What Is the Cheapest Way to Process Credit Cards?

Understanding credit card processing costs is important for businesses to identify economical payment acceptance methods. This article clarifies the components of credit card processing, various pricing models, available solutions, and strategies to reduce expenses.

Understanding Credit Card Processing Costs

Credit card processing fees consist of three main components: interchange fees, assessment fees, and processor markup. These combine to form the total cost a business pays to accept card payments, typically ranging from 1.5% to 3.5% of each transaction’s value.

Interchange fees are the largest portion of processing fees, often 70% to 90% of the total. The merchant’s bank pays these fees to the cardholder’s bank for each transaction. Card networks like Visa and Mastercard set these rates, which processors cannot negotiate. Interchange fees compensate issuing banks for card services and risk coverage. The specific fee depends on factors like card type (credit vs. debit, rewards), transaction type (in-person or online), business industry, and transaction amount. Debit card transactions generally have lower interchange fees than credit cards.

Assessment fees are paid directly to card networks like Visa, Mastercard, Discover, and American Express. These fees support the networks’ operating costs and infrastructure. Calculated as a small percentage of monthly processing volume, assessment fees are mandatory for every transaction, though significantly smaller than interchange fees.

The processor markup is the fee charged by the payment processor for services like transaction facilitation, customer support, and fraud prevention. This markup is the only negotiable part of the processing cost structure. Processors may charge it as a percentage of the transaction, a fixed per-transaction fee, or a combination. The markup varies between processors, depending on a business’s transaction volume and average transaction amount.

Selecting a Pricing Model

Payment processors offer various pricing models, each structuring how interchange fees, assessment fees, and processor markups are presented and charged. These models impact overall cost-effectiveness and transparency.

Interchange-plus pricing is the most transparent model. The processor passes interchange and assessment fees directly to the merchant, adding a separate, fixed markup. This markup is typically a percentage plus a per-transaction fee, such as 0.20% plus $0.10. This breakdown clearly shows what businesses pay to issuing banks, card networks, and the processor. Interchange-plus is often more cost-effective for businesses with higher transaction volumes or larger average ticket sizes.

Tiered pricing categorizes transactions into different rate levels, such as “qualified,” “mid-qualified,” and “non-qualified.” Each tier has a different processing rate, assigned based on factors like card type (e.g., standard debit vs. premium rewards credit card) and transaction method (e.g., swiped, keyed-in, online). This model can be less transparent and more expensive. Transactions may “downgrade” to a higher-cost tier, leading to unpredictable and often higher fees. Lack of detailed reporting makes it difficult for businesses to track costs.

Flat-rate pricing offers a single, fixed percentage rate plus a per-transaction fee for all transactions, regardless of card type or method. For example, a processor might charge 2.6% plus $0.10 per transaction. This predictable model suits small businesses with low transaction volumes or small average transaction sizes. However, flat-rate pricing may not be the cheapest for growing businesses. The rate is set high enough to cover the processor’s costs for even the most expensive transactions, meaning businesses might overpay for lower-cost transactions.

Payment Processing Solutions

The choice of payment processing solution impacts a business’s overall costs. Different solutions cater to varying business needs and operational environments.

Point-of-Sale (POS) systems are integrated hardware and software solutions primarily used by brick-and-mortar stores. These systems manage sales, inventory, customer data, and process payments. POS hardware costs range from a few hundred dollars for basic setups to several thousand for comprehensive systems, including terminals, card readers, receipt printers, and cash drawers. POS software often operates on a subscription basis, with monthly fees typically ranging from $50 to $150, though some advanced systems can exceed $200. Businesses also incur standard credit card processing fees for each transaction through the POS system.

Online payment gateways enable secure processing of card-not-present transactions for e-commerce businesses. These solutions transmit payment data from a website to the payment processor. Gateway costs include setup fees, monthly gateway fees (often $10 to $25), and per-transaction fees separate from core processing fees. Online transactions generally carry higher interchange and assessment fees than in-person transactions due to increased fraud risk. Businesses should evaluate the total cost, including specific gateway charges, when choosing an online solution.

Mobile card readers offer a flexible, low-cost option for businesses on the go, such as food trucks or service providers. These devices connect to a smartphone or tablet to accept payments. Many mobile readers have low upfront hardware costs, sometimes free. However, they often use a flat-rate pricing model, which can be higher than other models, typically 2.6% to 3.5% plus a fixed fee per transaction. While convenient for small or mobile operations, higher per-transaction fees may become less economical as transaction volume increases.

Virtual terminals are browser-based solutions allowing businesses to manually key in credit card information, often for phone or mail orders. This transforms a computer into a payment terminal without specialized hardware beyond a standard computer and internet connection. Costs typically involve monthly and per-transaction fees, similar to online payment gateways. Transactions processed via virtual terminals are considered card-not-present and may incur higher interchange rates due to increased risk from manual entry.

Reducing Your Processing Expenses

Businesses can implement several strategies to reduce their credit card processing expenses. These actions can lead to significant savings over time.

Negotiating rates with payment processors is a way to lower costs. Since the processor markup is the only negotiable component, businesses, especially those with higher transaction volumes, should regularly review agreements and seek better terms. Processors may offer more favorable rates to retain existing clients or attract new ones.

Optimizing transaction types can lead to savings. Encouraging customers to use lower-cost card types, such as standard debit cards over premium rewards credit cards, can reduce interchange fees. Processing transactions using EMV chip technology or contactless payments (taps) is less expensive than manual entry or traditional magnetic stripe swipes, as chip-based transactions carry a lower fraud risk.

Implementing surcharging or cash discounts allows businesses to offset processing costs. A surcharge is an additional fee added to a credit card transaction to cover expenses. Surcharging is permissible in most states, with a maximum limit of 4% of the transaction value set by card networks. Businesses must clearly disclose surcharges to customers before the transaction and list them as a separate line item on receipts.

A cash discount program offers a discount to customers who pay with cash, effectively passing the processing cost to card users. Both strategies require adherence to card network rules and local regulations.

Batching transactions promptly can impact interchange rates. Delaying the daily submission of transactions for settlement can result in higher-cost interchange categories. Establishing a consistent daily batching schedule helps ensure transactions are processed at optimal rates.

Maintaining PCI (Payment Card Industry) compliance is important for avoiding fees and penalties. Non-compliance with PCI Data Security Standards (PCI DSS), which protect cardholder data, can result in monthly or annual processor fees, typically $15 to $125. Compliance also reduces the risk of data breaches and associated costs like fraud losses and legal liabilities.

Regularly reviewing processing statements is important for cost management. Businesses should audit statements to identify discrepancies, unexpected fees, or savings opportunities. Understanding each line item and comparing current rates against industry benchmarks or negotiated terms helps identify areas for cost reduction. This vigilance ensures a business does not overpay for payment processing services.