What is the basic percentage charged by Credit Card companies to process retail purchases.?

Question

This is for actual store owners/merchants. I am trying to get a better feel for what a good deal is for Credit Card transactions and with companies like PayPal and others offering the service for between 1.9% (over $1 mill) to 3% (0-$1000), I need to know if that is a good deal.

Answer 1

Geek is right - you only have part of the picture. But there is more to it than even he let on.

Let's start by saying that what you should try to gauge is the EFFECTIVE RATE. The effective rate is the total percentage paid in fees for your credit card transactions over a given period of time. Your target for your effective rate will vary depending on your average ticket, total volume, method of processing and card assortment.

Your average ticket plays a big part in targeting your effective rate. A smaller average ticket will be impacted more by per transaction fees than a larger average ticket.

Example with 2% rate and $0.25 total transaction fee:
$5.00 transaction-
($5.00 X 2.00%) + $0.25 = $0.35 or 7%

$100.00 transaction-
($100.00 X 2.00%) + $0.25 = $2.25 or 2.25%

Example with 3% rate and $0.15 total transaction fee:
$5.00 transaction-
($5.00 X 3.00%) + $0.15 = $0.30 or 6%

$100.00 transaction-
($100.00 X 3.00%) + $0.15 = $3.15 or 3.15%

This tells us two things. First, the smaller your average ticket the higher your effective rate will be. Second, with a higher average ticket you should be more concerned about the rate and less about the per transaction fee while the opposite is true if you have a lower average ticket.

Once you have determined what your expectations should be based on your average ticket then the total volume, card assortment and method of processing come in to play. For starters, it is important to note that Visa and MasterCard (the card associations), and not merchant services provider, receive the majority (over 75%) of the fees that merchants pay for their processing services. The remainder of the fees, or the margin, is what the merchant processor receives. What this means is if you pay $10,000.00 annually in processing fees, over $7500.00 of this goes directly to the card associations and is non-negitiable by you or your merchant processor. The card associations have also designated over 240 different card categories that each merchant processor must recognize and process. Every merchant processor, no matter how big or small, is charged the same rates and fees by the card associations and every merchant processor differentiates each card category utilizing exactly the same card category name as designated by the card associations.

The card categories are designated in the following manner:
1.)Industry – Retail, Restaurant, Hotel, Government, Utility, Service Industry, Gas Station, Supermarket, etc.
2.)Type of Card – Personal Visa or MasterCard, Visa or MasterCard Debit, Visa Rewards, MasterCard World, Commercial Visa, Corporate MasterCard, etc.
3.)Method of Processing – Face-to-Face (swipe), Mail Order/Telephone Order, Key Entered, E-Commerce, etc.
4.)Processing Efficiency – Address Verification, Authorization/Settle Match, Timeliness of Settlement, etc.

These categories are as diverse as they seem. If a cardholder uses the same card to buy something from a retail establishment, lunch at a restaurant and pay their electric bill, all three of these transactions will be designated as a separate card and rate category. If a retail establishment accepts two different types of cards (ex. - a Visa Debit Card and a Visa Rewards Card) for a purchase of the exact same amount, both of these transactions will be designated as a separate card and rate category. The same is true for a Face-to-Face transaction as opposed to a telephone order. Furthermore, if a merchant does take a telephone order and doesn’t enter the required cardholder information, the transaction will be downgraded to a higher priced card and rate category than a properly executed telephone order.

Sure, some merchant processors offer a simplified statement format with bundled categories, but only to keep from disclosing individual rates. The simpler the statement format the less a merchant knows about what their true credit card processing costs are or should be. A simple statement also makes it very difficult to perform an accurate comparison to other programs. For many merchant processors, their most successful customer retention tool is their customer’s complete inability to understand their services. If you ask all of the right questions you will certainly be able to make an educated pricing decision.

There are some additional things to consider when making your merchant processing decision:

*Service, support, integrity and education-
Many merchants make their choice solely based on price. Be sure to ask questions about the service platform. The web is full of stories from merchants who have had horrible issues with a processor that they went with for a perceived $5.00 monthly savings.

*Leased equipment-
Always, Always, Always a bad deal. I have never spoken to a merchant who is happy that they did this. Do the math.

*Term agreements-
Avoid if possible and check the buy-out. Look for a processor who will sign you to an at-will agreement so you will always have open options.

*Beware "FREE" anything-
Free setup. Free equipment. Free software. These things cost the processor money and their margin is incredibly small - especially with small businesses. Ask yourself the what, when, why and how of your business giving away something for free and try to figure out what the benefit is of a processor doing it for you. If it is too good to be true........


If you have any additional questions, feel free to contact me at [phone] or [e-mail].

Answer 2

Even my local Council charges a 2.5% fee for payments made by credit card. The reason is due to the fact that credit card companies charge the merchants that or a like sum for the privilege of providing what is (in effect) free credit to the merchant's customers.The merchants also have to wait for payment. It is perfectly legal, provided the charge is explained in advance

Answer 3

It depends on the card. For Discover, I think we are charged 1% on any purchase. For AmEx (traditionally the highest charge), it's upwards of 3%.

Edit:
Geek49203 makes a very valid point: different companies do have different policies on how quickly the money is deposited into your account. Most are around 72 hours, but it does vary depending upon the company and the credit card used.

Answer 4

You've only got part of the picture.

Ask the credit card company about any annual fees or minimums. And, ask them how long before you get your money.

I know a person who thought they were getting a great deal on credit cards, moving from 4% or more to 1-2%. Unfortunately, the new company kept his money for 2 weeks before he got it, which played havoc with his cash flow.

Soooo... the answer is... there's a lot more than just the percentage points.

Answer 5

we get charged 3% for the total amount purchased by the customer

Answer 6

3%