Small Business Credit Card Processing Guide

Let’s face it; credit cards are convenient and increasingly safe to use. More Canadians are choosing to pay with credit cards. In Canada alone, there are 9.68 million Visa and Mastercards in use. It is, therefore, beneficial for businesses to accept credit cards as a form of payment. This article looks at some associated costs to help you make the best business decision.

How to get started

To process credit cards, you need a terminal that allows the payment information to be entered and funds electronically transferred. Purchasing one can be costly; if you decide to lease the equipment, you must pay monthly fees. It may be cost-efficient to buy the terminal outright, depending on your situation. 

Types of Fees

Interchange Fees

An interchange fee is a per-transaction fee charged by the issuing bank. It covers their costs and protection from fraud, car rental insurance and reward programs. 

The factors that determine the amount are:

  • If the transaction was processed at a point of sale or online
  • The amount charged
  • The type of business
  • The type of card. Premium cards charge higher fees
  • International transactions (0.005%-3.0%)

Brand Fees (Assessment Fees)

These are fees paid to the credit card brand. It is how brands like Mastercard and Visa make most of their money. It’s a small fee of 0.07% to 0.09% of the transaction based on monthly sales.

Payment Gateway fees

A payment gateway is a physical machine used in stores, for example, a cashier or self-serve station. It can also be used online, more commonly experienced as Checkout on an e-commerce site. Payment gateway fees are processing fee per item that is charged monthly. These charges cover operating expenses, software maintenance, and tech upgrades.

PCI Fees

PCI stands for payment card industry data security. It is also known as PCI DSS. The PCI fees are paid to the payment card industry. PCI Standards are a set of guidelines to ensure cardholder data remains secure. They range from $5 per month to $99 per year.

Incidental Fees

These fees are charged for insufficient funds or transaction chargebacks. Also, some providers charge an activation fee when your merchant account is first opened. This can be up to $300.00. 

Credit card processing

Who are the players in credit card processing?

Networks

Mastercard, Visa, American Express and Discover are the four major credit card networks. Of the four networks, two are card issuers — Amex and Discover — which we will explain more about in the next section. In addition to aiding transactions, card networks determine where credit cards are accepted.

Issuers

An issuer is the cardholder’s or customer’s bank. Issuers can also include fintech companies and payment firms. The issuing bank must pay the acquirer for approved credit card transactions and collect payment from cardholders.

Merchants

The business uses processing services—for example, the grocery store or Amazon.

Service providers

This company provides the terminal and service to process credit cards. It can be a bank organization or a cloud-based service.

Merchant account vs Payment Service 

  1. A merchant account is set up by a bank or company and provides a terminal and processing service. 
  2. Payment service provides online payment processing.

How to pay fewer fees

Credit cards are a large part of doing business, and most cannot afford to lose business by using cash only, but do not overpay for credit card fees! 

Processing fees can vary and change twice a year, in April and October. Always check with your provider for the pricing breakdown.

There are some ways you can keep fees lower:

  • Shop around for a provider 
  • Give a discount to customers that pay in cash or debit. This method only makes sense for some types of businesses, though. Customers will be less likely to pay cash for high-priced items, and the company should consider the labour cost of someone counting the money and depositing it into the bank.
  • Set a minimum purchase. Small purchases are only valuable to the business if they are at least the fee charged by the credit card provider. Creating a minimum purchase requirement for credit card use is a way to ensure the sale is higher than the fees it makes.
  • Avoid chargebacks – When a customer disputes a charge, it can increase processing fees because the bank may deem the business a higher risk. The company can charge the card regularly if customers sign a pre-authorized form. This works well for service or subscription businesses.
  • Negotiate – The business can meet with the provider before the merchant account is set up to discuss processing fees. Often banks are willing to negotiate in the beginning. If the business already has a contract with the provider, it will have to wait until it expires to negotiate better fees and terms. For smaller companies, it is a good idea to refrain from signing lengthy contracts with a service; this way, there is more opportunity to negotiate or change providers.

Before using a method to control fees, be sure the merchant contract allows it and always explain costs to customers before they are charged. Customers must know what they’re paying to reduce chargebacks or bad reviews.

While it is true that accepting credit cards is an added cost to small businesses, the costs can be manageable with some research and shopping for providers. Take time to understand your needs and what makes sense for your business.

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