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The High Cost of Free: What Cheap Card Processing Rates REALLY Cost You

Tips for Small Businesses

Posted Nov 14, 2018
credit card with cash

Business owners see a lot of costs in a lot of areas.  One that seems to aggravate more than most though, is the cost to process a credit card transaction.   It seems “unfair” to have to pay just to process a card.

This can send some merchants on a quest to find the cheapest card processing they can.  But let’s face it, you never really get something for nothing. There’s always a cost, even if you can’t see it right away.  We’re going to help you understand where and how you end up paying for “free service.”

First — Credit Card Processing Really Does Cost Money

Understanding where the fees come from can give you better insight into why “free” card processing is never, actually, free.

The reality is that EVERY credit card processing service has to pay someone else in order to provide card processing to you. The card brands have fees.  The networks and banks that actually handle the transaction have fees.  Even the government tacks on the occasional fee. And somehow, your vendor has to collect enough money to pay them all, and have a little left to pay himself.  You may be surprised to learn that nearly 90% of whatever you pay is going to someone other than your service provider!

Rates Cover Risk, Too

In addition to covering the costs of all the participants in a transaction, the rate you’re charged must also cover the risk associated with each credit card transaction.

There is a risk to the purchaser’s bank because a credit card transaction is basically a small loan to the buyer until the merchant’s bank is paid by the cardholder’s bank, and the buyer pays his credit card bill. And if a charge is fraudulent, the cardholder’s bank often still has to pay the merchant and his bank.  But there is also a risk on the merchant side for the bank as well – chargebacks do occur, and banks must invest time and resources to resolve these.

Knowing that your card processor and banks have costs associated with a credit card transaction, someone must be paying those fees, right? If it’s not you, then who?

The Lie of “Free” Processing

So if someone, somewhere, is paying for these fees, but your processor is offering you low cost, or even “free,” processing who is covering the required expense?

In one option, it’s the customer. A lot of processing companies advertise low or zero fee processing by setting the merchant up with a credit card surcharging or a cash discount program.

These programs do not actually provide you with “free” processing.  They enable you to offer a discount to customers paying with cash or a gift card.  Or they have you add a surcharge to anyone paying with a credit card. So you avoid the fee.  It’s not free.

Be aware that if you do use one of these programs, there are strict rules you must follow, both from the state you operate in and from the card brands themselves.  In certain states, credit card surcharging is flat out illegal. Plus Visa just recently issued a statement that you must very clearly state that you offer both a cash and a credit price (e.g. what you often see at gas stations).  If you do this wrong, Visa will fine you $5000!

Also, check if these companies have other fees you are responsible for, like monthly account fees.  These fees can be much higher than a typical processor would charge to help defray costs. When evaluating a processor, look at the TOTAL cost of the account, including monthly fees, chargeback fees, and other costs.

Another way card processors give you the “appearance” of a cheap/free rate is to bury their expenses in added fees.  It’s critical that you evaluate what you’d pay for the month overall, not just learn what your rate will be. Remember, after thousands of years of commerce, there still really is no such thing as a “free lunch!”

Consider the Positive Impact Credit Cards Have on Your Sales

Accepting credit cards should be viewed as more than a cost to be minimized.  They can have a major impact on your sales income.

Consumers love their credit cards. According to a 2017 survey, 44% of those surveyed preferred to pay with debit cards, 33% with credit cards, and only 12% with cash.

Also, consumers aren’t used to paying surcharges to use their cards and could react negatively to being asked to do so. Unless you’re selling a highly unique and necessary product or service, or all your competitors also charge for using credit cards, expect that customers will go elsewhere if you charge them to use a card.

So if you adopt a “cash only” policy, or make it seem “unfair” to pay with a credit card, your sales figures could suffer.  For some consumers, being charged to use their cards will drive them out of your store and to your competitors.

Lastly, consider your time investment. A card processor who offers you a higher rate may have tools and services not available with cheap options. Terminal features, upgrades, reporting software, and a dedicated help-line to support you can all make your life easier and give you time back to dedicate to other areas of your business.  And that may be well worth a bit more in card processing fees to you.

Card processing expense, as with any business expense, must be evaluated in terms of its pros and cons, and how it impacts ALL your business efforts. While a cheap credit card processing offer may seem like a great deal on the surface, the prospect of losing business because of it, or wasting time managing it, may outweigh the supposed savings. As you consider your options, be sure you’re getting the best deal for your business, NOT just the cheapest.

Ready to evaluate ALL your card processing costs and benefits?
Contact the pros here at Simpay.
Call 866-363-8603  or email