Accepting credit card payments allows your business to benefit in a number of ways. To begin with, getting paid by credit card means getting paid faster than is possible with just an accounts receivable or check payment system. Charge cards also give your business the ability to set up automatic client payments, and they provide a more convenient customer experience overall.
While fees are a necessary part of processing credit card payments, with a little understanding of why they exist, you can take steps to avoid being over-charged for making the most of this indispensable payment system.
Why Your Business Should Consider Credit Card Payments
Small business owners frequently struggle with the question of whether or not to accept credit card payments. In fact, the newer or smaller the business, the more likely an owner is to view credit card fees as an overwhelming or unnecessary expense.
In truth, however, it’s become difficult - if not flat-out impossible - to stay in business without accepting credit card payments and the fees that go with them. When you deny potential clients the convenience of paying by charge card, you also deny your business the opportunity to:
- benefit from small or spontaneous customer purchase decisions,
- take advantage of lucrative recurring income business models, and
- successfully compete with similar companies that do accept multiple forms of payment
As we move closer to a cashless society, a growing number of business owners are discovering that digital payments of all types not only deliver better bookkeeping efficiency, they offer an enhanced level of payment security.
How Credit Card Processing Works
Once you’ve established that credit card processing fees can be a worthwhile investment, it doesn’t mean your business shouldn’t be vigilant about reducing or avoiding them where possible. To understand what drives credit card fees, we first need to understand how credit card payments are processed.
Whether you accept charge cards in person – with a point-of-sale (POS) terminal, for example – or online, the process is virtually identical:
- Your customer’s credit card and payment information are collected by swipe or manual entry.
- The data is forwarded to your payment processor or merchant account provider.
- Your service provider directs the payment request to your customer’s credit card issuing bank for approval.
- The card issuer confirms the availability of customer funds by approving or denying the payment transaction.
- That approval or denial is communicated back to your payment processor, who in turn relays it to you.
The only real difference between processing credit cards through your website as opposed to through a physical card reader is that online payments require the use of a payment gateway.
This gateway performs two important tasks: it encrypts your customer’s payment data in such a way that it can be securely transmitted to your payment processor, and it relays the payment processor’s approval or denial message back to your website.
Once payment has been approved, however, your business still needs to get paid – so the process doesn’t end there:
- Your customer’s issuing bank must transfer the approved funds to your company’s merchant bank, and issue a payment statement to your client.
- Your merchant bank, meanwhile, is responsible for administering your merchant account, and for transferring payment funds from it to your regular business account after the settlement period has ended (usually within a few days).
With such a complex procedure involved, it’s hardly surprising that the credit card payment process includes a number of fees. After all, every specialist in this chain of events must be compensated for the role they play in making digital payments happen in seconds, and for the financial risk they assume.
Keeping Credit Card Fees to a Minimum
When it comes to moderating your company’s credit card fees, you should first understand that - because they represent a lower level of fraud and chargeback risk - card-present (in person) transactions have a lower fee attached than card-not-present (online or over the phone) transactions.
The average fee for a card chip reader payment, for example, is 1.5% to 3.0%, whereas the fees associated with remote credit card payments are closer to 3.5%.
Payment processing charges are made up of a combination of fixed interchange (issuing bank) fees, and potentially flexible transaction fees, flat fees, and incidental fees. So, the simplest way to avoid over-paying for the opportunity to accept credit card payments is by:
- researching and comparing payment processing fees upfront,
- reviewing the fit of your existing merchant account at least annually, and
- negotiating better fees based on your transaction frequency, volume, or sales type
Once you’re satisfied that your credit card processing fees are in line with the individual needs of your business, you should take steps to ensure you're recording them correctly in your accounting software of choice.
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