Accepting credit and debit cards has become an indispensable aspect of modern business operations, offering the convenience that customers expect in today’s fast-paced world. According to the Canadian Payment Methods and Trends Report 2023, credit and debit cards remain the preferred choice of payment, surpassing cash, cheques, and online transfers. The seamless nature of card transactions, coupled with perceived safety, speed, and the allure of earning rewards, continues to fuel the popularity of this payment method. However, behind the scenes, there’s a complex world of payment processing fees that business owners must navigate. This blog explains what payment processing fees entail, why understanding them is crucial, the various fee structures, additional charges to be aware of, and the essential payment card data security requirements. Knowledge of payment processing fees will help empower you as a small business owner to make informed decisions that are best for your business.

What are Payment Processing fees?

Payment processing fees are charges incurred by businesses to process electronic payments. Whether it’s through credit cards, debit cards, mobile wallets, or online payment gateways, payment processing services are necessary to facilitate transactions securely and efficiently. Fees typically consist of wholesale fees and service fees. Wholesale fees include interchange fees (paid to issuing banks) and assessment fees (paid to card networks). Factors such as card type, business type and transaction type (card-present vs. card-not-present) can affect wholesale fees. Service fees, also known as markup or discount fees, are paid to the payment processor, payment gateway and acquiring bank.

The Benefit of Understanding Payment Processing Fees

Payment processing fees may seem like a small detail in the grand scheme of running a business, but they can have a significant impact on your bottom line. An understanding of the true cost of processing payments can identify opportunities to optimize expenses and preserve profitability. Having a grasp on fee structures, services and features gives you the knowledge to evaluate providers more effectively and select the one that best suits your business needs. Taking the time to understand these sometimes-complex fees will empower you to make informed decisions that support the long-term success of your business.

Types of Fee Structures

The formula used to calculate the fees paid by small businesses to process electronic payments from customers varies by provider. The three most common payment processing fee structures are: flat rate pricing, interchange plus, and tiered pricing. Each structure has its own pros and cons; understanding them can help you choose the best option for your business needs.

Flat Rate Pricing

Flat rate pricing is a straightforward fee structure where businesses pay a fixed percentage of each transaction, regardless of the card type or transaction amount. For example, a payment processor may charge a flat rate of 2.55% + $0.12 per transaction. The simplicity of flat rate pricing makes it easier to know what expenses to expect, and identify any abnormal charges, if any arise.

Interchange Plus Pricing

Interchange plus pricing (sometimes also called “pass through”) is a more complex fee structure where businesses pay the interchange fee set by the card networks (such as Visa or Mastercard) plus a markup set by the payment processor. The interchange fee varies depending on factors like the type of card used, transaction method, and risk level. Businesses can see exactly how much they’re paying in wholesale fees and how much is being charged by the processor with this pricing method. However, since every transaction has a different payment processing rate, it does take time to sift through all the data to know what charges to expect on your statements.

Tiered Pricing

Tiered pricing categorizes transactions into different tiers or categories based on criteria such as card type, transaction method, and risk level. Each tier has its own predetermined rate, often labeled as qualified, mid-qualified, or non-qualified. While tiered pricing may seem simple at first glance, it can be more opaque than other pricing structures, as the criteria for each tier are determined by the processor and may not always be clear to the merchant. With a tiered pricing structure, it can be challenging for businesses to accurately predict their processing costs and compare offers from different providers.

Additional Payment Processing Fees

In addition to the rates for processing transactions, there are a variety of other payment processing fees. These fees can vary significantly depending on the provider and can impact overall processing costs. When entering into a payment processing agreement, it’s crucial to carefully review the terms and conditions, including any fee schedules, in the contract. Pay close attention to the fine print in your merchant statements to ensure that you understand all the fees being charged. If anything is unclear or seems unreasonable, don’t hesitate to ask for clarification. Some fees to be aware of include:

Monthly Fees: Some providers charge monthly fees payment processing fees for account maintenance, access to customer support services, or other administrative costs. These fees can vary in amount and may be fixed or based on factors such as transaction volume or account features.

Chargeback Fees: Chargeback fees are incurred when a customer disputes a transaction and requests a refund through their credit card issuer. Processors may charge a fee for each chargeback occurrence to cover the administrative costs associated with managing the dispute process.

Batch Fees: The batch fee covers the cost of processing and settling the batch of transactions. It may be a flat fee per batch or a fee based on the number of transactions in the batch. This fee is separate from the transaction fees charged for each individual credit card transaction.

Cancellation Fees: Some include cancelation fees in their contracts, requiring you to pay a penalty if you end your agreement. These fees can be significant and may deter businesses from switching to a different provider if they are dissatisfied with the service.

Equipment Fees: Many providers charge fees for leasing payment processing equipment such as card readers or subscribing to point of sale (POS) software.  Additionally, there may be fees for installation, maintenance, or software updates.

While low transaction rates may be appealing, it’s essential to consider the full picture of payment processing fees, including additional charges that may be imposed by the processor. By being vigilant, informed, and proactive in understanding your contract terms and statements, you can effectively manage your processing costs and avoid unexpected surprises that could impact your bottom line.

Payment Card Data Security Fees

The continued popularity of credit and debit cards also brings increased risk. According to the 2023 Credit Card Report by security.org, 65% of credit card holders have experienced credit card fraud in their lifetime, up from 58% from the previous year. To safeguard customer data and protect against security breaches, fraud, and identify theft, any organization that accepts, stores, processes, or transmits payment card data (regardless of size or transaction volume) is required to comply with the Payment Card Industry Data Security Standards (PCI DSS).

Compliance with PCI DSS helps to mitigate risks and build customer trust. It includes security best practices such as: use strong passwords; educate employees, use a firewall on your network and devices; check pin pads and devices regularly for tampering, and not storing cardholder data on paper. Most importantly, it requires organizations to use PCI DSS compliant POS and payment software. Failure to follow these best practices can not only result fraudulent activity, but it can also become costly with monthly non-compliance fees and hefty fines.

Many merchant service companies will offer guidance on achieving and maintaining PCI compliance. If you fail to comply, a non-compliance fee is imposed by the PCI DSS council. For businesses who are compliant, some providers will still charge a PCI compliance fee, something to watch out for when reviewing your statements.

Choosing the Right Payment Processor

With a better understanding of payment processing fees, you can assess providers according to your business requirements. There are several essential factors to consider when evaluating payment processing providers:

Reliability and Long-Term Partnership:  Look for a payment processor that is reliable, cost-effective, and committed to building a long-term partnership with your business. Choose a provider that values your business and is willing to answer questions, address concerns, and clearly outlines payment processing fees upfront. Transparency and open communication are essential for fostering a positive and trusting relationship.

Responsive Customer Service: Customer service is paramount when it comes to payment processing. Opt for a provider that offers responsive customer support, allowing you to speak to a real person whenever you have questions or encounter issues. Avoid providers with complex phone menus or convoluted support systems that make it challenging to get assistance when you need it most.

Flexible Contracts and Pricing: Avoid getting locked into lengthy contracts with rigid terms and conditions. Instead, choose a payment processor that offers short contracts and a rate-lock guarantee for the duration of the agreement. This flexibility ensures that you can adapt to changing business needs without being bound by restrictive contracts or fluctuating payment processing fees.

Security and Compliance: Prioritize security and compliance when selecting a payment processor. Look for providers that prioritize security measures and adhere to industry standards, such as Level 1 PCI DSS compliance—the highest security standard for handling payment card data. Protecting your business and customer data from security breaches and fraud should be a top priority.

Integration and Efficiency: Consider how well the payment solution integrates with your business model. Look for solutions that offer mobile payment capabilities and seamlessly integrate with your point-of-sale (POS) system. Tight integration enhances efficiency, reduces human error, and streamlines the payment process for both you and your customers.

The Best Solution for Your Business

Understanding payment processing fees is paramount for small business owners looking to thrive in today’s competitive market. Business owners can gain insight into the factors influencing their costs and make informed decisions when selecting a payment processor. Being well-versed in payment processing fees, from fee structures to additional charges and security requirements, is essential for safeguarding profitability and customer trust.

Choosing the right payment processor is a critical decision that can significantly impact a business’s success and efficiency. By prioritizing reliability, responsive customer service, flexible contracts, security, and integration capabilities, business owners can find a payment processing provider that aligns with their needs and sets them up for long-term success.

As you navigate the world of payment processing, remember to prioritize transparency, reliability, and security. With the right payment processor by your side, you can streamline your payment operations, enhance customer satisfaction, and propel your business towards greater profitability in the digital age.

Ready to optimize your payment processing and safeguard your business’s profitability? Contact us today to learn more about how ClearTEQ can help you navigate payment processing fees, ensure PCI compliance, and streamline your payment operations. Our team is here to answer your questions and provide solutions to meet your business needs. Get in touch with us here.