Credit Card Processing, Part 3: Reduce Cost

Credit cards are the most important payment method for e-commerce customers. But for merchants, the backend infrastructure for processing and collecting funds is often confusing.

This is the third and final post where I answer frequently asked questions about payment processing. The first part, "Part 1: Learning the Jargon," contained a comprehensive glossary of industry terms as well as explanations of fixed versus percentage fees. I've enabled the defined terms when used below,

The second part, "Part 2: Pricing Models," dealt with the details of "standard pricing," "stored pricing," and "interchange plus." Each model has its advantages and disadvantages, which I have included in that article.

In this "part 3" post, I will answer questions related to reducing treatment costs.

My processor charges a flat fee for e-commerce transactions regardless of the card. Is that normal?

If you are charged a single flat rate for all your domestic e-commerce transactions, you have a flat rate plan. (International transactions usually have a higher fee.) Stripe, PayPal, Square and many other processors offer this pricing model.

Fixed-price pricing is acceptable if you prefer simplicity. You can easily calculate treatment fees as well as predict future expenses for a given volume. In addition, your monthly statements will be easier to understand.

Be aware that standard pricing includes set fees on top of exchange fees and card association fees. Markup Fees represents a profit for the processor. If you don't care about relatively complex monthly statements, an Interchange Plus pricing model can save you money. Unfortunately, not all processors offer Interchange Plus. Those who often require a monthly transaction volume each month.

Why do some credit cards have higher processing costs?

If you do not have a fixed price plan, premium rewards cards, company cards and luxury cards are more expensive to accept as the exchange fee (which your processor pays) is higher.

Someone has to pay for all these points, rewards, gifts and privileges! The issuing bank charges the cardholders a monthly or annual fee. The financial institution will also earn interest on unpaid balances. But for the most part, the costs of these exclusive cards are paid by the merchants via higher exchange fees. However, it is not necessarily bad. Holders of premium and exclusive cards will spend on average more than holders of a regular credit card. Thus, in exchange for the opportunity to receive larger payments, you are charged a higher exchange rate.

My processor charges a discount. But I get no discounts. I'm confused.

In the financial world, a "discount rate" is the rate charged to financial institutions to borrow funds from other institutions, such as the US Federal Reserve. A credit card payment is like a loan. The cardholder borrows money from the issuing bank to pay for goods and services. This is the origin of the term used in credit card processing.

The discount rate is the last, all-in fee that a buyer pays to process a payment. The discount rate includes the exchange fee and card association fee (collectively "wholesale fee") plus the set fee. Unfortunately, there is no cost reduction, as the name suggests.

How can I lower my treatment fees?

There is no simple answer. Payment processing fees are a cost of doing business. However, here are some ideas that may help:

  • Negotiate with your processor to try to lower its selection fees. Remember that exchange fees and card association fees are set by the card brands (Visa, Mastercard, American Express, Discover), which prohibit negotiation. Selection fees, on the other hand, are set by each processor. Many processors will lower their Markup fee for a decent transaction volume, especially for new customers.
  • For merchants with stored pricing, try to downgrade your processor. Downgrades (moving from qualified transactions to intermediate or unqualified) raise fees. For example, accepting credit card payments over the phone causes a downgrade. All transactions with cards that do not exist (ie e-commerce) are unqualified.
  • Use a reputable anti-fraud platform. When your company accepts fraudulent payments, your processor will assess reimbursement fees. In addition, you will lose both the product you sold and the funds you received.
  • Choose a processor carefully. Ask about markup fees, levels and hidden fees. Don't go for the first cheap quote you get. Make sure you understand how the processor will serve your business. Compare quotes and make an accurate, informed decision. If your business requires value-added services – such as subscription sales, shared payments, archived cards, fraud verification – be sure to include these fees in your evaluation.
  • Think about Interchange Plus pricing. If you don't mind the extra work of reading (and understanding) longer, complex monthly statements, and if your business can meet monthly transaction volumes each month, Interchange Plus prices will usually offer the lowest prices.

I'm still confused. Is that normal?

Yes. The payment industry is a massive network of financial institutions, card brands and technology providers. Each player provides a service and therefore wants to be compensated. The result is a mishmash of confusing terms and fees. Force yourself to read articles like this. Develop a working knowledge of the system to demand better service and more reasonable prices.

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