How Do Credit Card Processing Costs Affect Your Bottom Line?
Credit and debit card payments have become a routine part of doing business. They offer customers convenience and can make it easier for businesses to collect revenue. But that convenience comes with a cost, and for businesses with significant card volume, processing fees can become a meaningful operating expense.
A processing rate of 2% or 3% may not seem particularly significant when viewed one transaction at a time. Applied across a year of card sales, however, those costs can add up quickly and have a meaningful effect on margins.
That does not necessarily mean a business is paying too much or should change how it accepts payments. Card acceptance provides real value. But processing costs deserve the same type of periodic review as other significant business expenses. Understanding what the business is actually paying can help management evaluate the effect on profitability and determine whether there are opportunities to reduce that impact.
What Are Credit Card Processing Fees?
Credit card processing fees are the costs a business pays to accept and process card payments. Depending on the processing arrangement, those costs can include transaction-based fees as well as account, technology, equipment and other service charges.
Processing costs can be easy to overlook because they generally accumulate transaction by transaction rather than arriving as one noticeable bill. As card sales increase, the expense often increases with them.
Before considering ways to reduce those costs, it helps to understand what makes up the expense. Credit card processing costs generally involve several components.
Interchange fees
Interchange fees are paid to the financial institution that issued the customer’s card and help cover the costs and risks associated with the transaction. The card networks establish interchange rates, which can vary based on factors such as card type, transaction type and how the payment is processed. These rates generally are not individually negotiated by a merchant with its processor.
Network or assessment fees
Network or assessment fees are charged by the card networks for their role in facilitating card transactions and operating the payment networks. These fees are generally passed through to the merchant as part of the overall processing cost and may appear under different names on a merchant statement.
Processor fees
Processor fees are charged by the payment processor or merchant services provider for processing transactions and providing related account services. Unlike interchange and network fees, processor pricing and markup may be negotiable depending on the provider and the merchant’s particular arrangement.
Beyond these core processing costs, businesses may also encounter account, equipment and service-related charges, including:
- Gateway fees: Charges associated with the technology used to authorize and transmit online payments.
- Equipment charges: Costs associated with payment terminals or other processing equipment.
- Chargeback fees: Fees that may be assessed when a customer disputes a transaction.
- PCI-related fees: Charges related to PCI compliance or, depending on the provider, noncompliance.
- Monthly minimums: Fees that may apply when processing activity falls below a required threshold.
- Settlement or batch fees: Charges associated with settling groups of transactions for payment.
- Other account or service fees: Additional charges that may apply based on the processor and services provided.
The presence of these charges does not necessarily indicate a problem. Some reflect legitimate services provided to the business. But they help explain why looking only at an advertised processing rate may not reveal what accepting cards actually costs.
Different processing arrangements can package these costs differently. Common pricing models include:
- Flat-rate pricing: A simple pricing structure where the business pays a set percentage and transaction fee for each payment processed.
- Interchange-plus pricing: A structure that separates the underlying interchange and network costs from the processor’s markup.
- Tiered pricing: A structure that groups transactions into different pricing categories, which can make the components of the total cost less straightforward to evaluate.
Business owners do not need to become experts in payment-processing pricing models. They should, however, understand enough about their current arrangement to determine what the business is actually paying.
One useful way to do that is to calculate the effective processing rate.
How Much Are Credit Card Processing Fees?
The cost of accepting credit cards varies based on several factors, including the types of cards customers use, how transactions are processed and the business’s arrangement with its payment processor. As a result, processing costs can vary not only from one business to another, but also from one transaction to the next.
The total cost generally reflects a combination of the interchange, network and processor fees discussed above, along with any other charges associated with the account. How those costs are presented will depend on the processor’s pricing structure. Some providers use a flat rate, while others separate certain components or use other pricing models.
That can make it difficult to understand the total cost by looking at a quoted rate alone. A business may see one percentage associated with its processing arrangement while also paying per-transaction, recurring or other fees.
Calculate Your Effective Processing Rate
One way to get a clearer picture of what the business is actually paying is to calculate the effective processing rate. This measures total processing costs as a percentage of total card sales over a given period.
Total processing fees ÷ Total card sales × 100 = Effective processing rate
Suppose a business processes $90,000 in card sales during a month and incurs $2,700 in total processing-related costs:
$2,700 ÷ $90,000 × 100 = 3%
The effective processing rate for that month is 3%. The calculation can provide a more useful starting point than focusing solely on a processor’s quoted transaction rate because it looks at the amount the business actually paid relative to its card volume.
It is important to understand which costs are included. Looking only at percentage-based transaction charges while excluding relevant recurring or other processing-related fees could understate the actual cost. Businesses may also benefit from calculating the effective rate over several comparable periods rather than relying on a single month. Doing so creates a baseline and makes trends easier to identify.
Suppose card sales increase 20% from one year to the next, while total processing costs increase 30%. That difference does not automatically indicate a problem. It could reflect changes in transaction mix, card types, processing methods, pricing, or other factors. But it gives management something worth investigating.
How Do Processing Costs Affect Your Bottom Line?
Knowing the effective processing rate is only part of the picture. The next step is to evaluate the expense in the context of the company’s actual financial results.
Suppose a business has $30,000 in annual processing costs. Looking only at sales, that expense might appear relatively modest. But if the business operates with narrow margins, $30,000 could represent a substantial portion of annual operating profit. A company with stronger margins may experience that same $30,000 expense very differently.
That is why processing costs should be viewed not only as a percentage of card sales, but also in relation to the business’s margins and profitability.
The same lens is useful when reviewing growth over time. A company might discover that processing costs have increased from $20,000 to $45,000 over several years. That increase may be entirely reasonable if card sales more than doubled during the same period. If sales increased by far less, management may want to understand what else changed.
The objective is not to assume that higher processing costs mean the business is being overcharged. It is to understand the relationship between processing expense, sales and profitability clearly enough to determine whether the cost warrants further attention.
How Can You Reduce Credit Card Processing Costs?
If processing costs are financially significant, the next question is whether there are opportunities to reduce their impact. There is no single approach that will make sense for every business, but several areas may be worth reviewing.
Review Your Current Processing Arrangement
Merchant-processing relationships can remain in place for years without receiving much attention. During that time, sales volume can grow substantially, average transaction size can change, customers can begin paying differently, and the services or fees associated with the account can change as well.
An arrangement established when a business processed $20,000 in card payments each month may deserve another look if monthly volume has grown to $200,000.
Several months of merchant statements can provide a useful starting point. Management can review the effective processing rate and whether it has changed, identify recurring fees and what they cover, and determine whether the company is still using all of the services or equipment it is paying for.
Depending on the provider and agreement, it may also be worth asking whether processor-imposed account, equipment or other fees can be reduced, discussing pricing with the existing provider, or comparing the current arrangement with available alternatives.
That does not mean a business should automatically switch processors when another company advertises a lower rate. Changing providers can involve contracts, equipment, software integrations, employee training and other factors. A lower advertised percentage also does not necessarily translate into a lower overall cost.
The question is simpler: Does the arrangement that made sense when it was established still make sense for the business today?
Rethink How You Accept Payments
How customers pay can have a meaningful effect on processing costs. The right payment mix will depend on the business, the types of transactions it handles and what its customers expect.
For many retail and consumer transactions, cards may be the most practical choice. They are convenient for customers and can help businesses collect revenue quickly. For larger invoices or recurring payments, however, lower-cost electronic options such as ACH may be worth evaluating. A professional services firm collecting a $25,000 invoice, for example, would incur approximately $750 in processing costs at a 3% rate.
Transaction size is only one factor. Businesses may also look at how customers prefer to pay, how quickly funds are collected, the administrative work involved and the costs associated with each option. A lower-cost payment method that creates delays or additional work may not provide as much of a benefit as the processing savings suggest.
The goal is not to steer every customer toward the least expensive payment method. It is to make sure the way the business accepts payments still makes financial and operational sense.
For many businesses, cards will remain an important part of that strategy. In that case, reducing processing costs raises a different question: Does the business need to absorb the full cost of card acceptance?
Not necessarily. Businesses can structure their pricing in ways that account for the cost of accepting different forms of payment. One approach is dual pricing.
What Is Dual Pricing?
Under a dual pricing model, a business displays two prices for the same product or service before the customer makes a purchase decision: a lower cash price and a higher card price. For example: Cash price: $100, Card price: $103. Unlike a surcharge, which adds a separate fee to a card transaction, dual pricing presents the prices upfront before the customer chooses how to pay.
Customers can choose the lower cash price or pay the card price for the convenience of using a card. This gives customers an incentive to choose cash while preserving the option to pay by card.
Under a traditional pricing model, the business generally absorbs card-processing costs as an operating expense. Dual pricing can change that dynamic. Some customers may choose the lower cash price, resulting in fewer card transactions. When customers choose to pay by card, the difference between the cash and card prices can help offset the associated processing costs.
The financial impact will vary by business. Suppose a company currently spends $40,000 annually on card processing. Even reducing a portion of that expense could have a meaningful effect on profitability. The business can estimate the opportunity by looking at how much of its current processing cost could be reduced under the proposed program and what those savings would mean for its bottom line.
Putting real numbers behind the opportunity can help management evaluate the financial benefit before deciding whether dual pricing makes sense for the business.
Is Dual Pricing Right for Your Business?
The potential financial benefit is only one part of the decision. A dual pricing program also needs to fit the business, its customers and its operations.
Customer expectations can vary by industry, market and transaction size. While customers retain a choice between the cash and card prices, businesses should think about how their particular customer base is likely to respond to the pricing structure.
Program structure also matters. Presenting a cash price and a card price upfront is different from simply advertising one price and adding a credit card surcharge at checkout, and the two should not be treated as interchangeable. Card networks maintain requirements for certain payment practices, and applicable laws may also affect how a program is structured. A business should understand how its particular program works and confirm the requirements that apply to it.
Implementation matters as well. The business’s payment or point-of-sale system needs to support the program, pricing and any required disclosures need to be presented correctly, and employees should be able to explain the pricing if customers have questions.
These factors do not eliminate the potential financial opportunity. They simply mean the financial benefit should be weighed alongside customer response, implementation requirements and the needs of the business.
The Bottom Line
Credit card processing costs can be easy to accept as simply part of doing business. But like any meaningful expense, they are worth understanding in the context of the company’s overall financial performance.
Start with the numbers:
- What is the business’s effective processing rate?
- How much does the business spend annually on processing?
- How significant is that expense relative to margins and operating profit?
- Are there opportunities to reduce the cost under the current arrangement?
- Would another payment approach make sense for certain transactions?
- Could dual pricing reduce the amount of processing expense the business absorbs?
The answers will look different for every business. Working through these questions can help identify opportunities to reduce processing costs and evaluate what those savings could mean for the company’s profitability.
Our team can help businesses with that analysis by reviewing processing costs, assessing potential savings and determining whether dual pricing or another approach makes sense.
If you want to better understand what payment processing is costing your business and explore ways to reduce that expense, contact us to discuss your options.
