If you’re in the process of starting a new business, you’ve got a lot to think about. You’ve probably spent considerable time developing a product line, interviewing potential staff, sorting out logistical procedures, and negotiating with suppliers. You might be surprised to hear that credit card processing is the second highest operating expense for US businesses, only behind labor. On average, business owners shell out around 3% of their revenue from card transactions just to accept card payments. Imagine if cash payments worked the same way; you’d never agree to that!
If you’re in the process of starting a new business, you’ve got a lot to think about. You’ve probably spent considerable time developing a product line, interviewing potential staff, sorting out logistical procedures, and negotiating with suppliers. You've probably got a laundry list of things left to do before launch, but there's one thing you definitely should not overlook: credit card processing. After all, your business can’t run without revenue, and you can’t have revenue if you can’t accept payments.
You might be surprised to hear that credit card processing is the second highest operating expense for US businesses, only behind labor. On average, business owners shell out around 3% of their revenue from card transactions just to accept card payments. Imagine if cash payments worked the same way; you’d never agree to that!
So what is it that makes credit card processing so costly? Let’s find out.
Before we can explain why processing is so costly, we first need to outline who is involved in the process. The following are all the major players in a typical credit card transaction:
Of course, not all of the above players will take a piece of the pie, but many of them do. Per-transaction fees are primarily assessed by issuing banks, card associations, and payment processors. When they’re used, payment gateways will also take their cut. Let's find out how that works.
To understand how these fees add up, let’s take a look at the life of a credit card transaction and point out where fees are taken and by whom:
Now that we understand who is charging processing fees and when they're taken, we need to understand exactly why those entities are taking your precious pennies. Some of those fees are simply margin, yes, but many of them were actually created to cover very real costs. Let’s start with the piece that will undoubtedly take the largest piece of the pie: interchange.
Interchange fees are decided and assessed by issuing banks and card networks. As such, they cannot be negotiated or adjusted for any business. There are three primary items that these fees cover:
When it comes to the actual process of completing a transaction, the processor’s role is really just to pass card information from the merchant to the issuing bank. As a result, the primary cost associated with these fees is security. Of course, processor markups go toward regular business costs: labor, utilities, business systems, et cetera, but the truth is that a lot of processor markups are pure margin. That’s why processor markup is the only piece of the processing pie that can be negotiated by merchants. If you’re worried about paying too much to accept cards, your focus should be in minimizing the fees you pay to your processor.
Like your processor, the primary function of your gateway is to pass card information from one place to the next. In fact, some gateways, like Authorize.net, operate as both a gateway and a payment processor. The main difference is that your gateway fees are non-negotiable (which is why we don’t recommend using them as your processor). Because of the similarities, the costs are similar as well. Gateway fees are in place to maintain the security of card data and also bring revenue to the gateway provider. Additionally, gateway providers use these funds to maintain partnerships and integrations with numerous processors and software providers so you can accept payments just how you like.
As much as we wish this was all you have to worry about, there are a number of scheduled fees that your processor will assess with each statement that you should be aware of. Here is a brief explanation of some of those fees, along with an explanation as to what they cover:
As merchants, we tend to look at credit card processing as a big black box. All we see is the card swipe and the deposit that comes a couple days later, albeit with a big chunk taken out. If we don’t understand what happens from the time we swipe the card to the time those funds come in, the process can seem unfair and exorbitantly priced, but when we consider the players in the process and the services they render, it’s no wonder that payment processing costs what it does.
That said, the majority of merchants are still vastly overpaying to accept credit cards. Business owners, especially first-time business owners, are prone to accept the outrageous 2.9% plus $0.30 rates that are readily available anywhere. However, savvy business owners know that some processing rates can be negotiated and that accepting cards doesn’t have to mean draining your bank account.
If you’re worried about paying too much to accept cards, your focus should be in minimizing the fees you pay to your processor.
If you want to avoid the mistake of overpaying for credit card processing fees, you need an advocate on your side to find the best solution at the lowest rate. You could seek out the perfect processor yourself, or you could leave it up to an expert.
Luckily for you, SwipeSum offers this service completely free of charge. After a short consultation to learn about your business, we’ll select a few great fits from our network of 70+ payment processors and force them to bid for your business. The result is better solutions at lower rates, guaranteed.