Making Sense of Transaction Fees: A Comprehensive Guide

Making Sense of Transaction Fees: A Comprehensive Guide

Transaction fees can be a surprise for businesses and customers alike. No one likes to look at their bank statement to find that they were charged fees they didn’t know about.As a business owner, it’s important to understand the transaction fees associated with credit card and debit card payments, so you can get the lowest credit card processing fees available for your industry — and so you can be transparent with customers.We’re here to take the mystery out of credit card transaction fees and show you how to eliminate them altogether with a credit card surcharge program.

What Are Transaction Fees?

Transaction fees are a type of service fee charged by a payment processor on top of the purchase amount when you make a sale. They’re basically the cost that your payment processor charges you in order to facilitate the transaction.When it comes to transaction fees, most payment processors charge a percentage of the transaction, but other times they charge a flat rate. Usually, these fees are paid by the merchant, but in some cases, they might be passed on to the cardholder — for example, if you use a credit card surcharge program.Transaction fees can vary from one credit card issuer to the next and even within the same credit card network for using different payment methods.Likewise, transaction fees for debit cards tend to be lower than credit card transaction fees since they’re regulated differently.This is why it’s so important to read the fine print before entering into a contract with a merchant services provider. All payment processors will charge fees, but some pricing models may be more favorable for your business than others.

Types of Credit Card Transaction Fees

To find the cheapest way to accept credit card payments for your business, it’s important to know what fees you’re being charged and how they’re calculated. Most transactions incur multiple fees, but not every fee will apply to every transaction.Here are a few of the most common transaction fees you’ll encounter.

Interchange Fee

The interchange fee makes up the bulk of credit card transaction fees, and unfortunately, it’s non-negotiable because it’s set by the credit card issuers. Even if you’re able to negotiate a good deal with your payment processor, they won’t be willing to charge less than the interchange fee, otherwise they’d be losing money.Your payment processor will pass on the fee in one of three ways:

  • They’ll charge a flat fee per transaction
  • They’ll charge you the interchange fee plus a markup.
  • They’ll offer a tiered pricing model for different types of transactions.

The second option is often the best deal, since it’s the most transparent, but you won’t know what the exact rate is until after the transaction is complete.

Network Fee

The second unavoidable fee is the network fee, which is charged by the major credit card networks, like Mastercard, Visa, and Discover.These fees vary from one network to the next, which is why in the past, some merchants have chosen not to accept American Express due to its higher fees. These days, though, all of the credit card networks charge similar network fees.

Processing Fee

The next fee to consider is the processing fee charged by your merchant acquiring bank or your payment services provider. If you have a merchant account, this is where your issuing bank will take their cut of the total amount for processing the transaction.If you use a payment processor, then you’ll still pay a processing fee, but you won’t have to pay additional fees such as an annual fee on your bank account.This is one area in which you can shop around to get the lowest rates. Some service providers, like Square, charge a different rate for card-present payments than for online and e-commerce transactions.Others, like Nadapayments, charge the same rate regardless of whether the credit card details are entered manually or if the card is swiped.

Foreign Transaction Fee

Foreign transaction fees aren’t charged to merchants, but they’re worth keeping in mind if your business operates in multiple regions or accepts different currencies. Most credit card issuers charge the cardholder a fee for foreign transactions — up to 3% of the transaction amount — but some travel credit cards may waive this fee.This is distinct from a currency conversion fee, which allows the cardholder to pay for a foreign transaction in U.S. dollars (USD).This fee can be an additional 1%, so it’s usually a better deal for the customer to accept the charge in the local currency and receive the mid-market exchange rate.

Address Verification Fee

Finally, your processor may charge an additional fee if you need to verify a customer’s address during the payment process.This fee isn’t usually applied to card-present transactions, but if your business makes a lot of keyed-in sales, then an address verification fee may be applied automatically.

How to Navigate Transaction Fees

Transaction fees: person paying using the contactless feature of their credit card

Transaction fees have become just another part of doing business, especially if you want to provide your customers with as many payment options as possible. But that doesn’t mean you have to put up with hidden charges on your financial statements.Here’s what you need to do to navigate transaction fees and get low- or no-fee credit card processing for your business.

Understand Your Statements

First, read your statements carefully to make sure that you understand all the charges. The fees that we’ve described here are just some of the fees you’ll encounter, so you may see other fee descriptions as well, such as an “authorization fee.”If you have any questions, ask your merchant services provider or merchant acquiring bank and see if you can negotiate a better rate based on your sales volume.

Choose the Right Merchant Services Provider

Since you can’t choose your cardholder’s issuing bank or credit card network, your merchant services provider is where you have the most leverage.If most of your transactions take place online or over the phone, avoid using a payment processor that charges more for those types of transactions.If you have a merchant bank account but have sales of less than $10,000 per month, you may be better off switching to a payment services provider or merchant services provider to eliminate monthly fees.

Start a Surcharge Program

There’s only one way to get rid of credit card transaction fees entirely, and that’s to pass them on to your customer using a surcharge program.With a surcharge program, if your customer wants to pay with a credit card, they will be charged a fee on top of the total amount of their purchase. For example, Nadapayments charges a flat 3.5%. In line with state regulations, your customers will see the surcharge on your credit card reader or point-of-sale (POS) system and can decide whether or not to accept it.The customer can choose to pay with cash, check, or a debit card if they want to avoid the surcharge. If they choose to pay with a debit card instead, they’ll pay $0 in fees, and you’ll pay only 1% plus 25 cents — much less than the fees for a standard credit card transaction.

Reduce Transaction Fees With Nadapayments

Person at a restaurant paying for their meal using his phone

Transaction fees may be a necessary part of doing business, but they don’t have to be a mystery. With Nadapayments, you’ll benefit from a transparent pricing structure and a surcharge program that passes on credit card transaction fees to customers.For $35 per month, you’ll get a Wi-Fi-enabled EMV credit card reader to process in-person payments, while access to the web-based virtual terminal is entirely free. You’ll pay a low transaction fee for debit card transactions and $0 for credit card transactions.Sign up with Nadapayments to lower your credit card processing costs today!

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Aleksey Nugid
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