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How to Lower Payment Processing Fees

Jul 16, 2008
Payment processing fees can initially seem reasonable. But, millions of small and medium-sized merchants have found that the aggregate amount of fees charged on each transaction they process can quickly become overwhelming. A transaction that first appears profitable can become far less so once the various fees are paid for processing the credit card. Discount rates, authorization fees, batch fees and statement fees can add up to siphon the profit from a transaction.

Though small merchants have few options and little leverage in demanding lower fees, understanding how the charges accrue can open the door to alternatives. In this article, we'll clear the confusion about the major fees involved in a credit card transaction. After reading, you should have a few ideas regarding how you can save money on your payment processing fees.

Clearing The Confusion

Each credit card transaction that you process carries a host of various fees. The most significant can be summarized into 2 different camps: Interchange fees and merchant service provider fees. The Interchange fee is levied by the customer's credit card company. It includes a small percentage of the purchase amount as well as a smaller flat fee. The merchant service provider fee works similarly (percentage of the transaction and a smaller flat fee).

Most small business people are coaxed into a merchant account contract with a competitive "discount rate." This rate includes both the Interchange fees and the merchant service provider fees. The problem with this is the merchant doesn't actually know how much the merchant service provider is charging. Without knowing the amount, you can't shop for a better deal.

Understanding Why Fees Vary

There's another problem that adds to the confusion (and thereby prevents the merchant from finding a better deal). The fees levied on each transaction can vary based upon how the transaction has been categorized. There are more than 100 different categories. The end result is that the same item purchased at different merchants can have different fees attached. The categories are lumped into 3 levels, averaged and a margin is applied. This process causes payment processing fees to fluctuate for each transaction. The variance muddies the waters and makes it difficult to shop for lower fees.

Can You Negotiate?

The size of your monthly transaction volume will largely determine how much you can negotiate your fee arrangement. If your business consistently processes over $20,000 each month, you may be able to qualify for the Interchange fee (and pay an additional small transactional fee). If you don't process that volume, you likely won't have the option. That said, it's important to remember that much of the confusion lies in the combining of the Interchange fees with the merchant service provider fees (i.e. the discount rate). There's little you can do about the Interchange fees. But, if you can identify the fees charged merchant service providers, you can shop for the lowest rate.

Knowing Your Options

Unfortunately, most merchants don't have a clear understanding of how much they're paying for each type of fee. Worse, many don't attempt to find out. As a result, their transactions are loaded down with fees they could likely lower. If you're looking for a merchant account for a payment processing solution, identify how much of the discount rate is distributed to the merchant service provider. As a small business owner with a light monthly transaction volume, that will probably be your best chance to lower your payment processing fees.
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This article is brought to you by PaySimple, a leading provider of echeck services.
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