How to Lower (Or Offset) Credit Card Processing Fees

Aaron Stahl / Merchant Processing / September 12, 2022

It costs money to make money — that’s what they say. But for many business owners, it can feel like they’re constantly flushing 3%-4% of their sales down the drain on processing fees.

But you can find ways to minimize those costs as much as possible. Keep reading to understand where credit card processing fees really come from and what you can do to lower those fees.

What Is a Merchant Processing Provider?

A merchant processing provider is a third-party company that acts as a middleman between your business and card-issuing banks. Also referred to as payment processing providers or credit card processing providers, they charge merchants a percentage of every payment that is conducted through them.

In exchange for their fee, they facilitate the complicated process of accepting credit cards at your business. For example, on top of simply allowing businesses to take credit cards as payment, merchant process providers keep sensitive customer data secure, help companies track expenses, and provide payment data to optimize operations.

With new technology emerging each day, your payment process provider should offer new tools to help your business accept all forms of payments, such as traditional terminals, contactless, mobile, and virtual terminals.

Do Businesses Have to Use a Merchant Processing Provider?

In this day and age, it’s essential for businesses to accept credit cards as a form of payment. If not, you run the risk of losing out on valuable sales.

Traditionally, a company would have to set up a merchant account through a bank to accept credit card payments. These are special accounts where the bank holds your money until the transaction is fully processed. Banks are picky about approval for merchant accounts since they are assuming the risk of credit card charges. They also require long-term contracts and charge various credit card fees for businesses.

While you could still set up your business’s payment processing through a merchant account, working with a payment service provider has a much quicker and easier setup and may not require long-term contracts.

Popular Credit Card Processing Companies

There are hundreds of merchant processing providers to choose from when businesses are looking for lower credit card processing fees. Some of the most popular companies include:

  • Block
  • Stripe
  • Stax
  • Helcim
  • PayPal
  • First Data
  • World Pay
  • Heartland
  • Payment Logistics

Types of Credit Card Processing Fees

When processing credit card payments, there are a number of fees paid on each transaction that can originate from any of the financial institutions enabling these payments. This percentage is also misleadingly known as the merchant discount rate. The total processing fees typically fall between 1.5% and 3.5% percent, which can add up to significant amounts pretty quickly, even for small businesses.

The types of credit card processing fees include:

  • Interchange fee: This percentage of the charge goes to the banks that issue credit cards. It is typically the largest portion of processing fees, between 1.5% and 3.3%, and is set by each network twice annually. These fees go to Visa, MasterCard, Discover, or American Express.
  • Assessment fee: Another fee paid directly to the card issuer to allow the merchant to accept certain credit cards. The fee is determined by the monthly sales run by a company and can be around 0.13% to 0.15% on average.
  • Merchant processor fees: These are the fees your merchant processor charges to facilitate the transaction between you and the banks that issue credit cards. They can be broken down into many different costs such as monthly fees, batch fees, chargeback fees, services fees – the list goes on. These fees can be negotiable, and it’s essential that the merchant services provider you choose is fully transparent about what and how they charge.

10 Ways to Lower Credit Card Processing Fees

While that may look like a lot of fees your business will be charged to accept credit cards, the benefits outweigh the costs for most companies. Still, business owners will want to do anything they can to raise overall profits. Even if it’s only a tiny percentage of your total sales, it can add up to a lot over the course of a year or more.

Here are ten easy ways to lower credit card processing fees:

1. Shop Around and Negotiate for the Best Rates

The first and most obvious step should be to search for a merchant processing provider that offers low credit card processing fees. With hundreds of options, you can use the competition to your advantage. Compare rates of competitors to negotiate lower prices with the provider of your choice.

Businesses can also leverage their transaction volume to negotiate lower fees. While merchant services providers may not have any control over interchange and assessment fees, they can potentially lower or eliminate merchant processor fees if you can give them a good reason.

2. Compare Pricing Structures

Merchant service providers have different pricing models, and while one might make the most sense for one type of company, another might be more beneficial for a different one. Therefore, it’s essential to consider the different pricing models in relation to your business’s specific needs.

  • Flat-rate pricing: A predetermined and constant fee is charged for every transaction regardless of the charge amount. This may be beneficial when it comes to predicting cash flow, but you’ll likely end up with high fees.
  • Tiered pricing: Charges are classified into tiers – qualified, mid-qualified, or non-qualified – and then fees are based on the tiers. The tiers are based on the type of card your customer uses, so businesses have no control over how they’re classified.
  • Interchange plus pricing: Fees are based on the interchange rates currently set by the credit cards. Merchant service providers will likely add additional fees on top of that. This pricing model guarantees that when interchange rates go down, you’ll get your share of the savings.

3. Avoid Long-Term Contracts

One of the benefits of using a payment processing provider instead of a merchant account is to avoid long-term contracts, so don’t get talked into anything long-term. With flexible contracts, you’re free to change providers if yours raises their fees. Without a contract in place, you can avoid having to pay cancellation penalties.

4. Utilize Interchange Optimization

One area where you can find the most significant savings is with interchange optimization. This requires identifying specific processing habits that can qualify you for the lowest rates available. Unfortunately, this isn’t the most straightforward process for the average merchant to tackle independently. Many complex variables go into how a business’s interchange fees are calculated.

Since interchange optimization is extremely complicated for businesses to fully conduct on their own, you can utilize the skills of experts such as P3 Cost Analysts. With our understanding of SIC codes and payment gateways, we can help you reduce your interchange fees and save your company money.

5. Minimize Chargebacks

Chargebacks are when a customer successfully disputes a charge on their credit card. When this happens, processors will hit you with a chargeback fee, which can cost you up to $100. Plus, you’re potentially already losing money from the sale. You can try to keep your chargeback rate low by implementing measures like an address verification system and using chip card readers to limit your liability.

Some processing providers offer chargeback alerts that will let you know when a customer has begun a dispute but before it has already turned into a chargeback. This way, you can try to work out the issue with the customer before you’re stuck with the high chargeback fee.

6. Limit Potential Fraudulent Charges

If you come off as a high fraud risk to your merchant services provider, they will hit you with higher card processing fees. There are some steps you can take that limit issues with fraudulent charges that are similar to the ideas that limit chargebacks.

You’ll want to avoid manual entry of credit card information if at all possible. Not only does this leave your business at a greater chance of experiencing fraudulent charges, but they can also have higher transaction fees because of the security risk. Always try to swipe cards or use the chip card readers.

On top of that, requiring security information can protect business owners against potential fraudulent charges. For example, it’s a good idea to require customers to enter the billing ZIP code and security code or even implement an address verification service.

7. Tap Into Level 3 Credit Card Processing

Credit card transactions can be sorted into three different types of data levels. Businesses that qualify can access the lowest possible processing fees by collecting the highest amount of data during transactions. On top of lowering rates, level 3 credit card processing reduces the risk of fraudulent charges, gets businesses paid faster, and gives you access to more customers and, thus, more sales.

Level 3 processing is only offered by Visa and Mastercard, and each has specific requirements. But qualifying for level 3 is just the beginning. Utilizing level 3 data to lower your credit card processing fees is a complicated process, but third parties like P3 Cost Analysts can help you reach the highest potential savings.

8. Accept ACH Payments

Sometimes it makes more sense for a business to accept ACH payments instead of credit card payments. This would be the case for businesses with a lot of recurring transactions. ACH payments clear faster and with much lower fees than credit cards.

9. Uphold Payment Card Industry Data Security Standards

Payment Card Industry (PCI) Data Security Standards are an industry-wide set of rules and procedures designed to optimize payment security and protect cardholders’ sensitive information. If your business isn’t PCI compliant, they will charge a noncompliance fee each month. Following these security guidelines can save you money on fees but also acts as one more safeguard against fraudulent charges.

10. Conduct Continuous Invoice Audits

It’s the merchant’s responsibility to ensure that payment processors are billing them correctly. Each month, you should check your statements and make sure you understand what you’re being charged. Processors may gradually raise their prices without informing you, and some are even guilty of making up fake fees.

Auditing merchant processing fees is a lengthy and complicated process with many different moving parts. P3 Cost Analysts is a professional cost reduction firm that can work to reduce your merchant processing costs. We will examine your invoices and help your business find low credit card processing fees. For example, we can help with interchange optimization, fee negation, reduction of chargeback fees, and correction of padded interchange fees.

How to Offset Credit Card Processing Fees

Another option for business owners, instead of going through all these steps to lower their credit card process fees, is to offset them by passing them off to the consumer. This is done quite easily by charging customers with a credit card convenience fee.

There are rules for charging credit card convenience fees that are put into place by the card networks. The main rule is that if you’re going to charge your customers a fee for using a credit card, you must offer alternative payment methods.

Convenience fees are different from surcharges, which are another way you can offset your processing fees by having your customers pay for these costs. Surcharges are governed by state laws and are actually illegal in six states.

Whether you’re considering charging a convenience fee or surcharge to your customers, make sure you fully understand state regulations or credit network rules on the subject and ensure you comply.

Average Client Savings With P3 Cost Analysts

Going through all of these steps in search of low-fee credit card processing could be a nightmare for you and your business. The good news is that you can take a much easier approach to lower credit card processing fees by working with P3 Cost Analysts.

Our clients save an average of 15% – 20% on merchant processing costs. We’ve helped businesses from many industries find savings, often without needing to change payment processors. If you’re ready to lower credit card processing fees for your transactions, schedule a risk-free merchant processing audit with our team today.

Lower Credit Card Processing Fees Are Just Around the Corner

The world of merchant processing fees and providers can be very confusing and difficult to navigate. Understanding the different types of fees that you’re subject to during credit card transactions is only the first step toward lowering processing costs. After that, there are many steps you can take towards reducing fees, each one more confusing than the last.

Cut right to the chase by working with a cost reduction consulting company like P3 Cost Analysts. With our full merchant processing audit, we can have you on the right track towards lowering processing fees in no time at all.

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