Online payment processing is a complex subject with a lot of factors that affect your bottom line, which can make it hard to understand whether you’re getting the best deal available or not. A lot of the complexity is baked into the credit industry, meaning that your processor can’t change the fact that there are going to be extra fees assessed by both the parent credit card company and the issuing bank. What they can help you control are the portions of the cost they assess, and depending on whether you use the same company for your merchant bank and payment processor, that can also mean they control the cost of running your merchant account. So what goes into the cost of processing card payments online, and what can you do to find the right combination of service and low overhead costs? Well, it helps if you start with a basic understanding of the fees associated with credit transactions.
Credit Processing Costs Demystified
Interchange fees are charged by the issuing bank, and they are non-negotiable. They also differ from bank to bank, so even two customers with a Visa might not cost you the same amount per transaction, because they might have different issuing banks. There are also assessment fees, which are the ones charged by the credit card organization or parent company. These are consistent for all cardholders of a certain brand, so all your Visa customers should have the same Visa assessment rate, as an example. Then, there are markup and processing costs. Markup fees are typically the ones charged by your merchant account provider, and processing costs are for your payment processor. In cases where those last two services are provided by the same company, it’s common to see some cost reductions for people who opt for a full service package.
Processing Costs as You See Them
In most cases, you don’t get a breakdown of all four types of service fees, nor do you necessarily get charged directly for them. Instead, most payment processors will work with your merchant bank and present you with a pricing system that simplifies your experience by lumping the outside costs together with the processor’s own fees. This can be presented in a few ways, and the right choice is highly dependent on your business model.
- Interchange plus pricing charges you the interchange fee for the issuing bank, as well as a simplified rate per transaction that may or may not equal the actual cost of the transaction. So, for example, if the interchange plus cost is 2.5%, your fees are interchange plus 2.5% of each transaction, regardless of what the transaction actually costs to process.
- Tiered pricing divides the interchange fees into several tiers, each with their own costs. This can be opaque because you are never able to tell exactly where the lines are drawn for price jumps unless the company discloses their full payment calculation, and that is both rare and a bit cumbersome to study even if it is made available. Tiered pricing is more predictable, though, because instead of several hundred interchange fees affecting costs, you only have three or four cost levels.
- Flat rate pricing can be the most expensive overall because it is typically assessed as a percentage of the transaction regardless of interchange fee, and that means you’re paying just as much for low interchange cards as for high interchange cards. The upside to this is that the flat rate is usually somewhere in the middle of the range of interchange fees, so some transactions cost you less than they would under other systems, and this can make for a simpler and easier to adopt system for new businesses.
Finding the processor for your business means looking at the fee structures and working out, based on your volume of business and projected growth after starting an online sales option, which is the most beneficial. That can be complicated, because even within one payment structure, the actual costs can be very different from one company to the next. That’s because processing fees and merchant fees can vary a lot from company to company, and what you’re seeing in the costs above the interchange fee are those prices. Use that knowledge as you shop to better understand whether you’re getting the best rate you can get.
Cost and Service
Before you break everything down, remember that you often get what you pay for when it comes to professional service. If you are going to be kept waiting because your low cost processor takes a long time to clear payments to you, it might not actually cost you less, since late payments can disrupt your cash flow and lead to your own outgoing payments being late. That, in turn, can raise the cost of doing business in other ways. As you shop for the right online payment processor, make sure you’re putting as much research into each one’s service record and transaction speed as you do into