The Ultimate Guide to Lowering Credit Card Processing Costs

Credit card processing fees can be astronomical for businesses, even those that pay low rates. But you can use these tips to lower them significantly.

The first step to lowering your credit card processing costs is understanding how they work. Then you can shop processors and pricing models on a level playing field.

Know What You’re Paying

Whether you are accepting payments online or in person, it’s essential to understand the assortment of fees that go into processing credit card transactions. This will allow you to compare rates and negotiate more favorable pricing with payment processors.

There are three components to credit card processing fees: interchange, assessments, and markups. Interchange and assessment fees are fixed and non-negotiable, going to the card association (Visa, MasterCard, American Express, and Discover). The remaining portion of the costs is the processing markup, which is negotiable.

Processors often bundle the interchange and assessment fee into a single “tiered” rate, making it difficult to see what you pay over cost. This is why avoiding tiered pricing from the outset is essential. Trying to negotiate lower fees when a processor charges you this way is like playing whack-a-mole; once you have secured a better deal on one fee, another will pop up to take it away from you again.

Also, remember that the types of credit cards you accept can impact your overall processing costs. For instance, debit cards have much lower interchange fees than credit cards. This is because they are less risky for the issuers to process and therefore don’t require as much verification from the cardholder or a merchant. This is why it is often more cost-effective for smaller businesses to use a mobile payment app, such as Square, instead of leasing expensive credit card terminals.

Know What You’re Negotiating

Many business owners must be aware that credit card processing fees are negotiable. Negotiating a suitable pricing model is the first step to lower credit card processing fees. The wrong pricing model will set you up for expensive processing costs.

For example, some processors “bundle” together interchange and their markup, making it difficult to separate the negotiable portion of your fees. This is also known as tiered pricing, and it can be a nightmare for businesses to negotiate rates. The problem is just when you think you have the rates locked in; the processor will spike your rates again. It’s a game of whack-a-mole that can cost you a fortune in credit card processing fees.

When negotiating your credit card processing fees, focus on the markup portion of your expenses. That’s the only area where you have a lot of wiggle room compared to the fixed components of your fees (interchange and assessments). A good target is to get your markup down to 12% – 20% of your total processing costs.

It’s important to carefully review all of the quotes you receive from different providers before you make a decision—attention to the markup rate, per transaction fee, monthly fees, and authorization rate. Don’t be afraid to ask the provider to break these rates down so you can fully understand what you are paying for.

Know What You Can Do to Lower Your Fees

While credit card fees may seem an inevitable part of doing business, there are steps you can take to cut these costs significantly. By understanding how the fees are charged, why they’re charged, and how you can negotiate them, you can save your business money without sacrificing your customer experience.

Payment processors typically charge various fees for processing credit card transactions, including transaction fees (a percentage of the total transaction value), assessment fees, authorization fees, monthly fees, and equipment fees. These fees can add to your bottom line, leaving you with astronomical monthly credit card processing bills.

When negotiating rates, your goal should be to get the markup portion as low as possible for the fixed expense components (interchange and assessments). A competitive rate is a markup that’s 12 – 20% of your total cost.

The best way to lower your fees is to negotiate with your processor. Start by asking if any fees can be waived or reduced in the future. Then, leverage your transaction volume by clarifying that you bring more value to the processor than other customers. This will make them want to work with you. It also helps to be proactive in reducing fraud and minimizing chargebacks, as this can reduce your fees.

Know What’s Right for Your Business

As the world becomes more cash-free, credit card processing fees are an ever-increasing burden for small business owners. In 2019, they cost small businesses $116 billion. Knowing how to shop around and negotiate can save you a lot of money, but you must also understand how these fees work.

There are many different types of credit card processing fees. Some are a percentage of the transaction, while others are a flat fee per transaction. There are also several one-time fees and monthly charges that payment processors may tack on to their base rates.

Behind the scenes, credit card processing involves seven entities: you (the merchant account), your customer’s issuing bank, the acquiring bank that connects you to your customers, payment networks, and credit card processing companies.

Ultimately, most of your fees are interchange and assessment rates from Visa, MasterCard, Discover, and other card associations. While reducing these through your processor is possible, the key to savings is fees above interchange and assessment. These fees and additional fees can be negotiated, like software or hardware costs. Be aware of these, and keep your numbers growing to continue to wring value out of your processor’s fees. This is the only way to make credit card processing fees less of a drag on your bottom line.