Getting started

It’s the question on every merchant’s mind: how do I reduce my credit card processing fees? It’s a good question, but a complicated one. The credit card industry is convoluted and confusing, and it takes perseverance and dedication to understand how processing fees work. But if you put in the time and do your due diligence, you’ll be rewarded with lower fees.

Here are some tips on the best ways to lower your processing fees.

Do your research

If you want to lower your processing fees, you’ll have to put in the work by researching different processors, comparing their rates, and learning how credit card processing fees work.

When you start looking into different processors, compare their rates and look for the best deal for your business. Every processor has different pricing structures and fees, and what works for your business may not work for another. Keep your monthly sales volume and average ticket price in mind when comparing processors—these numbers will help you make sense of how different pricing structures will affect your business.

There are many factors you should consider when choosing a new processor, but if you’re looking to lower your rates, then make sure the processors you’re considering are clear and upfront about their fees and rates. Determine what your monthly bill will include and read your contract thoroughly. Better yet, choose a processor that doesn’t require you to sign a contract.

If you’re already processing credit cards, then carefully read your statement every month. Pick it apart—research anything you don’t understand or call your processor to ask questions. Learn to read your statement well, and you’ll be able to use your knowledge get a lower fee.

Learn about credit card processing fees and pricing structures with sources like our Resource Library or online blogs and videos. Educate yourself on the processing industry so you’re prepared to negotiate for a lower fee.

You should know the basics about processing fees, including the difference between fixed costs and markup. Fixed costs include interchange and assessment fees, which are controlled by Visa, MasterCard, and the other card brands. You can’t do anything to change these. But you can change the markup—the percentage your processor charges you above and beyond interchange and assessment. The markup (also called the discount rate) is how processors earn their profit, and it’s how you can lower your processing fees through negotiation.

When it comes to pricing models, know the difference between interchange plus and flat rate pricing and the pros and cons of each. In a nutshell, merchants using an interchange plus pricing model pay a different percentage each month because the model is based on interchange, which is affected by how and which credit cards are processed. You’ll often get the lowest pricing with interchange plus, but your statements will change from month to month and you’ll be responsible for ensuring your transactions aren’t downgraded (more on that later.)

In contrast, flat rate pricing guarantees one flat rate no matter what. You’ll know in advance what your processing fees will be—no surprises ahead. And you won’t have to worry about downgraded cards because your processor will be responsible for ensuring there are no downgrades. However, you won’t be getting the lowest price possible.

To negotiate a lower interchange plus rate, focus on reducing the processor’s markup and make sure your cards aren’t downgraded.

To negotiate a low flat rate, take a look at your last three credit card statements. Find your average processing fee and then use this number to negotiate for a lower fee. If you can get a rate that’s lower than your historical average, then you know that you’ll save money each month. This is the only true way to guarantee savings.

Each pricing model has its advantages and disadvantages, but tiered pricing is one you should definitely avoid. Tiered pricing models are the least transparent and often the most expensive, so if a processor is aggressively pushing that model, it’s time to move on.

Finally, round out your research by determining your effective rate. If you’re currently processing credit cards, you can use your effective rate to get a comprehensive picture of your overall processing costs. Oftentimes, when it comes to processing fees, merchants get bogged down in details or particular percentages. The effective rate will give you a more holistic idea of how much you’re paying for credit card processing and a better sense of the overall cost.

To calculate your effective rate, divide your total processing fees by your total sales volume. For example, if your processing fees totaled $350 and your sales volume totaled $10,000, then your effective rate is 3.5%. You can use this number as a bargaining chip when negotiating with your current processor or switching to a new one.

Don’t downgrade your cards

Did you know that the way you process credit cards can affect your monthly processing statements?

When a credit card transaction occurs, the interchange rate is determined by the type of card and how it was processed. For example, business credit cards typically have higher interchange rates than personal credit cards, and swiped or card-present transactions usually have lower interchange rates than card-not-present transactions.

However, certain frowned-upon processing practices cause your transactions to be classified in a higher interchange bracket. The riskier a transaction seems, the higher its interchange rate. This is called a downgrade.

Too many downgrades will raise your monthly processing bill. The problem is that many merchants don’t know what downgrades are or how to avoid them.

Here are three simple ways to avoid downgrades:

1. Preauthorize and capture for the same amount.
When the preauthorization amount and the capture amount differ, it raises red flags about the legitimacy of the transaction.

2. Batch out every day
Close your batch every day (either manually or automatically) to avoid stale authorizations. Stale authorizations occur when too much time passes between authorization and settlement. In most cases, the time limit is 24 hours, so it’s best to batch out at the end of each night.

3. Include AVS
Include AVS (address verification system) with every transaction by entering the billing zip code. Providing the zip code lowers the risk of the transaction because the extra information reduces the chance that the transaction is fraudulent.

Four factors that raise your fees

We’ve covered strategies to help lower your processing fees. Now let’s go over four factors that raise your fees.

1. High risk
If your business is considered high risk (adult stores, cannabis, travel, etc.), then you’ll have a smaller margin to lower your fees. High risk businesses typically have higher processing fees because they’re prone to more chargebacks and other complications. You may have some wiggle room to negotiate for a lower fee, but don’t expect rock-bottom pricing.

2. Ignorance of the industry
If you aren’t aware of standard industry practices, the pros and cons of pricing models, and other essential information, then you won’t get the best deal possible. Educate yourself about credit card processing to make sure you’re negotiating for a fair fee.

3. Hidden fees
It’s unfortunate, but not every processor is looking out for their clients. Some processors will sneak hidden fees into your contract and hope you won’t find them. Read your statements and contracts carefully—and choose a processor that will partner with you to grow your business, not take advantage of you.

4. Downgrades
Careless processing practices lead to downgrades and inflated monthly statements. Research best processing practices and how to avoid downgrades to lower your processing fees each month.

Conclusion

The credit card industry is not easy to understand. It takes time and dedication to learn about processing, but it’s worth it when you use your knowledge to negotiate for a fair fee. We hope these tips give you a starting point to reduce your credit card processing fees and take control of your processing.