Credit Card Processing Fees: A Comprehensive Step-by-Step Calculation Guide

Introduction

In today’s fast paced digital world, running a business without accepting credit card payments is highly difficult. However, there’s an inevitable expense attached to this convenience—credit card processing fees.

A credit card processing fee refers to the charge levied by payment processors for transactions conducted via credit cards. These fees typically hover between 1.3% and 3.5% per transaction, depending upon various factors.

These fees can become a substantial expense for businesses when accumulated over time. Hence, it becomes crucial to understand the nuances of credit card processing fees—their types, calculation methodologies, and the ways to reduce it.

This comprehensive guide aims to equip you with all the insights into credit card processing fees and how they work so that you can minimize the cost associated with it.

What Are Credit Card Processing Fees?

Credit card processing fees refer to the charges a business needs to cover whenever their customers choose to make payments using credit cards. Each transaction comes with various fee types, and the amount can differ based on the specific credit card being used.

 This fee includes the cost of processing the transaction and is typically composed of several components. Broadly, there are three types of credit card processing fees. 

Types of Credit Card Processing Fees

Assessment fees

All well-known credit card providers charge a minimal assessment fee from the merchant. For example, if you have a Visa credit card, you have to pay an assessment fee of 0.14% for every transaction you make via that particular credit card.

The assessment fees charged by the other major credit card networks are:

Payment processing fees

You also have to pay a payment processing fee to the processor for every transaction you make via credit card. The credit card network may also charge additional payment processing fees, such as monthly service fee, fee for each transaction, cost of the credit card equipment.

Interchange fees

The bank that issued your credit card charges interchange fees on your transactions. This amount is incurred by the card issuing bank that manages your credit card. The fee varies from company to company, ranging from 1.5% to 3.3% based on factors such as—the relative risk involved, current interest rates, and the amount of money you transfer.

The interchange fees of the four major credit card networks are:

How to Calculate Credit Card Processing Fees?

One of the finest ways to calculate credit card processing fees is by finding the effective rate. 

The effective rate can be calculated by dividing the total amount deducted for processing by the total monthly sales. The amount you get after the calculation is your effective rate. 

It is the total amount your credit card company is charging you for accepting credit card payments.

What Are the Average Credit Card Processing Fees for Businesses?

Credit card processing fees can differ based on various factors, which include the type of business, the volume of transactions, and more. credit card processing fees range from 1.5% to 3.5% of the total value of transaction and a flat fee per transaction, which is around $0.10 to $0.30. 

Here are the average credit card processing fees for the four payment networks (also called “card networks”):

Sources: Visa USA Interchange Reimbursement Fees published on April 23, 2022, Mastercard 2022–2023 U.S. Region Interchange Programs and Rates, Wells Fargo Merchant Services Payment Network Pass-Through Fee Schedule, and Wells Fargo Payment Network Qualification Matrix effective April 22, 2022.

Best Practices for Reducing Credit Card Processing Fees

If you accept credit card payments, managing your credit card processing fees is essential, as they could impact your profit margins. 

Despite seeming insignificant, those small percentages can accumulate rapidly. While it’s impossible to eliminate the credit card processing fee entirely, there are ways to help you save thousands of dollars each month. 

Let’s explore these ways

Use AVS (Address Verification Services)

As a credit card holder, you can use address verification services to verify your billing address with the bank. This simple fraud-fighting software has several advantages in the world of eCommerce, such as identifying legitimate customers and ensuring efficient working operations. 

Customers have also reported that they’ve seen a 10% increase in ID verification matches when using AVS. After the address verification is completed, the bank sends an AVS code to the merchant, who can use it to approve or reject the transaction. Visa motivates businesses to use AVS and even promises a lower interchange rate for each transaction.

Properly set up the account and terminal

Small mistakes can often lead to higher processing fees and additional costs. Therefore, you must set up your account correctly right from the beginning. Your bank may charge more if you enter incorrect information while filling out your account details. 

The same applies to how you configure your terminal, as it significantly impacts processing fees. Develop a habit of processing transactions every 24 hours, which reduces the transaction count within that specific period, resulting in lower processing fees.

Stay away from credit card fraud

The most effective way to avoid credit card fraud is by entering the right security information, which is a three-digit code that you can find on the back of the card. This protects the cardholder from any fraudulent activity since it validates the purchase. 

You should also enter the billing ZIP code when prompted. This adds an extra layer of security to your purchase. Skipping this step can result in a higher rate due to fraud risk.

Negotiate the fees with credit card processors

As a merchant, the most effective way to reduce credit card processing costs is by negotiating the fee with payment processors. The more transactions you show to the processor, the higher your chance of getting a lower fee. You can leverage the total transaction volume against the cost it takes per transaction.

How B2B payments Can Assist in Achieving Cost-Effective Invoicing and Credit Card Payments

HighRadius offers a robust system that has several features that can assist your businesses in achieving cost-effective invoicing and credit card payments. 

Let us look into them

AI-based EMail Remittance Capture: This feature facilitates the automatic capture of remittance information from emails. This feature empowers businesses to save time and reduce the risk of manual errors.

Tokenization and PCI compliance: The payment gateway offered by HighRadius comes with solid security components like tokenization and PCI compliance which helps businesses in reducing the risk of data breaches.

Credit Card Hold for Sales Orders: Positioning automatic holds on credit cards for high-risk customers is one strategy to lower the risk of chargebacks and unpaid invoices. This feature enables businesses to receive payment in full before orders are completed, reducing the risk of payment disputes.

Re-Authorization: Automated re-authorizing of cards secures the payments throughout the entire transaction. This ensures smoother payments besides reducing the risk of declined transactions.

Auto-settlement: With the integration of this feature, all the settled transactions are converted into invoices which streamlines the payment process and reduces manual intervention.

Real-time payment confirmation: Businesses and customers will receive a confirmation that provides immediate visibility into the status of payments. 

Interchange Fee Optimization: This feature helps businesses significantly lower interchange fees. By integrating this feature, businesses can reduce their overall card processing costs.

ACH/eCheck Processing: Opting for low-cost payment options like ACH and eCheck payments can support businesses reduce transaction fees associated with credit card payments. 

FAQs.

1) Why should you accept B2B credit card payments? 

Accepting B2B credit card payments is good, as many of your customers prefer doing business that way. This works well, especially for startups and small businesses. Declining credit card payments might result in losing out on a bunch of potential customers. 

2) What is the transaction fee for a credit card?

Credit card organizations generally impose a fee per transaction to merchants, which is made up of an assessment fee to the card network and an interchange fee paid to the bank issuing the credit. This fee would be 1.5% to 3.5% of the transaction value plus a fixed cost of $0.10 to $0.30.

3) Is the credit card processing fee negotiable?

Yes, merchant fees for credit cards can be negotiable for businesses that execute transactions in high volumes. For merchants with good credit and a fair processing history, it is always possible to negotiate on the processing fee, especially when they’re executing a high volume of transactions. 

4) Who pays the credit card processing fee?

The responsibility of paying the credit card fee depends on the contract between the merchant and the payment processor(provider). In general, merchants(the seller) bear the credit card processing as a part of the total expenses associated with accepting payments through credit cards.

5) How do payment processors determine B2B credit card processing fees? 

Payment processors define Business credit card processing fees by considering several factors: transaction volume, average ticket size, industry risk, card type, and more. If a business is observed to handle many transactions and seen as less risky, the credit card fees will likely be lower.

6) How do you calculate the 3% processing fee?

In order to calculate a 3% processing fee, you will have to multiply the whole transaction value by 0.03. For instance, the processing fee would be $3 (100 x 0.03 = 3) if the transaction value was $100. The customer would be billed a total of $103, including the processing fee.

7) What is the best payment method for B2B?

ACH transfers, wire transfers, and corporate credit cards are commonly used in B2B payments due to their efficiency, security, and lower fees compared to traditional methods like checks. However, the best B2B payment method depends on the specific needs and preferences of the businesses.