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According to a recent report from the Federal Reserve, 83% of US adults have a credit card, 94% of US adults with an income over $50,000 have a credit card, and 98% of US adults with an income over $100,000 have a credit card. With credit cards being ubiquitous among US consumers, small businesses need to accept credit card payments. However, there are fees associated with processing credit cards and small businesses need to understand how to navigate them to minimize credit card machine charges. This article has two main sections that focus on minimizing credit card transaction fees and how to implement alternative payment methods (using merchant account infrastructure likely already in place) to minimize fees and give customers more choices to make a payment.
Ways to Minimize Credit Card Processing Fees
There are myriad factors when it comes to minimizing credit card processing fees and there is no one-size-fits-all solution for every small business. However, we will break down a range of tactics to minimize credit card machine charges and it is up to each small business to determine if the tactic discussed applies to their specific situation:
- Surcharge: A surcharge is a percentage-based markup that the business is requiring the customer to pay to use their credit card. The fee is intended to offset the cost of credit card processing fees and is not intended to be a revenue driver for businesses. Not to be confused with a convenience fee – which is always a flat dollar amount – surcharges are typically legal business practice with some exceptions. These 10 states plus one US territory have made adding a surcharge illegal: California, Florida, Kansas, Maine, New York, Oklahoma, Texas, Utah, Connecticut, Massachusetts, and Puerto Rico. Although a surcharge is a legitimate way to offset the credit card fees (except in the states/territory we just discussed), small businesses should consider the potential impact on their customers’ experience and what their competitors might be doing.
- Switch to interchange-plus pricing: interchange-plus pricing is an adjustable-rate pricing structure where processing fees depend on the card brand (i.e., Visa, Mastercard, Discover, American Express) used by the cardholder. This pricing model can on average have lower rates than flat-rate pricing but it depends on your business and you need a firm grasp of the types of cards your customers use. For example, if you are a high-volume credit card processor and your customers frequently use Visa, Discover, or Mastercard, interchange-plus pricing could be a great way to minimize your credit card machine charges. Helcim, one of many vendors in the space, on average for in-person transactions charges 1.86% + $.08 and on average 2.40% + $.25 for keyed/online transactions. A deeper analysis of your specific transactions is required, but on the surface, this is much better than typical flat fee pricing.
- Switch to flat-rate pricing: For certain businesses, flat-rate pricing might be preferable to interchange-plus pricing. Interchange-plus pricing is an adjustable-rate pricing model where processing fees depend on the type of card used. Businesses need to research interchange fees for each card whereas flat-rate pricing is more straightforward to plan for. In some cases, the interchange rate for American Express transactions can be at, near, or over 3% (typically around travel and hotels) which means interchange-plus pricing would be more expensive than flat-rate pricing for those transactions. It comes down to knowing your data and the services you sell.
- In-person vs online vs manual entry: in-person swipe, tap, or chip credit card transactions made on a point-of-sale card reader are cheaper than both online credit card and manual-entry transactions. There is less risk of credit card fraud for an in-person transaction. If it makes sense for your business to encourage in-person transactions, this is a way to lower your processing fees. Unfortunately for certain eCommerce businesses with no physical footprint, this savings tactic might not be possible because you can only accept online payments. For example, Square, one of many credit card processing companies, charges 2.6% + 10¢ per transaction when the card is present, 2.9% + 30¢ per transaction when a customer makes a purchase online, and 3.5% + 15¢ for card-not-present transactions such as when you manually key in your customer’s card details into the pos system or use a card on file.
- Shop around: There are a lot of vendors in this space and competition among them means better pricing and lower fees for your business. You might be paying higher fees and not realize savings is possible simply by switching vendors. Many websites offer comparisons and calculators to help you determine which payment processing service is best suited for your small business. Certain vendors charge monthly fees, while others do not, etc. For additional information and a breakdown of popular vendors, please read our article titled The Best Credit Card Vendors to Consider for Your Small Business in 2022.
- Negotiate: You might as well ask! Especially for businesses that require a custom solution and have an account manager at their vendor they can talk to. Low-volume, occasional-sale businesses might not have the negotiating power to get their rates lowered. Keep in mind that businesses can’t negotiate the rates of interchange-plus pricing with credit card issuers. For example, if Visa’s posted interchange rate for a certain card is 1.65% + 10¢ per transaction, you’re unable to contact Visa to try to get them to lower that number or you. However, you can attempt to negotiate with your merchant account.
- Require a minimum purchase amount: For small business owners that sell low-cost inventory – think a convenience store at the corner – requiring a minimum purchase amount can save on credit card processing fees and potentially losing money. If a customer were to purchase something for $1 or less, the fees alone might cause the store to lose money on the transaction. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 permits businesses to impose a minimum purchase amount of up to $10 for credit card use. The $10 minimum will help offset the credit card processing fees or encourage the customer to use cash or buy more. Keep in mind that minimum purchase amounts cannot be applied to transactions that are processed with a debit card. Similar to a surcharge, small businesses should consider the potential impact on their customers’ experience and what their competitors might be doing.
- PCI Compliance: PCI compliance is a set of data security guidelines and practices around the handling of your customer’s sensitive credit card information; a billing address is an example. A merchant account might charge a compliance fee, a non-compliance fee, or no fee at all. Non-compliance fees are usually higher than compliance fees. Fees for PCI compliance come down to who is handling, storing, and safeguarding the customer’s data. It might be a small business or it might be the merchant services provider. Although not part of PCI compliance, another way to maintain a strong data security posture is to process payments by having your customers use a credit card with an EMV chip. Chip-based security is common on credit cards today and EMV cards store payment information on a secure chip instead of a magnetic stripe.
- Reduce Chargeback Fees: Most merchant accounts and credit card processing companies have service fees around chargebacks. The most common chargeback scenario is when a customer calls their credit card company or card-issuing bank and claims they do not recognize a charge that was made with their card. If your business receives a high percentage of chargebacks (anything near or over 1% would be considered high), you need to audit your operations. In addition to chargeback fees, companies with a high transaction volume will also be paying in the form of time, effort, and energy of the employee who has to deal with chargebacks.
Alternative Payment Methods that can Minimize Credit Card Processing Fees
Giving your customers a choice in how they pay you is part of providing good customer service. In addition to credit cards, small businesses can accept other forms of payment that will minimize credit card machine charges. Payment processors still charge fees for other forms of payment, but relative to credit card fees they can be a lot less. We will break down a range of alternative payment methods and their associated tactic to encourage customers to use them. Ultimately it is up to each small business to determine if the method discussed applies to their specific situation:
- Debit Cards: A very common credit card alternative is a debit card. When a consumer uses a debit card, money is withdrawn directly from the consumer’s bank account as opposed to a credit card transaction where the money is lent to the consumer. Because the transaction is settled, there is less risk in the transaction which results in debit cards having a lower processing cost, which means the business keeps more money. However, the business only realizes these savings when using interchange+ pricing as flat-rate credit card processors typically charge the same fees for both credit cards and debit cards. For example, PayPal’s standard rate for receiving domestic transactions on standard credit and debit card payments is 2.99% + a fixed fee per transaction. The base Interchange Rate for a debit card is 0.800 % + 15¢ per transaction. There are other fees on top of that, but they don’t exceed PayPal’s posted merchant fee payment processing rates.
- ACH Direct Debit: For certain businesses, offering direct debit payments can make sense. Maybe not for your local coffee shop, but for certain small businesses where you make monthly, quarterly, or yearly payments that are typically larger than everyday expenses. For example, insurance agencies offering ACH direct debit can make sense. ACH is when your customer pays you directly from their bank account. The fees associated with ACH can be much lower than credit card processing fees depending on the size of the payment and frequency of payments. With merchant services providers like Stripe, businesses can accept payments or recurring charges securely with ACH debit and pay a 0.8% fee that is capped at $5.00 for standard settlement.
- Cash: Gas stations frequently post the cash price and the credit card price for gas. Due to the nature of their business, both high-volume and higher-ticket transactions, credit card machine charges can add up. Cash is promoted as a way to save the business money as there are no fees whatsoever when a customer pays in cash.
With so many factors at play, each business needs to understand their payments data to determine which tactic(s) it can implement to minimize its credit card machine charges. With credit cards being so ubiquitous among US consumers, it is worth it to take the time and make the right decision. For additional insight into merchant accounts and credit card processors, visit our article titled The Best Credit Card Vendors to Consider for Your Small Business in 2022.