Accepting credit card payments is a must for every business, from brick-and-mortar businesses to e-commerce companies. It’s especially important as more and more customers prefer to shop online and use contactless payment options (and the COVID-19 pandemic only accelerated this trend). But accepting credit cards comes at a cost, and it isn’t always cheap or easy to understand. If you suspect you’re paying too much, or you want to start accepting credit cards for the first time, you may be wondering: What is the cheapest way to accept credit card payments?There’s no simple answer. How much you’ll ultimately pay depends on a variety of factors, like your industry, transaction volume, and payment methods. However, there are some simple strategies to lower your credit card processing costs, no matter what your unique scenario is. There are even free credit card processing options, which we’ll talk about later.Ready to save? We’ll cover the different types of payment processing fees, compare pricing models, and give you three strategies to get the cheapest credit card processing for your business.
Anatomy of Your Credit Card Processing Costs
What can make credit card processing so confusing — and expensive — is that there are many different types of providers, plans, and transaction rates. Below, we’ve broken this down into digestible sections, including helpful terminology, common fees, and pricing models. That way, you can understand how to find the cheapest way to accept credit card payments and avoid unnecessary charges.
Helpful Credit Card Processing Terms To Know
Credit card network: The four major card networks — Visa, Mastercard, Discover, and American Express — are what make credit card transactions possible. They connect consumers, merchants, and banks.
Issuing bank: This is the bank or institution that issued your customer’s credit card or debit card. When a customer makes a purchase, the issuing bank checks whether they have the funds and requests information from the card network.
Acquiring bank: This is the bank that accepts and processes the funds released by the issuing bank.
Payment processor: This is the institution that acts like a middle man between the merchant and the banks to get your customers’ funds into your bank account. You may use a merchant services provider (MSP) like Nadapayments or a payment service provider (PSP) like Stripe, PayPal, Square, or Shopify. Sometimes the acquiring bank and payment processor are one and the same.
Merchant account: Your payment processor will help you open a merchant account for your business. With it, you can securely accept credit cards in-store using a point-of-sale system like a credit card terminal or online using a payment gateway. These accounts often come with many fees that are sometimes hidden in the fine print.
Common Credit Card Processing Costs
Your credit card processing costs include a variety of fees, some negotiable and some non-negotiable. Here are four of the most common fees you’ll encounter.
The four major credit card networks — Visa, Mastercard, Discover, and American Express — charge issuing banks a fee to use their credit cards and debit cards. This fee is known as the interchange rate, and issuing banks pass this cost onto business owners like you. Rates are often between 1.3% and 3.4% for every transaction, and that’s before any other fees or markups from your payment processor. Costs vary based on:
The business type
The card brand
The type of card
The payment method
The risk level of the transaction
For example, online transactions carry a higher interchange fee because it’s harder for small business owners to verify their customer’s identity and prevent fraudulent transactions.
Assessment fees, also known as network fees, are paid to the card networks each time a credit card is used.
Payment processors also have wide latitude to charge additional fees in order to make a profit and cover the risks of managing merchant accounts. (After all, they’re a business too.) However, a good payment processor will use a transparent pricing model that ensures these fees are clear. Alternatively, you can use a service like Nadapayments that will save you the headaches and number-crunching by offering free payment processing.
In some cases, there are additional costs you can expect from your processor. For instance, they may charge a monthly fee for the POS system you use, like the mobile card reader or digital shopping cart for your online store.
Different Payment Processor Pricing Models
Credit card processing companies use a variety of payment plans to cover the above costs and offer merchants their services, each with unique pros and cons.
Flat-rate pricing charges businesses the same transaction rate for every type of transaction. You may recognize this model from payment service providers (PSPs) like Square or PayPal. While it’s easy to understand, it's also easier to charge hidden fees. For small businesses and startups with a low volume of card transactions or low average transaction value, however, this can be the cheapest way to accept credit payments.
Many industry experts and businesses regard interchange-plus pricing as the most transparent pricing option. It’s cost-effective for most businesses, regardless of industry type or size. The credit card processor simply adds their fee (typically a small percentage) on top of the interchange fee. Because of this, it’s also called “wholesale pricing,” meaning you’re only charged the mandatory fees for each transaction, plus a small processor markup.
With tiered pricing, the payment processor will create different tiers or categories for your transactions based on their risk level. Generally, there are three tiers — qualified, mid-qualified, and non-qualified — each with a different processing rate. Of the different pricing models, tiered pricing is the least transparent and the hardest to predict. It’s difficult to understand whether you’re getting a good deal on each transaction, and processors can change their rates and rules at any time.
3 Key Strategies To Lower Your Credit Card Processing Costs
As credit card processing fees add up, they can seriously weigh your business down. Here are some tactics that will help you save money, including a free credit card processing solution.
1. Use a Credit Surcharge Program
Credit surcharge programs allow merchants to pass their transaction fees onto their customers. At checkout, customers are presented with two options: pay with cash or debit card, or pay with credit for an additional 3.5% fee.We know what you’re thinking, “Won’t there be backlash when customers see this fee?” The first important thing to note is that customers always have a choice. They can opt to use debit or cash and avoid the fee entirely. And second, the reality is that a credit surcharge can actually be the better option for your business in the long run. Think about it: You’re being pummeled by processing costs and other expenses, so you decide to raise your prices. These new prices are higher than the amount customers would pay for processing fees, especially if you have high-cost services like plastic surgery or dentistry. Customers compare your high prices to your competitors — and walk away. With a fee-free credit card payment processor like Nadapayments, you can reclaim your revenue, and customers who pay with cash could actually save money.
2. Negotiate a Better Processing Rate
If you’re happy with your current payment processor, you can try negotiating a lower payment processing rate. A great moment to do this is when your contract is up for renewal or when you’ve just closed a particularly successful sales period. Your processor won’t want to lose a valuable customer. Shop around for better merchant account quotes and ask your processor to match them, or suggest your own figure. Finding a better deal might mean moving to a different payment service provider. If so, look for one that offers transparent pricing and specializes in your industry. They should have good customer reviews, a healthy Better Business Bureau rating, and 24/7 customer support.
3. Incentivize Different Transaction Types
As we’ve talked about, certain transaction types cost more than others. Even flat-rate pricing options charge different rates for in-person payments and online payments. While you can’t control which payment methods your customers prefer day to day, you can encourage them to use less costly options. For example, you can put up friendly signage asking customers to use a debit card when possible or offer discounts for cash purchases. These simple measures can go a long way to lower processing costs.
The Cheapest Way To Accept Credit Card Payments
Accepting credit cards may be the cost of doing business, but doing so doesn’t have to eat up your hard-earned revenue. Now that you have a deeper understanding of fees, merchant account providers, and pricing models, you can use the strategies we’ve covered to take control of your processing costs.But for an even more effortless way to save money, choose Nadapayments and pay “nada” on every credit card transaction. With our credit surcharge program, you take home 100% of all your credit card transactions. There are no setup fees and no commitments — just an affordable way to take payments anywhere you are.If you’re ready to save thousands of dollars every year in processing fees, get in touch with us for more information!