The Cost of Accepting Credit & Debit Cards

The most common reason business owners give for not accepting credit cards is because of a scary word known as “fees.” There is no doubt that if you are not careful, you will pay more in processing fees than someone who is. How much more? That depends on a couple of factors, and the difference between a good rate and bad rate is usually no more than 2%. We could get into the nitty-gritty of fee types (I may in future posts) but I calculate what I call the “average cost” because it’s easier and gives a better overall picture.

The average cost looks at all the fees that are included in your merchant service fees and combines them together to look at the average cost percentage. It’s important to look at merchant account rates as an average cost because every company structures their fees in different ways. Some charge high monthly fees and some don’t, some charge different rates for different types of transactions and some don’t, and it goes on like this forever. This can can make comparing merchant account providers very difficult.


Calculating the average makes things easier.

So, how do you calculate the average? Generally, it’s only possible if you are already accepting credit cards. Take three of your most recent statements and add together your total credit card sales and then add up the total fees you paid. Finally, divide the total fees paid by the total sales and multiply the total by 100. The final number is your average cost of accepting credit cards for your credit card sales. (Example: $350 in fees divided by $10,000 in credit card sales multiplied by 100 equals an average rate of 3.5% or, $350 / 10000 x 100 = 3.5%).

Keep in mind that the percentage we just calculated is only the cost of accepting credit cards for the credit card sales, not the cost of accepting credit cards for the overall sales. To get a better picture of the actual cost, calculate your overall sales, including cash and checks, then divide the total by your merchant account fees. Obviously the average cost will drop significantly for most businesses.

Why is it important to look at it this way? If a business does an equal amount of cash and credit card sales, most estimates say that a business would lose half of the credit card sales it had made had it not accepted credit cards. This is because the only other option for the customers would have been cash and most people don’t carry much cash nowadays. Not taking credit cards actually costs much more than accepting them. When a business does most (or all) of its sales through credit cards, the average rate becomes much more important. A difference of 2% can add up to be a pretty substantial number.

You might be surprised to find out that your average rate is much higher than the rate your agent quoted. If this is the case, it’s because your agent only quoted the “qualified” rate and conveniently forgot to mention the “mid-qualified” and “non-qualified” rate tiers that are much higher. He also probably forgot to tell you that 50%-75% of all your transactions will be charged in those tiers.

Businesses are charged at the higher “mid-qualified” tier whenever they run a card with rewards, like miles or points. If they run a business, corporate, or foreign card then they’re charged at the even higher “non-qualified” tier. The only way to avoid these other tiers is to get “interchange-plus” rate pricing which on average has a cost of 1.5% – 2.5%, depending on the type of business.

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