What Does It Cost a Business to Accept Credit Cards? Total Charges Explained

In today’s fast-paced, cashless economy, accepting credit cards is essential for most businesses. More customers are weighing the pros and cons of credit cards, optimizing the various credit card perks, flexibility, and convenience offered. However, with this convenience comes a cost. Businesses must navigate fees associated with credit card transactions, from processing to hidden costs like chargebacks.

Understanding these charges is crucial for business owners to make informed financial decisions and maintain profitability while offering this payment option. In this blog, we’ll break down the total costs of accepting credit cards and explore ways to minimize these expenses.

Understanding Credit Card Processing Fees

Credit card processing fees are businesses' primary costs when accepting card payments. These fees are essentially the cost of using the network infrastructure and services that allow credit card transactions to occur. For example, businesses can incur a fee if a credit card transaction is declined. Fees typically fall into three categories: interchange fees, assessment fees, and payment processor fees.

Credit Card Transaction Fees

Credit card transaction fees are incurred every time a customer uses their card. These fees are typically a percentage of the transaction amount plus a fixed fee, varying based on the type of card used (credit, debit, or rewards) and the nature of the business.

Interchange Fees

Interchange fees are charged by the cardholder's issuing bank whenever a credit card transaction is processed. These fees usually make up the largest portion of the overall transaction cost. They are designed to cover the risks and handling costs incurred by the bank. The rate varies depending on factors like the type of card (credit, debit, or rewards), the method of payment (in-person or online), and the transaction amount. Higher rewards or corporate cards generally incur higher interchange fees.

Assessment Fees

Assessment fees are charged by credit card networks, such as Visa, Mastercard, or American Express. These fees represent a small percentage of each transaction and are used to maintain and operate the card network infrastructure. While smaller than interchange fees, they are still mandatory for credit card processing. The rate is usually consistent across all merchants but can vary slightly depending on the credit card network.

Payment Processor Fees

Payment processors, the companies responsible for managing the transfer of funds between the customer’s bank and the business’s account, charge flat fees and a percentage of the transaction. These fees cover the technology and security that ensure the transaction is processed safely and efficiently. Rates can vary depending on the payment processor, the volume of transactions, and the type of plan the business selects (e.g., tiered or flat-rate pricing).

Fixed Transaction Fee

In addition to percentage-based fees, payment processors typically charge a fixed transaction fee for each transaction. This fee remains constant regardless of the transaction amount. It may be small, but these fixed fees can quickly accumulate and impact the overall cost of payment processing for businesses with high volumes of smaller transactions.

Industry-Specific Fees

Some businesses, particularly those in high-risk industries like travel, hospitality, or adult services, may face elevated processing fees. Payment processors may consider these industries more likely to experience chargebacks or fraudulent transactions, resulting in higher fees to compensate for the increased risk. Even within the same payment processor, different industries can have different fee structures based on their risk profile.

Foreign Transaction Fees

Businesses accepting payments from international customers may incur additional foreign transaction fees for currency conversion and cross-border processing. These fees compensate for the extra costs of processing payments from foreign credit cards or accounts. Both the card networks and payment processors may apply these fees, and they are typically higher than standard domestic transaction fees, adding to the overall cost for businesses engaging in international trade.

How to Accept Credit Card Payments

Here's how businesses can accept credit card payments from their customers.

Choose a Payment Processor

The first step to accepting credit card payments is selecting a payment processor or merchant services provider. They handle the technical side of transactions, from authorizing payments to transferring funds to your business account. Popular options include PayPal, Stripe, Square, and traditional bank-based services. Look for providers that offer competitive rates, reliable customer support, and security features.

Set Up a Merchant Account

Many businesses will need to open a merchant account, which is a type of bank account that allows you to accept credit card payments. This account temporarily holds the funds from a credit card transaction before they are transferred to your main business account. Some payment processors bundle this service, while others require a separate setup.

Select Your Payment Methods

Decide which types of credit card payments you'll accept. Will you process payments in person with a point-of-sale (POS) system, or do you need the capability for online and mobile payments? Many businesses now offer a combination of both. Ensure your system supports major credit card networks like Visa, Mastercard, and American Express.

Get the Right Equipment

For in-person transactions, you'll need the appropriate hardware, such as card readers, POS terminals, or mobile card readers. Many modern devices support EMV chip cards, contactless payments like Apple Pay, and magnetic stripe cards. Ensure your equipment is compatible with your payment processor and supports the latest security features.

Enable Online Payments

If your business operates online, integrate a secure payment gateway into your website or e-commerce platform. This gateway processes transactions between your site and the credit card network. Platforms like Shopify, WooCommerce, and Magento offer seamless payment gateway integration with processors like PayPal, Stripe, and others.

Secure Your Transactions

Protecting customer data is crucial. Ensure your payment system complies with the Payment Card Industry Data Security Standard (PCI DSS) to safeguard sensitive information like credit card numbers. Implement SSL certificates on your website and use encryption to secure transactions. Many payment processors also offer fraud detection and chargeback protection services.

Test Your System

Ensure all credit card types are accepted, transactions are processed correctly, and customers receive confirmations. Regularly review your system’s performance and security to ensure it runs smoothly and follows the latest standards.

Review Fees and Terms

Understand the fee structure of your payment processor. Besides standard transaction fees, there may be additional charges for chargebacks, international transactions, or PCI compliance. Carefully review the terms of your agreement and regularly audit your fees to ensure you’re getting the best deal for your business.

Credit Card Payment Processing Costs

Accepting credit cards comes with transaction and non-transaction fees. Transaction fees include interchange, assessment, and payment processor fees, while non-transaction fees cover costs like equipment, terminal rentals, monthly service fees, and PCI compliance.

Understanding and managing these expenses is essential to keep payment processing costs under control while providing your customers with the convenience of card payments.

Equipment Costs and Terminal Fees

• Card Reader & Terminal Purchases: To accept in-person payments, businesses need card readers or payment terminals. The cost of purchasing this equipment varies, depending on features such as chip cards, contactless payments, and built-in receipt printers.

• Terminal Rentals: Instead of purchasing, some businesses rent their terminals. Renting is a cost-effective solution to avoid upfront costs, though the rental fees may add up.

• Mobile Card Readers: For mobile businesses, portable card readers are often more affordable and support chip, swipe, or contactless payments like Apple Pay and Google Pay.

• EMV and NFC Compatibility: Terminals and readers that support EMV (chip cards) and NFC (contactless payments) tend to be more expensive, but they are essential for reducing fraud and improving security.

• Maintenance and Upgrades: Equipment requires occasional maintenance or software upgrades to stay secure and functional. Some providers include maintenance in their service contracts, while others may charge additional fees for updates and support.

Payment Processing Pricing Structures

• Flat-Rate Pricing: A simple and predictable pricing model, flat-rate pricing charges a fixed percentage fee per transaction, regardless of card type or transaction size. This is ideal for businesses with low transaction volumes or those seeking simplicity in their pricing structure.

• Interchange-Plus Pricing: Interchange-plus pricing offers more transparency by charging the exact interchange fee plus a small markup from the payment processor. This structure allows businesses to see the breakdown of fees but may be more complex. It often results in lower costs for high transaction volumes.

• Tiered Pricing: With tiered pricing, transactions are grouped into different tiers—qualified, mid-qualified, and non-qualified—based on card type and risk level. Each tier has a different fee rate, with qualified transactions (e.g., standard debit or credit cards) having the lowest rate and non-qualified transactions (e.g., rewards or corporate cards) carrying the highest. This model can result in higher overall fees, as most transactions may not qualify for the lowest tier.

• Subscription/Monthly Fee Model: Some processors offer a subscription-based model where businesses pay a monthly fee for access to wholesale transaction rates. This model is ideal for businesses with high transaction volumes, as it reduces the per-transaction fee and can lead to significant savings over time.

• Pay-As-You-Go: Suitable for smaller or seasonal businesses, this model charges only for each transaction processed, with no monthly fees or long-term contracts. While per-transaction fees are typically higher, this structure is ideal for businesses with inconsistent or low-volume sales.

• Batch Fees: Some processors charge a batch fee for closing out transactions at the end of each business day. This fee is typically a small flat fee but can add up if the business processes high daily transactions.

Minimizing Credit Card Processing Fees

1. Negotiate with Payment Processors: Payment processors often have some flexibility in fee structures, especially for businesses with high transaction volumes. Don’t hesitate to shop around and negotiate for lower rates. Consider using multiple quotes from different processors as leverage to get better terms.

2. Choose the Right Pricing Model: Your pricing model can significantly impact costs. For businesses with high transaction volumes, interchange-plus pricing is often more cost-effective than flat-rate pricing because it provides greater transparency and passes on the exact interchange fees with a smaller markup.

3. Encourage Debit Card Usage: Debit card transactions generally have lower interchange fees than credit cards, especially rewards or corporate credit cards. Encouraging customers to use debit cards instead of credit cards can help reduce processing costs. Signage or discounts for debit payments can make this option more appealing to customers.

4. Avoid High-Risk Transactions: Transactions considered higher risk—like keyed-in payments or international transactions—typically carry higher fees. Whenever possible, opt for chip or contactless payments, which are considered more secure and often have lower fees.

5. Batch Your Transactions Daily: Some payment processors charge a batch fee for closing out transactions at the end of the day. To avoid unnecessary costs, be diligent about batching your transactions daily rather than waiting multiple days, which could result in additional batch fees.

6. Monitor Chargebacks: Chargebacks, when a customer disputes a transaction, can lead to additional fees and lost revenue. Reducing chargebacks through clear return policies, excellent customer service, and fraud detection tools will help lower these extra costs. Some payment processors offer chargeback protection services, which can be worth the investment.

7. Use PCI-Compliant Payment Systems: Ensuring your business complies with PCI DSS (Payment Card Industry Data Security Standard) can help avoid non-compliance fees. Many payment processors charge additional fees if a business does not meet these security standards. Using PCI-compliant systems and following best practices in data security will prevent these penalties.

8. Consider Surcharging or Cash Discounts: Surcharging allows businesses to pass credit card processing fees to the customer. While some states or regions restrict this practice, where it’s allowed, it can be an effective way to offset fees. Alternatively, offering a small discount to customers who pay with cash can encourage them to avoid using credit cards.

9. Review Your Statements Regularly: Payment processing fees can vary month-to-month due to changes in card types, transaction volume, and other factors. Regularly reviewing your statements helps you spot fee changes or errors. If you notice unexpected increases, contact your processor to discuss adjustments.

10. Use a Processor with No Monthly Fees: For businesses with low or seasonal transaction volumes, consider using payment processors that do not charge monthly fees, such as Square or PayPal. These platforms typically have higher transaction fees but can save businesses on fixed monthly costs if they process fewer transactions.

Benefits of Accepting Credit Card Payments

1. Increased Sales: Accepting credit cards expands your customer base, as many consumers prefer the convenience and security of paying with cards.

2. Convenience for Customers: Credit cards offer a fast, hassle-free payment method, whether in-store, online, or through mobile devices. This convenience can improve customer satisfaction and encourage repeat business, especially for online shoppers who rely on card payments for quick checkouts.

3. Improved Cash Flow: Credit card payments are processed quickly, often within one to two business days, ensuring faster access to your funds. Unlike waiting for checks to clear or chasing down unpaid invoices, credit card payments streamline cash flow and reduce the risk of late payments.

4. Enhanced Security: Accepting credit cards through secure payment processors reduces the risk of handling cash and decreases the chances of theft or human error. Modern card readers support encrypted, EMV chip-enabled, and contactless transactions, offering better protection against fraud.

5. Online and Mobile Payment Capabilities: Credit card acceptance is essential for businesses looking to sell products or services online or through mobile apps. Customers expect seamless payment options, whether purchasing from a website, using a mobile app, or paying on the go.

6. Global Reach: Credit card processing allows businesses to accept payments from international customers, expanding their market reach. With multi-currency support and international payment capabilities, businesses can serve a broader audience without geographic limitations.

7. Builds Credibility and Trust: Displaying major credit card logos at your point of sale or online checkout signals to customers that your business is established, trustworthy, and secure. Many consumers associate the ability to pay with credit cards as a mark of legitimacy and professionalism.

8. Easier Financial Tracking: Credit card payments are recorded automatically by payment processors, making it easier to track sales, manage accounting, and reconcile transactions. Many processors also offer detailed reports and analytics, helping you monitor cash flow, spot trends, and make data-driven decisions.

9. Access to Financing: Payment processors sometimes offer short-term financing solutions, such as merchant cash advances, based on your credit card transaction volume. This can provide a quick source of capital for expanding your business or managing seasonal fluctuations.

10. Competitive Advantage: Businesses that accept credit cards often have an edge over those that only accept cash or checks. Offering multiple payment methods increases your competitiveness in a crowded market and can lead to greater customer loyalty.

Get a Secure KOHO Credit Card Today

Understanding the costs of accepting credit cards is essential for any business looking to thrive in today’s digital economy. By choosing the right payment processing solution, businesses can streamline their finances, minimize fees, and enhance customer experiences. This not only simplifies transactions but also ensures a secure payment process for both the business and its customers.

With KOHO, customers can shop with ease, knowing their virtual card transactions are safe and convenient. Embracing KOHO's features can empower businesses to optimize their payment processes and foster customer loyalty, ultimately contributing to their overall success.