For many small business owners, deciphering a monthly credit card processing statement feels like trying to read a foreign language. The array of fees, rates, and confusing terminology can make it difficult to know exactly what you"re paying for and whether you"re getting a fair deal. This guide breaks down the components of processing fees to help you understand your costs and identify potential savings.
The Three Main Components of Processing Fees
Every credit card transaction involves fees that are split among three primary entities: the card-issuing bank, the card network, and your payment processor.
1. Interchange Fees (The Largest Portion)
Interchange fees are the non-negotiable rates set by the card networks (Visa, Mastercard, Discover, American Express) and paid to the card-issuing bank. These fees make up the vast majority of your total processing costs, often accounting for 70% to 90% of the total fee.
What determines the interchange rate?
- Card Type: Rewards cards, corporate cards, and premium cards typically have higher interchange rates than standard debit or basic credit cards.
- Transaction Type: Card-present (swiped, dipped, tapped) transactions are considered lower risk and have lower rates than card-not-present (keyed-in, online) transactions.
- Merchant Category Code (MCC): Your industry affects your rate. For example, a grocery store might have a different rate than a high-risk online retailer.
2. Assessment Fees (The Network"s Cut)
Assessment fees are also non-negotiable and are paid directly to the card networks (Visa, Mastercard, etc.) for the use of their brand and infrastructure. These fees are generally much smaller than interchange fees, often a fraction of a percent.
3. Processor Markup (The Negotiable Part)
This is the fee paid to your payment processor (like Custom Payments) for facilitating the transaction, providing customer support, and maintaining the technology. This is the only part of the fee structure that is negotiable.
Common Pricing Models:
- Flat-Rate Pricing: You pay a single, fixed percentage (e.g., 2.9% + $0.30) for all transactions, regardless of the card type. It"s simple to understand but often more expensive for businesses with high volume or large average tickets.
- Tiered Pricing: Transactions are categorized into "tiers" (e.g., Qualified, Mid-Qualified, Non-Qualified) based on risk and card type. While it seems simple, it can be opaque, and many transactions end up in the more expensive tiers.
- Interchange-Plus Pricing: The most transparent model. The processor passes the exact interchange and assessment fees directly to you, plus a clearly defined, fixed markup (e.g., Interchange + 0.20% + $0.10). You know exactly what the processor is making.
Common Additional Fees to Watch Out For
Beyond the per-transaction fees, many processors charge additional monthly or annual fees. It"s crucial to review your statement for these:
- Monthly Minimum Fee: A fee charged if your processing volume doesn"t reach a certain threshold.
- Statement Fee: A charge for receiving a paper or electronic statement.
- PCI Compliance Fee: A fee for maintaining Payment Card Industry Data Security Standard compliance. Sometimes, a "PCI Non-Compliance Fee" is charged if you fail to complete your annual questionnaire.
- Gateway Fee: A monthly fee for using an online payment gateway (common for e-commerce).
- Early Termination Fee (ETF): A penalty for canceling your contract before the agreed-upon term ends. (Note: Custom Payments offers month-to-month agreements with no ETFs).
How to Lower Your Processing Costs
- Understand Your Pricing Model: If you"re on tiered pricing, consider switching to interchange-plus for greater transparency and potential savings.
- Encourage Debit Card Use: Debit cards generally have lower interchange rates than credit cards.
- Ensure Proper Processing: Always swipe, dip, or tap cards when possible. Keyed-in transactions carry higher rates due to increased fraud risk.
- Settle Batches Daily: Delaying your daily batch settlement can sometimes result in higher interchange rates.
- Explore the EDGE Program: Consider programs like Custom Payments" EDGE Cash Discount Program, which allows you to pass the cost of processing to customers who choose to pay with a card, effectively reducing your processing fees to 0%.
Get a Free Statement Analysis
The best way to understand your specific fees is to have an expert review your current processing statement. At Custom Payments, we offer a free, no-obligation statement analysis. We"ll break down exactly what you"re paying, identify hidden fees, and show you how much you could save by switching to a more transparent pricing model or our EDGE program.
Contact us today to take control of your processing costs.