Why Does It Cost Money to Accept Credit and Debit Cards?

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.

Who Charges Credit Card Processing Fees?

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:

  • Cardholder: The customer who’s willing to give up their hard-earned money in exchange for your amazing product.
  • Merchant: That’s you, or at least the business you run.
  • Issuing Bank: The organization that issued the credit or debit card to your customer.
  • Card Association: These companies operate global networks that process card payments and set a lot of the restrictions (and fees) that go along with them. Examples include Visa, MasterCard, Discover, and American Express.
  • Payment Processor: Processors provide merchant accounts and connect businesses to card networks. Sometimes you’ll hear them referred to as acquiring banks. There are cases in which a processor and merchant account provider will be different groups (e.g. independent sellers will be considered processors but will provide the merchant account through a larger acquiring bank).
  • Payment Gateway: Though not necessary for all merchants, gateways connect point-of-sale software and web platforms to payment processors.

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.

When Are Credit Card Processing Fees Charged?

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:

  • Step 1: The cardholder provides their card information to the merchant with a swipe or by entering it into a digital system.
  • Step 2: When necessary, a gateway passes card information to the merchant’s payment processor. At this point, the payment gateway may earmark a portion of the funds to be sent back to them after the completion of the transaction. Alternatively, gateway fees may be assessed at the end of a given period based on the number of transactions attempted during that period (usually daily or monthly).
  • Step 3: The payment processor requests authorization to transfer funds from the issuing bank via a card network. At this point, the issuing bank will either approve or decline the transaction.
  • Step 4: Assuming the transaction is approved, the issuing bank will pass funds back to the processor via the card network. Most per-transaction fees come out at this point in the transaction. Interchange fees are deducted from the total amount of the transaction and split between the card associations and issuing banks; we’ll discuss more of these fees below.
  • Step 5: After receiving funds via the card network, payment processors take their cut, often referred to as markup fees, before finally depositing the remaining funds into the merchant account. If funds were earmarked by a gateway during Step 2, the processor will take those fees out of the total deposit and pass them to the gateway provider.

What Do Credit Card Processing Fees Cover?

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.

What Does Interchange Cover?

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:

  1. Maintenance of necessary systems: Banks and card associations process millions of payments daily. Visa, for example, maintains systems capable of processing more than 65,000 transactions per second (or 5.6 billion transactions per day). That infrastructure doesn’t come cheap, and nor do the engineers who build it. Thus, a small portion of your interchange fees go toward building and maintaining the vast computer network that makes card transactions so quick and seamless.
  2. Card rewards: If you’ve ever wondered how credit card companies can provide great rewards to their cardholders, interchange is your answer. Someone has to pay for all those airline miles! Unfortunately, the responsibility for those rewards falls primarily on the backs of merchants. This is why you’ll see higher interchange rates for those high-reward cards.
  3. Risk: This is last on our list, but it’s certainly not least. In fact, you could probably argue that risk is the largest cost decider behind interchange fees. In 2015, fraud accounted for nearly $22 billion in losses to card issuers. In order to balance out these tremendous losses, card associations and issuing banks have no choice but to charge a bit more to their customers. Of course, when you reduce the risk of a payment by using secure payment systems, you’ll find that your interchange rates decrease as well.

What Do Processor Markup 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.

What Do Gateway Fees Cover?

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.

What Other Fees Can I Expect to Pay?

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:

  • Equipment Rentals: These are charged by payment processors to a merchant to lease point-of-sale (POS) hardware and credit card terminals for swiping, inserting, and tapping payments. Terminal leases typically end up costing the merchant more than purchasing the equipment outright, so if you can pay full price for equipment up front, it’s in your best interest to do so.
  • Monthly Processor Fee: A merchant pays this fee to use the services of a payments processor. Typically, this fee covers customer services such as phone-based support. If you are on a membership or subscription pricing model, you’ll pay a higher monthly fee in lieu of a per transaction percentage fee.
  • Statement Fee: Some payment processors charge a flat monthly fee for preparing and mailing your monthly statement. Some providers will offer free online statements, while others will still charge a statement fee for electronic statements.
  • PCI Compliance: While a portion of processor fees go to protecting card information after it’s been acquired, Payment Card Industry (PCI) security guidelines ensure that card information will be safe within your internal systems before a transaction has been completed. Processors will face penalties if merchants are not compliant with these guidelines, so oftentimes, processors will pass those fees on to merchants. There are simple ways to remove this fee from your monthly statement, which we highly recommend pursuing.

How to Reduce What You Pay in Card Processing Fees

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.

If you want to learn more about our credit card processing marketplace, visit SwipeSum.com or click here to get started!

Taft Anderson

Taft Anderson is the former Product Marketing Manager of Swipesum. A graduate of Washington University in St. Louis' Olin Business School, Taft is a content and branding expert.

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