Man at mobile food truck register hands credit card back to customer.
Choosing the best credit card processor means researching the processing fees and knowing what happens in the event of a chargeback. — Getty Images/Thomas Barwick

In today’s digital world, many consumers prefer to pay for both large and small purchases by credit card. If you don’t accept credit card payments at your brick-and-mortar business, you’re missing out on a lot of potential sales

For e-commerce retailers, card-based online payments are one of only a handful of options. A credit card processor or online payment platform is a necessary investment for most businesses today.

However, credit card processors can be pricey. Hidden fees can drive up costs. Meanwhile, the risk of chargebacks could leave you on the hook for the price of merchandise or services you’ve sold, while putting your ability to accept credit card payments at risk.

It’s important to be aware of credit card processing fees and the potential for chargebacks before you open a merchant account and begin accepting credit card payments.

How much are credit card processing fees?

Perhaps the biggest downfall of accepting credit card payments is having to cover credit card processing fees. Depending on the processor you choose, these can be hefty costs.

Here are some of the most common credit card processing fees:

  • Setup fees often range from $50 to $100 and cover the costs of setting up the credit card processing system for the first time. In addition, you might pay a monthly fee to lease the equipment.
  • Interchange fees represent a percentage of each transaction, and usually range from 2 to 3.3% of the total purchase. Some payment processors charge a flat rate for each transaction plus a percentage of each sale.
  • Assessment fees go to the payment network, such as Visa, Mastercard, American Express or Discover.
  • Monthly minimum fees may be required if you do not meet your minimum monthly fee based on transactions processed.
  • Early termination fees are an added expense if you break your contract. Early termination fees can range from $295 to $495, but that amount might be calculated per store, not per merchant, so the costs can add up if you have multiple locations. If you lease equipment, you may have to pay an additional fee of up to $775 per device in early termination fees.

As a business owner, you’ll want to do your due diligence by researching these potential charges, since credit card processing companies may not always disclose these fees upfront. Ask sales reps about potential hidden fees.

Also, ask how fees are calculated, as credit card payment processing companies use a few different methods to calculate fees and bill merchants.

Typical credit card fees for small businesses

Interchange fees may vary based on the type of industry you’re in, the volume of sales you write, the method for processing credit card transactions and the type of credit cards you accept.

Travel rewards credit cards and top-tier cards often have higher interchange fees than other types of credit cards. Card-not-present transactions, including online purchases and phone sales, carry a greater risk of chargebacks and fraud. They may have higher interchange fees than transactions that use EMV chip cards or even contactless payments.

Credit card payment processing companies use one of four methods to calculate interchange fees.

  • Interchange-plus. This payment model lists all fees separately, so you know exactly what you’re paying for and where the money for each transaction is going.
  • Flat rate. A flat-rate model charges the same rate on every transaction, which is typically a flat rate plus a percentage of the sale. Some companies that use this billing model do not have monthly fees associated, which can save smaller businesses money.
  • Subscription. A subscription model is similar to the interchange-plus billing model, except you’re paying a higher monthly fee in exchange for lower transaction fees. If you process a high volume of credit card transactions each month, this model could save your business money.
  • Tiered. A tiered model collects fees based on the total cost of the transaction depending on the type of transaction. For instance, swiped/inserted/contactless payments carry lower fees than card-not-present sales, because there is less risk of chargebacks or fraud.

Get quotes from a few different companies to determine the best fee structure for your business.

As a business owner, you’ll want to do your due diligence by researching these potential charges, since credit card processing companies may not always disclose these fees upfront.

What are credit card chargebacks?

Credit card chargebacks are a big risk for business owners. A chargeback occurs when a consumer requests reimbursement for a purchase, or when a bank identifies a possible fraud, and initiates a forced refund from the merchant’s bank.

You can avoid some chargebacks by granting refunds when a customer requests it because they are unhappy with a product or did not receive what they ordered. However, chargebacks that occur as a result of fraud are a bit more difficult to avoid.

How much is a chargeback fee?

When a chargeback happens, the merchant is hit with a chargeback fee, which typically ranges from $20 to $100. The more chargebacks you get, the higher the fee. If you have too many chargebacks in a short period of time, you could lose your merchant account that enables you to process credit card payments.

In addition to paying the chargeback fee, you’ll be forced to pay for the cost of the item or service. The charge will be removed from the customer’s credit card statement, and you will be responsible for giving back the money from that purchase.

If you’re experiencing many chargebacks, you might want to investigate the root cause. Is your system secure? Is your customer service up to par? Also, make sure you are addressing chargebacks in a timely manner.

Chargeback rules and time limits

Consumers generally have between 60 to 120 after their days after their purchase to file a chargeback, and merchants have about 45 days to respond or dispute it. The merchant’s bank will then review the matter and determine whether arbitration is needed.

If the chargeback is deemed valid, the merchant will then have to provide the necessary documentation to prove its position before having the charge cleared. If the merchant fails to do so, however, it will be charged with the fee and the funds will be removed from the merchant’s bank. The charge will be removed from the customer’s credit card.

How to avoid chargeback fees

Sometimes, chargebacks are inevitable, especially in the case of fraud; however, you can lessen their occurrences by practicing the right prevention methods.

The best way to prevent chargeback fees is by adhering to the policies and guidelines of each payment processing network. Typically, this involves obtaining verification (like a signature) from a customer, ensuring the credit card being used is not expired and is signed on the back and adhering to PCI rules and current security standards, like EMV readers.

Additionally, ensure your customer receives the merchandise or service as expected. For instance, if you are an e-commerce business, this means shipping the products in a timely manner.

Review your return policies to ensure that customers have enough time (for instance, 30 days) to return an item if they aren’t happy.

The more you focus on customer service after the sale, the less motivation customers will have to force a credit card chargeback.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published June 28, 2021