There are two sides to the world of credit cards: The consumer side and the merchant side. Many people are familiar with how predatory and powerful the forces of interest and overdraft fees are. In fact, these things have become so dangerous that children are taught about avoiding them in school.
But while those are worth talking about, they are far from the only fees that exist for credit cards. If you are running a business that uses a credit card machine, then there will be a cost associated with that convenience. That cost will manifest itself as a series of costs and charges on every transaction.
However, it is important that you understand that not all possible costs are being levied against you at all possible times. There is a time and a place for every cost, and there is a way of figuring out the exact price of each cost. That’s what we are going to explore today: Not only which costs you are likely to see and how much they are, but also why those costs exist, and even how to reduce them when possible.
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The Three Sources of Credit Card Machine Costs 💳️
We call them “credit card machine costs” because they happen when you use a credit card machine. However, that does not mean they only happen within the credit card machine. In fact, every group involved in the process of using a credit card to extract payment will get their own value out of it.
The three groups involved are the card network, the payment processor, and the card issuer.
The Card Network
This is the group that owns the credit card that the customer is using. That means that, at least ostensibly, the person buying goods and services from you has an account of credit or debit with this card network. Card networks take fees to compensate themselves for the liability of having card holders.
That might sound strange, but most tiny fees like this in the world are the result of liability insurance. This fee is usually tiny, but if you operate a larger business, customers will notice it. They might even expect discounts that respond to this fee. But you only need to worry about that if you’re selling yachts.
The Payment Processor
Fees from the payment processor come from the actual machines you use to process credit card payments. These machines are the equipment you buy to allow credit cards to be swiped. You might have heard of these things described as “point-of-sale” machines.
A payment processor company will charge you, the business owner, a fee that essentially exists as the cost of the convenience provided by these point-of-sale machines. For that reason, even contactless pay, online payments, virtual terminals, and other credit payments charge these fees to you.
The Card Issuer
While a card network charges the customer a fee for the amount of money they are spending and the risk involved with it, the card issuer charges a similar fee to you. This is another convenience fee (be prepared to hear that phrase a lot), but while the processor fee is charging its fees based on the use of their machine, a card issuer will charge its fees based on the use of the card involved in the purchase.
One thing that is important to understand about all three of these fees is that they can all be charged by the same company. They can also all be charged by a different company. You can have a customer use a Visa card, meaning that Visa charges card issuer fees, while your payment processor is provided by Mastercard. In certain regions, a card network might even be different from the card issuer.
What are the Common Credit Card Machine Fees? 💷️
Knowing the sources of the different credit card fees is important to understanding what those fees are and why they are being charged. Once you have a grasp on that, then you can start thinking about what fees they are charging you, why, and how much they are charging you with each fee.
The three fees charged by those different sources are assessment fees (also known as “service fees”), interchange fees, and markups.
We will start with assessment and service fees, as they are the fees that most people are intuitively familiar with. This is the fee paid to the card network. As mentioned before, that means that it is determined by the network which processes payments for the card a customer uses.
The most common size of this kind of fee is a decimal point of a percentage. For example, Mastercard charges a service fee of .13% to the businesses where its customers use their cards. Discover charges the same fee, Visa charges .14%, and American Express charges .15%.
It is important to distinguish the difference between a decimal of a percentage from a percentage. Some people will use .15 to represent 15% of something. But .15% means that it is less than a whole 1%. In fact, it is barely more than 1/10th of a single percentage point.
You are unlikely to notice these fees except in the grand scale of things. If you have thousands of customers over the course of a year, they might add up to something significant. Otherwise, you are likely to lose no more than a dozen or so pounds off of these fees.
Service fees are so small that they are barely noticeable. But interchange fees are quite a different story. They are easily the largest fees of them all, though their size can change based on a few factors.
To understand why, you need to know why these fees exist: An interchange fee is a fee levied by the payment processor. That means it comes as a cost of using the equipment which allows you to take credit cards as methods of payment in the first place.
Most interchange fees will be between 1% and 1.5% of the total price of the purchase. They will have a 10-cent minimum fee alongside that, and can be increased by the card being used, the medium of payment (such as if it is online or point-of-sale), and even sometimes the goods being bought.
The best way to think of these fees is that they are implemented on a case-by-case basis by the payment processor. Markups can happen if your store has special risks associated with it, if the transaction surpasses a certain size, or even if the personal credit of the business owner is too low.
If it sounds like a markup can come in at any time for any reason, then yes that is generally the case.
However, markups are also frowned upon by the law, to say nothing about both businesses and consumers. If a credit card company or a payment processor started putting absurd markups on every single transaction of every single business, most businesses would shut down under the weight of it rather quickly. Not only that, but they would eventually have to defend these markups in court.
While credit card machine markup fees are always possible, they are also highly unlikely to actually happen without some very special circumstances. And when they do get charged to you, it is a good idea to call whoever charged them, whether it was the card network or the payment processor.
Because markups are so uncommon and so hard to defend legally, you might be able to get them refunded just by scrutinising the logic behind them being charged to you.
Why Do These Fees Exist? ➡️
Now comes the big question: Why do credit card machine fees exist? Everything seems so automatic. What are you getting when you pay these fees? What labour are these fees covering?
Contrary to popular belief, these fees actually exist for a reason. It is easy to think that a credit card machine operates completely on its own. The presumption is that there is no “work” being done. When you drive a car, it burns fuel. Fuel is limited, so paying for it makes sense. What limited quantity is being consumed when you use a credit card machine? By all appearances, it doesn’t require any fuel.
These fees exist primarily because every transaction slows down all the other transactions on the network. As you might expect, every credit card machine needs to be connected to every bank and every other credit card machine in order to process payments and transmit money.
The “limited quantity” here is the bandwidth of that system.
Credit card machines are a highly convenient way to take payments in a world that is becoming more and more reliant upon convenience. These fees should not be taken as reasons to avoid the machines.
Rather, you should be keeping these fees in mind and account for their effects when considering the cost of doing business with whatever storefront you own, whether online or in-person.