Ideal Cost Reacts: CreditDonkey’s “Credit Card Processing Fees: What You Need to Know”
In this article, the editor disclosure for affiliate compensation from third-party advertisers isn’t clearly shown at the top of the article. In fact, you have to scroll throughout the article’s many affiliate links to the bottom of the article where you’ll find the disclosure. Putting the disclosure at the very bottom is very sneaky, and most people won’t see it before following links to credit card processing authors.
Nevertheless, is CreditDonkey a reliable source of information for small businesses making decisions on their credit card processing? We’ll find out if this article stands up to scrutiny on credit card processing fees.
Credit Card Processing Fee Logic
- The processing method matters.
Card-present (swiped or chip reader) transactions pose a lower risk for banks. They have a lower risk of fraud and/or chargebacks.
This allows for lower processing fees. Card-not-present transactions (over the phone or internet) have a higher risk of fraud and chargebacks, resulting in higher processing fees.
- The size of your average transaction matters.
The lower your average transaction, the more you’ll pay in transaction fees. For example, 100 $5 transactions are much more expensive than five $100 transactions.
If the merchant service provider charges 2% plus $0.15, for example, you’d pay $0.15 one hundred times for the lower transaction. Compare that to the five times you’d pay it for the $100 transactions, and you’ll see the difference.
- The type of business you run matters.
All businesses have a Standard Industrial Classification Code and a Merchant Category Code. These standard codes let card issuers know what type of business the consumer is trying to conduct.
Risky businesses are often provided higher credit card transaction fees just because of the risk they pose.”
The author is correct in the comparison of card-present transactions, posing a lower risk to banks than card-not-present sales. It is easier for scammers to retrieve fraudulent cardholder information as opposed to a physical chip-enabled card. Therefore, more fraud can be committed through online or phone-based purchases, which may hurt the banks’ and card associations’ bottom line. The banks and card associations price the fraud into the higher transaction rate, though it isn’t the only factor. Additionally, that rate is charged to the credit card processors, not the end-user. Therefore, the rates will be marked up again before they reach the business client.
Yes, the smaller the transaction, the more significant the transaction fee becomes. A $0.10 per transaction fee on a $10 average sale is equivalent to a 1% processing charge.
The author is oversimplifying the standard code process. The standard codes are essentially buckets, which define the closet possible business type for any client. Most businesses have an exact match for these standard codes. Still, these codes are unable to keep up in real-time with evolving and nuanced businesses. Often, businesses get lumped into standard category codes, which are impractical. In turn, the business client may get hit with rate hikes and account restrictions, which are entirely inappropriate.
Negotiating Credit Card Processing Fees
“Remember, you can negotiate markup fees charged by credit card processors and merchant account providers.
High volume sales merchants usually have the best luck negotiating these fees. What you negotiate should depend on the type of sales you make.
For example, large transactions are more affected by the percentage add-on than the per-transaction fixed fee. Using our above example of 0.5% + $0.15, let’s see the difference for two transactions:
- $10 transaction: $0.05 + $0.15
- $100 transaction: $0.50 + $0.15
The lower the transaction amount, the more sense it makes to negotiate the per-transaction fee. If you were to negotiate a lower percentage, you would save a penny or two.
But if you negotiate the per-transaction fee, you could save as much as $.05 to $.10 per transaction. That might not sound like a lot, but after 1,000 transactions, you’d save $50 – $100.
Higher transactions, on the other hand, would save you more with a lower percentage fee. If you were able to negotiate a 0.4% fee rather than 0.5%, you’d save $0.10 per transaction.
After 1,000 transactions, you’d save $100. Of course, the higher your transaction amount, the more you save.”
Yes, businesses can negotiate credit card processing fees. While large merchants may have more leverage, in theory, the more substantial sales don’t always translate to any savings. In some cases, credit card processors even see these larger accounts as a burden. There are specific ranges of sales which are easier to negotiate than others, but there are plenty of other factors such as technology needs, customer service needs, chargeback ratios, etc.
The author succinctly points out how higher average transaction businesses are affected by rates and percentages, and lower average transaction businesses are more affected by the transaction fee. However, the author neglects to take the argument one step further. Ultimately, both the percentages and rates matter as well as the average transaction size except in extreme cases. Even if a business has a $1000 average sale, if they are running 10,000 transactions a month, the size of the average sale is irrelevant.
The original article is quite long. It goes into detail about the intricacies of the players and the anatomy of a typical credit card transaction. We picked the most relevant parts of the article for the business community. Overall, the author is mostly accurate, but their analysis is surface-level at best. Between the lack of in-depth analysis and placing the advertiser disclosures at the bottom of the article, and even using some unusual language, we find this piece a little above average.
We give this article a B-.
Don’t Take On The Credit Card Processors By Yourself
Since 2009, IdealCost.com has helped hundreds of companies nationwide reduce their merchant account fees through identifying and fixing hidden profit, overcharges, fake fees, and billing errors. Clients have saved $300-$20,000 per month on their credit card processing fees without going through the hassle of changing their processing vendor, bank, or equipment. Switching credit card processors should be a last resort, only reserved for funding delays, poor customer service, or technical difficulties. Before you consider switching credit card processors, see if you qualify for our small business solutions monthly savings program. Upload your most recent merchant statement for a free analysis. You’ll receive an estimate within 24 business hours.
If you are opening a new credit card processing account or switching credit card processors, feel free to contact us for a free consultation. IdealCost.com can help secure the best terms and fees based on your specific needs.