Strategies To Help Lower Your Business’s Credit Card Fees

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As a merchant, you’ve probably received calls from companies promising to lower your credit card fees. What’s surprising is how they make these promises without even reviewing your processing statements. How is that possible?

It’s because merchant processing fees are made up of many components and several fee categories, and there are many ways to inflate and hide certain fees, which is something I’ve written about previously.

My company specializes in auditing credit card statements for businesses, and key fee groups include:

• Discount fees: These are the fees charged by credit card processors, often calculated as a percentage of the transaction (e.g., 0.05%) or a flat fee per transaction (e.g., 5 cents per transaction). I’ve seen that sometimes, but rarely, both a percentage and transaction fee apply. The good news is these fees are often negotiable, in my experience.

• Dues and assessments: These fees are charged by credit card networks, such as Visa, Mastercard, Discover and American Express. These fees are not negotiable, and they can vary among networks.

Tips For Reducing Fees

The answer to reducing credit card fees lies in how your transactions are processed. While interchange fees are typically the largest component, reducing the rate at which your transactions settle is key to cutting costs. There are a few ways you may be able to do this.

Use a level three payment gateway.

One of the best ways to reduce your fees is by ensuring you’re using a level three payment gateway. A level three gateway means more data is being passed along with each credit card transaction. The more data passed, the lower the interchange fees.

For example, a transaction that clears at more than 3.5% may also be able to clear at less than 2%. Reducing your rate by even 1% can make a difference. If your current effective rate is 3%, lowering it to 2% would mean a 33% reduction in your processing fees. If your business primarily handles consumer card transactions, this advice may not make a huge impact. However, for merchants that accept business, corporate or purchasing cards, this could be a game changer.

However, a level three payment gateway is data in and data out. This means it is up to your system to pass the necessary transaction details, which I’ve seen is an average of about 30 fields, to qualify for the lowest interchange rate. Merchants can use data-enhanced payment gateways for this. These gateways automatically populate the necessary data fields, which can help you get the lowest rates without the manual data entry required with a level three gateway.

I recommend taking the following steps:

1. Request a detailed interchange downgrade report. Ask your processor for a report on your interchange downgrades, or the transactions that didn’t qualify for the lowest rates, and how much money you’re losing because of these downgrades. This will give you a clear idea of potential savings from upgrading to a data-enhanced gateway.

2. Compare the cost of solutions you’re considering. In my experience, many processors offer a data enhancement service, but they may take 50% to 80% of interchange savings. Another option is asking for a data-enhanced gateway, which often comes at little to no extra cost and allows you to keep more of the savings.

Here is a hypothetical financial comparison of the two options: Let’s say a business processes a $500 purchasing card transaction. The data gets enhanced, which simply means any data that may be missing was added to get the lowest interchange rate. Now, the transaction clears at the lowest rate and reduces the business’s interchange fees by 0.85% (which I’ve observed is about the average). This would save the business $4.25 on the processing cost.

• Option A: For a data enhancement service, we’ve found many processors charge 75% of the savings. So, the business saved $4.25, but the processor charged it $3.19 to enhance the data. This leaves the merchant a savings of $1.06.

• Option B: Providers of data-enhanced gateways often charge 0.05% of the transaction plus 15 cents in my experience. If you multiply $500 by 0.05%, plus 15 cents, you’re at 40 cents, which leaves the merchant a savings of $3.85.

While that’s only a difference of $2.79 between the two options, if the business processes a thousand of these transactions in a month, the difference is now $2,790 per month or $33,380 a year.

Consider an audit.

There are several companies (my own included) that specialize in helping merchants lower their processing fees, including audits of your existing fees. However, be careful; many will try to lock you into contracts, which could make it difficult to switch if their service doesn’t deliver as promised. Look for companies that offer no-contract, transparent services. A simple Google search can help you identify companies in this space, but make sure to do your research and choose wisely.

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