3 Things You Didn’t Know About Credit Card Processing Fees

Credit cards are essential to modern life. They are easy, quick, and accepted everywhere. Behind every swipe is a world of fees and costs. Businesses, on the other hand, are most certainly thinking about what happens after you’ve used your card, but most people aren’t. The role of processing fees in business is huge. Here are three things most people don’t know about them.

Not All Transactions are the Same Price

You might be surprised to learn that the cost of processing a credit card depends on how the payment is made. The transaction you make at a physical store with a card reader is entirely different from the one you make online.

The transaction is safer when a card is physically present. Cardholders are usually right there, so there’s less chance of fraud. That’s a different story, though: online or phone payments. Banks and payment processors are riskier. It’s not easy to verify the buyer’s identity. As a result, businesses pay higher fees for these types of transactions.

The type of card matters even among in-person transactions. For example, premium rewards cards tend to have higher fees. They are the cards that give you points, cash back, or miles. They’re good for the cardholder but not so good for the merchant. But part of that cost has to be passed along in the form of higher fees.

Small Businesses Feel the Impact More

For large corporations, processing fees are just another cost of doing business. They can negotiate better rates because of their size. Small businesses, on the other hand, don’t have that advantage. These fees can take a significant chunk out of their profits.

Imagine a small coffee shop. Each cup of coffee might only bring in a few dollars. A small percentage of that goes straight to credit card processing fees. While it might not seem like much for one transaction, it adds up quickly over time.

Some businesses even implement minimum purchase amounts for credit card use. This helps offset the cost of processing smaller transactions. Others may pass the cost directly to the customer by adding a small fee for using a card. These practices can be frustrating for shoppers, but they’re often necessary for businesses trying to stay afloat in a competitive market. Increasing operational costs, such as credit card processing fees, have led many retailers to adopt this approach. While it may deter some customers, it ensures that businesses maintain profitability without absorbing the additional expenses. Ultimately, these fees are a trade-off between convenience for customers and sustainability for businesses.

The System Benefits Multiple Players.

When you swipe your card, it sets off a chain reaction involving several parties. There’s the bank that issued your card, the merchant’s bank, and the payment processor that connects them. Each of these players takes a cut of the fee, and their share can vary depending on the specific agreement. The interchange fee, which is the largest portion, goes to the card-issuing bank. Payment processors and merchant banks also take their cuts, and sometimes third-party services are involved. This complex system ensures that the transaction is completed smoothly, but it also means more costs for the business.

The card-issuing bank typically gets the largest share. This is known as the interchange fee. It’s a fixed percentage of the transaction plus a small flat fee. The payment processor also takes a slice, along with the merchant’s bank. These fees can vary depending on the agreement between the business and its payment processor.

It’s worth noting that these fees don’t just disappear into thin air. They help maintain the infrastructure that makes card payments possible, covering costs like fraud prevention, customer service, and technological advancements. However, many business owners feel the system is stacked against them, especially when they have little bargaining power. Large payment processors and banks often set terms that are difficult for smaller retailers to negotiate, forcing them to absorb high fees. This can strain their financial resources, leaving them with limited options to stay competitive and manage operating costs effectively.

Conclusion

Understanding the card processing fees can change the way people view payments. It’s easy to take the convenience of credit cards for granted. But there’s a cost to that convenience, and it’s businesses that bear the brunt of it. By being more aware, consumers can make choices that support the businesses they love.