Credit Card Processing and Transaction Fees Explained

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Demystify credit card processing and transaction fees. Our guide explains costs, factors, and tips to optimize financial efficiency for your business.

Credit Card Processing and Transaction Fees Explained

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Credit card processing transaction fees and credit card merchant fees are a fact of business life to all who accept this particular payment method. As both the cost of living and the cost of doing business continue to increase at the same time as the use of cash continues to decline, the case for minimising those fees makes more sense than ever.

We all know that accepting card payments is ultimately a trade-off. Between payment processors, businesses and customers there is an acknowledgement that the level of convenience that cards offer comes at a cost, but to what extent do we understand these fees, can they be reduced, and if so, how?

Understanding Credit Card Processing Fees

For all that you may not see it when you present your card in a shop to pay for something, getting your payment authorised and paid takes a lot of work behind the scenes. Your business, the issuing bank, the acquiring bank and the credit card processing company are all involved, and it is expected that this process will be as quick and smooth as possible.

Transaction fees can vary quite a lot, from 1.5% to 3.5% per transaction, but that’s only a small part of the story. Other fees will also come into play, and once these are all factored in the total cost of accepting a card payment can get as high as 5-6%. Few businesses can afford that sort of amount being knocked off their bottom line, and passing the whole of the cost onto your customers can only make you less competitive in the marketplace.

Types of Credit Card Processing Fees

The different types of credit card processing fees soon start to mount up, but do bear in mind that not all of these fees apply to all types of car payments.

Interchange fee

The bulk of your business credit card charges–as much as 70-90%–boil down to the  ‘interchange fee’. This is made by the acquirer's bank to the issuing bank with every sale, and if you’re shopping around it’s the percentage that you’ll see in the biggest letters on any website.

This rate will depend on the type of card used, but as a rough estimate, debit cards will be charged between 0.2% and 0.5% per transaction, credit cards between 0.3% and 0.9%, and business credit cards between 1.5% and 2.5%

Debit cards are the most used card type for most transactions in most sectors, but this isn’t guaranteed. It does vary by industry and if you do your business with other businesses you’ll likely see a higher percentage of commercial cards being used.

Terminal charges

Businesses operating completely online won’t need to worry about paying for a payment terminal, but any business dealing face-to-face with clients should think about terminal hire fees. This is the charge for a chip and PIN machine, with prices varying by the type of terminal. If you sign up for a longer rental contract your monthly fees will be lower, but be warned contracts are quite long, typically lasting between four and six years, and that early termination fees can apply should you wish to leave.

Gateway fees

Payment gateway fees are the costs incurred by a business to facilitate online payment via a chosen payment gateway on the website or app. Payment gateway charges are determined as a percentage of an online payment amount and depend upon the specific type of payment.

Fees vary widely, with some providers charging by the transaction at 6p-10p per transaction,  and others a flat monthly rate, often from £10 to £20 per month. Fixed rates will usually be for a set number of transactions

Authorisation fees

Authorisation fees ensure payments will go through by testing card validity, and are charged at 1p-6p per transaction.

PCI compliance fees

If your business is taking card payments, you have to comply with the Payment Card Industry Data Security Standard or PCI DSS. This ensures that all customer data is stored and transmitted securely. The cost of PCI compliance can be anywhere between £2 and £20 per month.

Additional administrative fees

You may also be charged additional administrative fees. Some processors have a one-off set-up charge for new merchants. Chargeback fees can be particularly costly, with an added charge of between £10 and £20 each time a customer charges a payment back.

Factors Influencing Credit Card Processing Fees

Four main factors will impact the cost of processing card payments:

The Company Type

Each industry and business type is classified by a “Merchant Category Code”, each of which is subject to different fee amounts that are affected by factors such as risk and business size.

Merchant Category Codes are designed by the credit card brands. Each four-digit Merchant Category Code (MCC) determines the interchange fee and specific benefits awarded to customers who shop in specific categories and card transaction rules.

The risk posed by a particular business type determines the interchange fee. Whether a business type is particularly vulnerable to refunds and chargebacks can also influence the interchange fee.

The Card Type

Generally speaking, debit cards cost less to process than credit cards because they pose much less risk to a transaction than credit cards. Debit card payments are approved payments, automatically debited from the customer’s bank account.

When your customers pay for your goods and services with their rewards credit card, however, things get more expensive. Many branded credit cards fund customer rewards through the interchange fee and pass on those costs onto you through higher interchange fees, though this should be offset against the possibility that customers may do more business on a specific card because of this.

The Transaction Method

Having the card and card owner present when they pay tends to result in a lower fee, with card-not-present transactions resulting in higher ones. Again, this is a matter of security, a matter of verifying that the card being used belongs to the payment making the payment. Different verification methods such as a signature or PIN can carry nominally different rates, but telephone orders, e-commerce, and mail order have a considerably higher likelihood of fraud and therefore carry higher interchange rates.

The Average Transaction Size

The fees charged by card issuers are made up of a combination of percentages and fixed per-transaction fees, and this means that the more small payments you take, the more you’ll ultimately be paying in fees.

Strategies to Reduce Credit Card Processing Fees

There are various strategies that you can employ yourself to help reduce your credit card processing fees. Make sure that your processor has the right merchant code for you, and try to prioritise in-person payments over card-not-present transactions, if you’re able to. If you accept smaller payments, you’re perfectly entitled to set a minimum card payment amount should you wish, though it should be added that this comes with an element of risk, if customers end up being put off by it.

Can I Negotiate Lower Credit Card Processing Fees With My Provider?

You can’t negotiate interchange and assessment fees, but the markup fee determined by the merchant account provider may be negotiable if you can present yourself to them as a high-value customer. If you’re not tied down to a contract or coming to the end of one, SwitchPal can get quotes for you and help you lower your costs.

How Can I Prevent Chargebacks and Their Associated Costs?

Chargebacks can be expensive for any business that accepts card payments, but you can take steps to minimise them. Giving clear refund policies, having an easily identifiable trading name and ensuring prompt delivery can all help to minimise the number that you receive.

A chargeback is a demand made by a credit card provider for a retailer to make up the loss on a fraudulent or disputed transaction. If a customer denies a payment on their bank statement or claims not to have received goods then they will be reimbursed immediately by their bank or credit card company. In the UK this applies to transactions worth less than £100, commonly known as the ‘chargeback scheme’. You can never fully eliminate chargebacks yourself, but there are steps that you can take to minimise them:

  • Use a trading name that is easily recognisable when consumers are searching for statements. Many chargebacks come about innocently because a customer doesn’t recognise a name on a statement.

  • Provide your customer with as much information as possible at the point of sale.

  • Make sure you have dedicated staff to deal with purchase queries and returns.

  • The period between the consumer paying for a service or product and receiving it is critical, and honest communication is vital to manage expectations, especially if a delivery is taking longer than anticipated or otherwise advised.

  • Offer refunds. Chargebacks are in place to protect the customer, and by offering refunds on products or services you are giving customers a reason to trust you. Refunds are also much easier to deal with than chargebacks.

  • Merchants who deal with high volumes of card payments may even wish to consider chargeback insurance.

When you see them hitting your bottom line, it can be easy to start complaining about credit card processing fees, but complaining about them won’t reduce them and there’s nothing that businesses can do about the fact that customers increasingly expect to be able to pay by this method. But there are things that you can do to limit these charges, either through proactive behaviours or negotiation, and while SwitchPal can’t help you with the former, we certainly can with the latter. These small amounts can quickly start to accumulate, so start cutting those costs today!

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