Credit Card Processing Blog

There’s an old adage: just because you can, doesn’t mean you should. As a business owner, you might be considering charging your customers a credit card processing fee. Charging the customer is an easy way of offsetting your own costs in that area. However, just because you can do this doesn’t mean that you should. There are different laws, card brand agreements and consumer laws that need to be followed depending on the nature of your business and where you’re located.

To help you make the right decision, here’s what you need to know about passing credit card fees onto your customer.

There’s a difference between Surcharge Fees and Convenience Fees.

First of all, it’s important to understand that Surcharge Fees and Convenience Fees are not one and the same. Surcharge Fees occur when you pass the processing fee onto the customer to help minimize the amount you as the merchant pays for processing credit cards. Whereas Convenience Fees are charged when you’re providing the customer with a payment option that may not have been available to them otherwise. (For example, when you go into your local bodega, make a purchase under a certain dollar amount and are charged an additional fee at the till.)

In the United States, there are certain states that don’t allow credit card surcharging.

If you’re operating in the United States, you’ll want to make sure that your State allows credit card surcharging. While some card brands allow surcharging if you follow the specific guidelines of their merchant agreement, at the end of the day it all comes down to where you’re located. California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Puerto Rico, and Texas all prohibit merchants from applying surcharges. Even if you don’t reside in one of these States, it’s important to read through your merchant agreement and know the local laws.

Each card brand has slightly different guidelines.

Research each card brand and familiarize yourself with their surcharge guidelines. Each brand has slightly different rules, so it’s important you read through each of them carefully.

Visa lists its guidelines under the 5.6.1.3 US Credit Card Surcharge Requirements – US Region and US Territories. Mastercard has its own distinct set of rules for US merchants which can be found here:  5.11.2 of the MasterCard Rules. Lastly, if you’re planning on allowing customers to pay by Amex, make sure you become familiar with their US Merchant Policy.

Consider the customer experience.

Sure, tacking on a credit card surcharge to customer purchases will help you offset credit card processing fees initially, but it might not be worth it in the long run. When you’re considering adding an additional fee to credit card payments, you need to carefully consider how it will impact the customer experience — especially if you’re a new business looking to develop a loyal customer base.

Think of it this way: people don’t like to pay extra just to use their preferred payment method. It leaves a bad taste and may impact whether a customer comes back in the future. As a merchant, credit card processing fees are a reality of doing business. To minimize the impact on the customer experience, it pays to do your research and find a processing company that offers you the best deal possible.

Trying to get a grasp on your monthly credit card processing bill can make you feel lost, with a bunch of hard to decipher numbers and what-the-heck-does-that-mean jargon laid out before you. As a business owner, you want to make sure that you’re not paying more than you have to for credit card processing and that your costs haven’t suddenly increased from one month to the next. This starts by having a firm grasp on your monthly credit card processing statement.

Trying to decode your statement? Here’s what you need to know.

Compare more than two months of statements at a time

If you’re looking to examine your costs from month to month, it’s helpful that you grab more than one statement to compare side by side. Because of the nature of credit card processing, it may take more than one statement to get a clear picture of one month’s worth of charges.

Effective Rate

The effective rate of a credit card processing statement is the total processing fees divided by total sales volume. In other words, it’s the percentage rate you’re paying for accepting payments by credit card. Effective Rate can be calculated using the following formula:

(Total monthly fees / Total monthly sales) x 100 = Effective Rate

Your total monthly fees include everything from processing charges and gateway fees to statement charges and equipment rental. It’s everything that you see on your statement. By looking at your Effective Rate (which should be visible in the summary portion of your statement) you’ll be able to see the big picture cost of how much you’re paying for credit card processing.

Interchange fees and card brand fees (wholesale costs)

Credit card brands like Visa, Mastercard and the like will take a cut of processing costs – these are called brand fees or “card association fees and assessments.” In addition, banks that have issued the credit or debit card to the customer will charge an interchange fee to cover the cost of processing each individual card and transaction (the more perks the card has, the higher the interchange fee). These are called wholesale costs and they might not be visible on your statements because sometimes they’re integrated with markups.

Markups

Everything outside of the fees mentioned above is considered a markup. This includes Processor Acquirer (fees added by the processor behind your merchant account), Merchant Service Provider (MSP) (the organization that sets up and manages your merchant account) and Additional Service Providers (fees associated with equipment or gateway providers).

Effective Markup

Markup fees vary wildly based on the the MSP, so knowing your markup costs is a good way to see if you’re paying more than you need to be. If you’re able to see your interchange rates and card brand fees on your statement, you can easily calculate your Effective Markup, which lets you see exactly how much you’re paying in controllable fees each month. You can calculate it using the following formula:

[Total Fees – (Interchange Fees + Card Brand Fees)] / Total Sales = Effective Markup

When decoding your monthly credit card processing statement, it’s important to understand the individual fees, but also look at your costs from a big picture perspective. If you don’t have access to your interchange rates and card brand fees on your statement, focus on your Effective Rate because that will tell you how much you’re paying in fees per month.

When it comes to credit card processing, the future really is mobile. According to a recent Juniper Research study, by 2023, mobile point of sale systems (mPOS) will account for close to a quarter of all POS transactions globally. That’s an estimated 87 BILLION transactions annually.

It makes sense. From arts and crafts vendors and food services to mobile businesses that need to make payments on the go, mobile point of sale systems are the way to go. Even brick and mortar stores and traditional restaurants are adopting mPOS as a way to make their business run smoother and more efficiently.

So, you’re a small business owner setting up shop and you want to accept payments on your phone and/or your tablet. Now what? Here are a few key points you need to know about mobile processing.

  1. You need to have internet availability.

If your business is operating in a remote area where there’s no wifi or cellular reception (or even an indoor space where getting a signal is challenging), a mPOS isn’t going to be the best option for you. In order to process credit card payments, you need to have a reliable internet connection. Whether it involves upgrading your current mobile plan or purchasing internet access from the venue where you’ll be making sales, these are costs that you need to factor into your business.

  1. You’ll need the right hardware.

Whether you’re going with a traditional point of sale system or mobile, you’re going to have to invest in the correct hardware. You’ll need to check to make sure the app you want to use is only available on iOS or whether it’s also available on Android, and then figure out what device best fits your needs and budget.

Next, you’ll want to look into a card reader. While most are universal, there are some card readers that need a Lightning connection for iOS devices and iPhone 7 and newer. You can get an adapter to bridge this gap, but if you want to keep things simple, a better option might be to go with a Bluetooth-enabled reader instead.

Lastly, are you looking for a mPOS that supports a receipt printer or printer driven cash drawer? What about a barcode scanner? If you’re looking for these features you’ll have to purchase additional hardware.

  1. Processing times matter.

Once a customer makes a payment with their credit card, you’ll want that money in the bank as soon as possible. Although times vary based on the processor, most should be able to deposit money into your account within 2 business days. Some processing companies even offer next day deposits, so it’s worth doing your research.

  1. Look for extra features.

Some mPOS and credit card readers offer extra features that can be really beneficial to your business such as accounting integration (Quickbooks or Xero), invoicing, a customer database (that saves phone numbers and other info) and even inventory management options. Figure out what you think you’ll need and choose accordingly.

  1. Know what’s important to you and do your research.

As a business owner, you know what’s most important to you. Do your research to see what kind of software each card processor comes with. What features do you need most? What kind of card reader is compatible and how much does all of this cost? Only you can answer these questions. Make a list of every feature that you’d like to have (but maybe isn’t 100% necessary) and go from there.

“Cash only” is so three decades ago. If you’re going to be running a business in 2018, you need to provide your customers with the option to pay by credit or debit card — no ifs, ands, or buts. If you’re an online business, you can probably get away with having PayPal as your sole option, but as your sales grow you’re going to need to upgrade to provide more payment options.

With that said, not all businesses are treated equally. Businesses are treated differently based on the perceived level of risk they present for the credit card processor. While high-risk credit card processing comes with its share of challenges, it doesn’t have to mean the end of your business.

Here are a few important things to keep in mind while navigating credit card processing as a high-risk merchant.

  1. The processor determines whether you’re high-risk.

When you apply for a merchant account your processor will determine whether you fall into one of their high-risk business categories. Unfortunately, there’s no negotiating here. What qualifies as high-risk varies based on the processor. For example, some processors will deem pornography or drug-related paraphernalia as high-risk merchants, whereas others may have different criteria. If you’re not sure if your business qualifies as high-risk, reach out to the processor for more info before you apply.

  1. How your high-risk business is treated depends on the processor.

How a high-risk merchant is treated also varies based on the processor. Some processing companies simply won’t accept high-risk merchants at all, whereas others may just charge you higher than normal fees. There’s also a third branch of companies that specialize in high-risk credit card processing. Do your research and find what a processor’s high-risk criteria are before you waste time applying to a processor that will likely reject you.

  1. Understand why you might be considered a high-risk merchant in the first place.

While criteria vary slightly depending on the processor; high chargeback or fraud rates, offshore businesses, products with questionable legality (for example, pornography), questionable sales or marketing practices (i.e. if your business appears as a potential scam), bad personal credit or a high-average ticket sale (for example, if you’re routinely selling big-ticket items) are all considered factors when considering whether a merchant is high-risk.

  1. High-risk merchants typically pay more in fees and have to sign longer contracts.

When it comes to contracts, the industry average for non-high-risk merchants is usually around 3 years with some room for negotiation. However, as a high-risk merchant, you’re going to typically be stuck in longer contracts from 3-5 years with very little wiggle room due to your high-risk status. Your contract may even include an early termination fee and a liquidated damages clause if you decide to get out of the contract before the end of its term. Add in the higher processing fees you pay and being a high-risk merchant will cost you more overall.

  1. Beware of predatory high-risk credit card processing companies.

Yes, you should expect to pay higher fees as a high-risk merchant, however, be aware that there are also businesses out there that are looking to take advantage of your situation. Check out their website. Is it modern and looks like it’s been updated recently? Read what other customers have to say about them online. Is the feedback positive? Before you sign on with a high-risk credit card processing company make sure you read the contract carefully — including all the fine print — to avoid any hidden fees or clauses that could be detrimental to your business.

American Express was founded all the way back in 1850. Since credit cards obviously weren’t around yet, the company’s roots were in express mail. In 1891, Amex expanded to traveler’s cheques. This helped them create a global presence. After first discussing the possibility of a charge card in 1946, the company spent over a decade to launch their Diners Club Card in 1958. By that point, there was so much demand for this type of card that the company issued over two hundred thousand prior to their official launch date.

Since then, the company has added their Green, Gold and Platinum cards, as well as a number of branded partnership cards. This had led to more than one hundred million Amex cards being in circulation, with about half of those belonging to consumers in the US. While this may sound like a clear success story, the company has hit some obstacles along the way.

One issue that plagued American Express for a long time was their practice of charging higher fees than other card companies. This made many merchants reluctant to accept Amex cards from their customers. However, they’ve been able to work around these obstacles and are on the cusp of hitting a very big milestone.

Amex is On Pace to Pass Mastercard

While the year is shaping up to be really strong for all credit card companies, American Express is seeing especially good results. Although Visa is still the dominant market player with a share of over 50%, the momentum Amex has built means they’re poised to take the #2 spot from Mastercard. If this occurs, it will be the first time any of these positions have changed in several decades.

The big move that American Express has made is thanks to posting a growth rate of 10% for the last two quarters. In terms of specific strategies that have helped the company reach this point, the reduction of merchant fees has been instrumental in its recent success. After losing an exclusive deal with Costco in 2016, the company decided to shift to this new model with the goal of driving a faster increase in card loans as well as transaction volumes over the coming years. Based on its current position, this strategy appears to have been the right one.

What This Means for Your Business

Because American Express has long been associated with higher transaction fees, plenty of merchants have made a habit of not accepting this card. But since that’s changing and more people than ever want to use Amex to pay, this is a policy that all businesses should revisit.

If you’re thinking about revising your practices for accepting Amex cards, having the right payment processing partner will make this easy to do. And even if you’re less than thrilled with your current processor, the good news is our online resources ensure that switching to a new credit card processor is as simple as possible.