Consumers nowadays tend to prefer using their credit cards to pay for both small and large purchases. If you don’t accept credit card payments at your small business, you miss out on many potential sales. An online payment platform or a credit card processor is an essential investment any business should have today.
It is vital to know that the process of accepting credit card payments comes with fees and potential chargebacks. These can add up fast and might affect your finances. That is why it is critical to get to know them to avoid paying more than what you have to.
Credit card processors generally charge you a processing fee for every credit card payment your business accepts. Moreover, you may be charged additional fees depending on what type of pricing model your processor uses. Hence, make sure to read reviews of various processors online, such as a comprehensive stripe review.
It is essential to know that transaction fees in credit card payments can be split into two primary kinds. One is wholesale, and the other is markup.
It is essential to know that card networks and issuing banks charge wholesale or interchange fees. On the other hand, markup fees are charged by the credit card processor and payment gateway.
Below are the three types of credit card processing fees you should know about:
This type of credit card processing fee is the same as mentioned earlier. It is considered a non-negotiable fee that can be paid for processing the transaction and the risks of accepting credit card payments. Furthermore, the interchange fee is the percentage of the total purchase and a set transaction fee set by each card network.
This type of fee is considered the highest cost for credit card payment processing and is typically affected by the type of credit card involved in the payment transaction. The average interchange fee is about 18% for credit cards and around 0.3% for debit cards in the US. However, the actual rate a merchant will pay tends to vary.
Service or Assessment Fee
A service fee is also considered a non-negotiable fee. The card network charges this. Moreover, this type of fee is a small percentage and can be affected by your business’ transaction volume and risk level as evaluated by the card networks.
It is vital to know that each payment processor charges its fees. This is also known as the payment processor markup. Furthermore, this type of fee varies depending on the pricing plan the processor implements.
The following are different types of pricing models, most payment processors use:
When it comes to a flat-rate pricing model, the processor charges your business with a simple fixed fee for all debit and credit card transactions regardless of the type of card used for the payment. Furthermore, this pricing model merges the markup and wholesale fees instead of separating them.
The processor will charge a fee based on the card type used in the payment transaction, the overall transaction volume of your business, and how much risk is connected with the transaction. This pricing model is considered the most complex type and typically confuses merchants.
This is considered the most common type of pricing model. It is also known as the most cost-effective and transparent. Moreover, the merchant is charged with a percentage of a transaction and a fixed per-transaction fee for interchange plus.
The processor charges a flat service fee per month when it comes to the subscription pricing model and a small per-transaction fee. Moreover, the wholesale fee is charged independently from the markup fee.
One of the problems linked to chargebacks is the fees businesses often face. Chargeback fees are considered as incidental fees a payment processor may charge you each time one occurs. These fees usually range from $20 to $50. Furthermore, it can also reach up to $100, depending on your processor.
Some processors charge a flat rate fee for the chargebacks you incur. On the other hand, others tend to charge additional fees linked with the process of disputing the chargeback on your behalf.
Chargebacks are both a financial and operational issue for business owners of all sizes. Merchant revenue chargebacks equaled a total of $19 billion in 2017. Moreover, there are various reasons a customer initiates chargebacks, including fraud.
Credit card processors can be costly; hidden fees can add up the costs fast. On the other hand, the risk of chargebacks can put you in a bad situation for the price of the product or services you have sold, putting your ability to accept credit card payments at risk. Hence, it is critical to be aware of credit card processing fees and possible chargebacks before you decide to open an account and begin to accept credit card payments at your business.
Allan Smith is a professional finance writer specializing in personal finance. He has worked in the finance sector for a long time. He believes that everyone’s economic and life situation is isolated, and he keeps this fact in mind while providing personal finance advice in his blog Day to Day Finance. All the people seeking financial guidance are in different stages of life. Allan loves to explore every possible angle of personal finance so that anybody can get help.