the acquiring bank pays to the issuing bank each time a cardholder makes a purchase. Interchange rates get passed on to merchants, and they’re often a percentage of the sale amount or a percentage plus a fixed rate. They can vary depending on:
- A card’s brand: Visa®, Mastercard®, Discover®, American Express®, etc.
- The type of card: Debit card, credit card, rewards card, etc.
- The merchant: Different merchants have varying levels of risk, and your fees may depend on your industry and the products you sell.
- How you process payment: Swiping, inserting, typing in the number, etc.
With each purchase, you’ll also pay an assessment fee, which is how the card networks make money. Then there are additional fees that you’ll pay to your payment processor for its services.
You can’t negotiate the interchange or assessment fees, but you can shop payment processors and pricing plans to lower the fees you pay to the processor.
Payment processing plans
“When you’re looking at pricing, there are generally two types of plans that merchants can be on,” says Wayne Akey, who’s worked in the payments industry for nearly 20 years and is president of Agile Payments. “One is a tier plan, and the other is cost plus.”
You may also come across flat-rate plans, which charge you the same amount no matter which type of card your customer uses.
The fees you pay to the processor could be advertised or labeled in different ways, but the discount rate is a common term for the combined interchange rate (which you may pay as an interchange reimbursement fee), assessment fee and the payment processor’s markup.
- Tiered plan. With a tiered pricing plan, the processor determines which tier or bucket a transaction is part of and charges an associated fee. For example, the amount you get charged can vary if the customer uses a debit card or rewards credit card.
- Interchange-plus plan. With an interchange-plus plan, you’ll pay the interchange reimbursement fee plus a flat-rate percentage or dollar-value fee. “Most small businesses should be paying no more than 0.25 percent (plus interchange),” Akey says. Depending on the processor, you may pay the interchange rate, plus a percentage of the transaction amount, plus a few cents for each transaction.
- Flat-rate plan. Some payment processors charge a flat rate, which is essentially a nonvariable interchange-plus plan. For example, Square charges 2.75 percent on credit card transactions, regardless of the type of card. However, it does have an alternative rate (3.5 percent plus 15 cents) for card-not-present purchases (such as if you key in a card’s details from a phone order). Flat-rate plans may be more expensive than other types of interchange-plus plans, but they’re also a lot easier to understand.
Akey says merchants are sometimes intrigued by tiered-pricing plans because the processor may advertise the lowest tier’s rates. However, many transactions may not qualify for that low rate.
While you should compare all your options to determine what’s available and best for your business, Akey thinks many business owners can save money by opting for an interchange-plus plan rather than a tiered plan.
Whichever option you choose, consider avoiding long-term contracts so your business can remain flexible. This way, you can compare your options and switch to a new processor if it’ll save you money.
Thoroughly researching your options can also give you ammo during negotiations. Sometimes you can negotiate the payment processing rates and other fees. You could also ask the processor to remove some terms, such as the cancellation fee, from your contract.
Transactional processing fees can eat into your margins. However, it’s only one of dozens of potential fees that payment processors charge business owners. Here are a few others you might see:
- Account setup fee. You might have to pay a fee to get started. You can easily compare this fee between providers.
- Terminal purchase fee. You can buy your point-of-sale terminal, which is often a good investment compared with renting or leasing a terminal.
- Cancellation fee. A one-time fee if you close your account before your contract ends.
- Monthly or annual fee. A recurring charge to keep your account open.
- Monthly minimum processing fee. The difference between how much you paid in processing fees from transactions and your monthly minimum, if you have one.
- Terminal lease or rental fees. Some payment processors require you to sign a long-term lease or offer to rent you a payment terminal or strip reader. Some payment processors give you this equipment for free.
Payment card industry (PCI) fees
The Payment Card Industry Data Security Standard is a set of security requirements agreed to by five major credit card brands. Your processor or merchant account provider could charge a PCI compliance fee to cover the cost of ensuring your system handles customers’ credit card data appropriately. Noncompliance could also result in fees, higher processing charges and costs associated with data breaches or fraud.
- Cardholder dispute. Processors may charge you a fee each time they look into a credit card transaction because a customer files a dispute.
- Chargeback. If the customer complaint results in a chargeback (a refund to the cardholder) you may need to pay another fee.
- Batch payment processing. A small fee that your processor could charge each time your business submits a batch of credit card purchases for processing, often once or twice a day.
Akey says two fees are especially important to pay attention to: the terminal fee and the PCI fee. They are easy to compare and you may be able to negotiate potential savings.
“The best way to save money on processing fees is to pick a reputable processor who has few, if any, additional fees beyond processing costs,” says Melissa Johnson, a writer with online payment comparison site Merchant Maverick.
It’ll be easier to understand what you’re paying for each month and can help prevent you from getting caught off guard by fees in the future.
“Merchants also tend to forget they have negotiating power,” Johnson says. “Even small companies can request waivers or ask for interchange-plus pricing instead of tiered pricing. Don’t be afraid to ask for what you want.”