When a customer makes a payment, they might assume that the whole amount simply goes to the merchant and they receive their goods or services. But is it really that simple? Unsurprisingly, no. Businesses deal with many hidden costs associated with payment processing that can significantly add up over the long-term.
In fact, it’s surprising to learn that standard processing fees can range between 1.5% – 3.5% of the whole transaction value. So, if that’s a large transaction, the fee is going to be substantial. That doesn’t even include assessment fees, which are extra charges from card networks.
To demystify this whole subject, let’s dive into the hidden payment processing costs that plague your life. We’ll talk about why they’re there, how to reduce them, and how choosing the best high risk merchant service provider can go a long way.
TL;DR
- Standard payment processing fees vary depending on payment provider and method, but range from 1.5% to 3.5% per transaction on average.
- Indirect costs include chargeback fees, fraud prevention, and administrative overhead, which can add up to 1-2% of total sales in many cases.
- High-risk businesses may experience payment processing challenges that can affect cash flow, with delays in fund transfers or reserve requirements impacting business liquidity.
- To optimize costs, businesses can negotiate rates, choose the right high-risk payment provider, and utilize volume discounts or flat-rate pricing.
- Compliance with industry regulations like PCI-DSS and GDPR can cost large businesses up to $1 million annually, depending on the scope and complexity.
- Staffing and training costs for payment processing can be significant. Businesses often need dedicated employees or training programs to handle technical or customer service issues.
The Visible Tip: Standard Processing Fees
First, let’s talk about the part you can actually see, i.e., standard credit card processing fees. We can call this the tip of the iceberg, but understanding this part gives you a good foundation on which to continue toward the hidden parts under the surface.
The standard processing fee is a percentage of the transaction value with a fixed fee per transaction on top. However, these fees vary depending on the type of card; in many cases, rewards cards have higher charges. Another aspect to pay attention to is the processing method, e.g., whether the card is or isn’t present, as this also impacts upon the final fee, along with the different types of payment gateways used across the board.
Interchange Fees: The Foundation of Processing Costs
Interchange fees are the basis of all processing costs and they’re set specifically by card networks and are non-negotiable. The actual fee is based on several different elements, which includes transaction method, card type, and the merchant category. For instance, high-risk businesses usually pay higher fees.
Interchange fees are calculated as a percentage of the full transaction amount with a fixed amount on top. These credit card fees are updated bi-yearly and can drastically impact a business’ processing costs across the year.
The table below gives some insights into different cards and their average interchange fees.
Card Network | Average Interchange Fee Range |
Visa | 1.15% + $0.05 to 2.40% + $0.10 |
Mastercard | 1.15% + $0.05 to 2.50% + $0.10 |
Discover | 1.10% + $0.16 to 2.40% + $0.10 |
American Express | 1.43% + $0.10 to 3.30% + $0.10 |
Card-Present vs. Card-Not-Present Transactions
One element that affects the overall processing fee is whether the card is or isn’t present at the time of the transaction. Lower fees are usually tied to card-present transactions, generally because the risk of fraud is much lower. However, card-not-present transactions usually have higher processing fees, often used for online purchases. These have a higher risk of unauthorised use and fraud, contributing to higher processing costs. However, our merchant accounts all come with built-in merchant fraud protection.
According to reports, card-present payments often have a fee of 1.51% + $0.10, compared to card-not-present payments, which may be 1.80% + $0.10. Therefore, if your business has both types of transactions, e.g., in person and online purchases, then it’s important to monitor your fees across both categories to ensure fees aren’t eating into your profit margins excessively.
Rewards Cards and Their Impact
Many rewards cards have higher interchange fees on the merchant side, although customers enjoy them because of the added extras they get in return. These credit card processing fees can significantly impact your processing expenses. For instance, a premium reward car might have a processing fee of 2.4% + $0.10, which is much higher than a regular card.
Assessment Fees: The Often Overlooked Charge
Next, let’s talk about assessment fees. These are extra charges that card networks dictate and they’re separate from the other types of processing fees. The biggest issue here is how quickly these fees can build up, especially if your business is one that regularly has high-volume transactions.
It’s important to understand these fees and take them into account when looking at the entire merchant fees picture.
In most cases, assessment fees are a small percentage of the overall transaction value, but as before, if the value is high, that means a higher assessment fee in the end. These fees are generally between 0.13% – 0.15%.
Visa's Fixed Acquirer Network Fee (FANF)
Another processing fee to know about is FANF, or the Fixed Acquirer Network Fee and it’s specific to Visa transactions. Depending on your business type, this fee can be small or large, especially if your business has several locations and regularly deals with high-volume transactions.
For a small business, the FANF could be just $10 per month, however large businesses may end up paying thousands of dollars based on locations and transaction amounts. This processing fee is calculated using a complicated tiered structure.
The Hidden Depths: Indirect Costs of Payment Processing
Credit card processing rates can be exceptionally high for high-risk businesses.
Source: Pexels
We’ve talked about the clearly visible fees; now let’s talk about the hidden ones that may take you by surprise. There are many processing costs that can build up over time and knowing about them is vital to ensure careful financial planning.
Chargeback-Related Expenses
Any business can experience a chargeback, but high-risk businesses often find them a regular occurrence. However, not only do these disputes cost time and money at the point of them happening, they also incur additional processing fees and can damage the business’ reputation.
According to data, the average chargeback fee can be anywhere between $20 – $100 depending on several factors. These include the payment processor, the type of transaction, and the business’ risk factor.
For instance, payment processors such as PayPal or Stripe charge around $15 – $20 per chargeback, whereas MasterCard and Visa can be anything from $0 to $100. The problem here is that many payment platforms don’t accept high-risk transactions and often block accounts as a result. This leads many businesses to seek a PayPal alternative, such as PayCompass. Luckily, our high-risk merchant accounts are designed for this very need, including chargeback prevention as standard.
Fraud Prevention Costs
Fraud prevention should be at the forefront of every business owner’s mind, whether high-risk classified or not. Implementing a strong strategy can help avoid unnecessary fees and expenses. However, in this world, you don’t get anything without spending first, and the same goes for setting up a robust fraud prevention strategy. These measures have their own costs but when you weigh up the risk versus benefits, there is a clear winner in terms of reducing unnecessary processing fees.
A 2022 study showed that financial services companies, such as insurers and banks, spend on average between 1.3% – 2.5% of their annual revenue on fraud protection measures. When you compare that to the amount businesses lose every year, it’s a small sacrifice – a study by the Association of Certified Fraud Examiners showed that businesses worldwide lose around 5% of their annual revenue to fraud.
PCI Compliance Expenses
All businesses must comply with a range of different regulations and in terms of payments, PCI compliance is essential. This step involves direct and indirect processing fees, which includes security upgrades, fines for non-compliance, and annual assessments. However, they’re non-negotiable in terms of protecting data and maintaining customer trust and keeping merchant account fees as low as possible.
Fees related to PCI compliance can vary from one side of the scale to another, however the full cost includes annual self-assessment questionnaires and vulnerability scans. Large businesses may also require on-site audits, which can be quite costly.
PCI Non-Compliance Fees
We mentioned that non-compliance is out of the question, but for those who do, there are heavy penalties. Non-compliance fees range from $20 – $60 per month, changed by the payment processor. In addition, fees are automatically applied if the business fails to complete their yearly PCI assessment.
Of course, failure to comply also leads to a potential data breach, which brings extremely severe consequences.
The Unseen Current: Cash Flow Implications
High credit card processing rates await behind every transaction.
Source: Pexels
Payment processing costs can be heavy across the board, yet it doesn’t only affect expenses; the situation extends to the business’ general cash flow. Let’s explore this subject in more detail.
Delayed Funding and Its Ripple Effects
There is often a gap between when a transaction is initiated and when the funds become available. This can create many challenges in terms of cash flow, and it’s even more of a problem if you have a tight margin or you’re in the middle of a seasonal fluctuation. Understanding merchant account rates and how delays affect cash flow in general is a vital part of the puzzle.
In general, standard funding times can be anywhere between 24 hours to 3 business days, and this depends specifically on the payment processor and the business’ risk profile. It’s not unheard of for certain payment processors to delay a payment while extra checks take place, especially if the business is deemed high-risk.
This delay has far-reaching effects, including an inability to pay suppliers or management inventory, therefore having a further knock-on effect on business operations moving forward.
The table below gives some useful insights into funding speeds and average times and costs.
Funding Speed | Typical Time Frame | Average Additional Cost |
Standard | 2-3 business days | No additional cost |
Next-day | 1 business day | 0.5% – 1% per transaction |
Same-day | Same business day | 1% – 2% per transaction |
Reserve Requirements
In some cases, depending upon the payment processor, high-risk businesses may face reserve requirements. This is when the processor holds back a certain percentage of the business’ transactions to cover any potential chargebacks and disputes. However, this can drastically impact on the business’ ability to function due to cash flow issues.
In general, reserve requirements are between 5% to 20% of the overall monthly processing volume and the reserve period can last anywhere between 6 months to one year. The specifics depend upon how risky the business is deemed in the eyes of the payment processor.
In some cases, reserves can be a rolling version, when a percentage of the day’s sales are held for a set amount of time, or an upfront version. In this case, a lump sum is held when the business signs up with the payment processor. However, at PayCompass we don’t hold reserves, so you won’t have any cash flow issues from the get-go. This is because we understand the challenges of high-risk payment processing very well indeed.
Currency Conversion Costs
Many businesses, especially e-commerce businesses, operate internationally and this obviously means currency conversion fees enter the picture. These credit card processing fees are complex and can be costly, making it vital to understand them properly.
In most cases, currency conversion fees range between 1% and 3% of the transaction value itself, however this varies on the currencies, the conversion method, and the payment processor. At PayCompass, we offer multi-currency accounts to avoid this problem.
Dynamic Currency Conversion (DCC)
When providing services to international customers, it’s always a good idea to offer Dynamic Currency Conversion or DCC. This is a more convenient option for your customers, but it does often have higher fees in the end. It’s worthwhile weighing up the pros and cons in terms of offering an easier and more complex service to your customers, providing clarity in terms of how much they will pay in their home currency. The higher processing fees may or may not be worthwhile for you.
In general, DCC fees are between 3% to 4% above the standard currency conversion rate and are usually split between the business itself and the payment processor.
Navigating the Waters: Strategies for Cost Optimization
By this point, it’s clear that there are many processing costs involved in a single transaction. However, using this information you can implement key strategies to optimize your expenses and improve your final revenue. Let’s take a look at how.
Negotiating with Processors
As you gain more knowledge about merchant services rates and overall processing fees, you can use that to negotiate with payment processors. Often, showing that you have in-depth knowledge of your industry and your own specific needs, you can secure favorable rates and terms.
While some payment processors have a firm stance on high-risk merchants, refusing to accept transactions, others are more flexible. Some processors may be happy to offer better rates to high-risk businesses if they have a strong processing history. However, it’s important to compare processors to find the best first. This can also give you more leverage when you do negotiate.
However, it’s also a much easier option to simply streamline the whole process and choose PayCompass instead. We offer a range of tools and features tailored specifically to high-risk merchants, and we understand the challenges you face. In the end, why make your life harder when we can make it easier?
Leveraging Technology for Efficiency
Technology is at the forefront of many innovations these days, and it comes as no surprise that it can also be used to lower processing fees, including general credit card processing costs.
Advanced fraud detection systems are very valuable as not only do they give key insights but studies have shown that they can reduce chargebacks by almost 50% in some cases. On top of this, automating reconciliation can cut down on the chance of error and save many hours of manual work. We can also mention integrated payment systems here, which can boost cash flow management and give you key insights into how your business is performing.
Tokenization and its Benefits
Tokenization removes sensitive card information and replaces it with unique digits and identifiers that cannot be read in the event of a data breach. As a result, this technology can reduce PCI compliance issues and the associated costs, while cutting down on the chances of fraud.
The Regulatory Riptide: Compliance and Legal Costs
It’s unsurprising that payment processing is heavily regulated and many of these rules can be easy to miss. For this reason, it’s vital to stay up-to-date with regulations related to your specific industry and any focused on the wider payment processing landscape. Non-compliance doesn’t only increase average payment processing fees, but puts the future of your business at threat.
Data Protection and Privacy Compliance
GDPR is a EU regulation that protects sensitive information and also affects payment processing fees.
Source: Pexels
Over the last few years, compliance to data protection and privacy laws has become extremely important, and GDPR and CCPA are two to take extreme note of. However, both of these require businesses to update their systems and train their staff, which are two large upfront investments.
Compliance setup costs vary depending on the size of the business. A very small business can expect to pay far less than a huge multi-location organization. However, studies have shown that 20% of small to medium sized businesses spent more than $1 million GDPR compliance, with just 6% spending less than $50,000. Despite that, non-compliance costs a whole lot more.
GDPR Fines and Their Impact
GDPR non-compliance fines can be substantial, reaching up to €20 million or 4% of global annual turnover, whichever is higher. Of course, a penalty this large has severe consequences in terms of business operations, and in many cases, is enough to end a business entirely.
Reports state that European regulators imposed fines totaling €158.5 million between January 2020 and January 2021. This is a 39% increase on the same period from 2018 to 2020. If that wasn’t substantial enough, violating GDPR can also lead to severe reputational damage, and in many cases, erodes customer trust to the point where they will go elsewhere.
Industry-Specific Compliance Requirements
It’s not a simple route to compliance for all industries, as specifics can make it more challenging and add more complications to payment processing fees.
HIPAA Compliance in Healthcare Payments
US healthcare providers must comply with HIPAA, which is designed to protect sensitive patient information. This is a non-negotiable regulation and there are initial and ongoing costs involved. Of course, these ultimately impact overall processing costs.
However, as with GDPR, it’s vital to weigh up setup amounts with the impact of non-compliance. In this case, penalties can be extremely severe, working on a tiered basis. According to current guidelines, penalties start at $25,000 for non-compliance with no knowledge of the issue, up to $1.5 million in cases where wilful neglect is demonstrated and not corrected.
Of course, this shows the importance of taking all roads toward compliance, including ensuring HIPAA-compliant credit card processing.
The Human Factor: Staffing and Training Expenses
Despite all the technology available to us, there is still, and probably always will be, a human element to payment processing, and of course, that in itself creates processing fees. This includes specialized professionals highly qualified in payment processing to customer service representatives.
Again, it’s important to weigh up the pros and cons but having a dedicated support system can improve the entire customer experience.
Specialized Payment Professionals
Hiring specialized professionals with in-depth knowledge and experience in payment processing is expensive, but if you have a large business, it’s probably worth the cost. According to current reports, a Senior Payment Analyst in the US receives an annual salary of between $69,000 to $116,000.
However, these professionals know all about maintaining a successful payment system with low credit card transaction fees and they know all about average merchant processing fees. You don’t have to worry about staying updated with any of this, and they’re also highly skilled in ensuring regulatory compliance.
Customer Service for Payment-Related Issues
Having a human customer service team isn’t a thing of the past. For sure, AI can help automate some of this, with high-quality chatbots able to handle basic questions, but for more complex issues, most customers prefer to speak to a human. However, as with everything, this also creates its own costs.
Training a member of staff in payment issues can cost anywhere between $1,000 to $3,000 per employee. Of course, regular refreshers are also needed to stay up-to-date with new rules and regulations.
Learnings Recap
We’ve spoken at payment processing rates, and it might have surprised you just how many fees are hidden from view. It’s true that there is so much more to one transaction than just the amount paid, and businesses must understand all related fees to optimize cash flow and avoid unnecessary surprises. For many high-risk businesses in particular, the fees simply increase rather than decrease.
To manage and reduce average payment processing fees, it’s important to consider all technological innovations available, while not forgetting the importance of the human touch. Yet, even hiring a professional to manage payment processing creates its own ongoing costs. It’s a constant battle, but one that all businesses must face and understand in order to find the best fit moving forward.
At PayCompass, we fully understand the high average cost of credit card processing in general, and we’re on board to help you reduce unnecessary costs wherever possible. Our merchant services are tailored to suit your specific needs and the nature of your individual business. We know that two businesses are never alike, and that’s why we have created our individual approach.
Our accounts all have built-in chargeback prevention and real-time transaction monitoring. These are two tools that go a long way to reducing payment processing costs from the get-go and helping you optimize your cash flow. If the latest credit card fees for merchants are enough to make your eyes water, contact us today and let us help you find a smooth and tailored route forward.
