The Future of Credit Card Processing Fees
In 2020, Visa® and Mastercard® announced plans to increase credit card processing fees in April 2021 for some purchases, including many online transactions. This change—which took effect in April 2022—is expected to result in an estimated $475 million in annual increases from processing fees, according to payments consulting firm CMSPI.
In the midst of a pandemic that's already presented challenges, having to pay more money to accept credit cards seems like another barrier to business success in a difficult climate. While business await the fee hike, it helps to understand the changes to prepare for the increase on the horizon.
What are swipe fees?
When a customer uses a credit or debit card to make a purchase, banks charge the merchant a fee to process the transaction. The credit card processing fee—also called a swipe fee—includes interchange fees, network fees and acquirer fees.
The interchange fee makes up the largest part of the swipe fee and is charged by the card-issuing bank. For credit cards, the interchange fee averages 2% but can be as much as 4% for rewards cards, according to the National Retail Federation, or NRF. The Federal Reserve capped the debit card interchange fee in 2011 at $0.21 plus 0.05% of the transaction. Visa, Mastercard or the debit card network charges the network fee, and the merchant's bank charges the acquirer fee.
Credit card merchant fees can vary depending on the transaction type. For example, a purchase made in person at a store may be charged a lower rate than an order taken over the phone. Transactions where the card isn't present will come with a higher fee due to a higher risk of fraud. Fees can also differ depending on the merchant. If a business is considered risky, they may be charged higher fees.
While the percentage may seem small, swipe fees can quickly add up, especially as more consumers move away from cash and increase their online credit card purchases. If a customer makes a $100 purchase using a credit card, the merchant could be charged $2 to $4 for the transaction. In fact, swipe fees are one of the top costs businesses incur, according to NRF.
Lowering your credit card processing fees
While you can't avoid credit card merchant fees, you can lower their impact. If you're a merchant with a high transaction volume, it's possible to negotiate the rate with credit card processors. It's important to shop around for the best rates.
Also, take steps to lower your security risk. Whenever possible, swipe cards to take advantage of lower card-present rates. If that's not possible, gathering as much information as you can—such as using the card's security code and billing ZIP code—can help lower your fees.
If you're making sales online, make sure your website uses an address verification service, or AVS, that verifies the cardholder's billing address with the card issuer. During the checkout process, the customer's address is compared to the address on file with the issuing bank. Visa charges a lower interchange fee when merchants use an AVS check on transactions.
Another option is to widen your payment options. Digital payments like Zelle® or QR code payments from companies like PayPal® often have lower fees than credit cards. Digital and mobile wallet payments are becoming more popular—they may even represent half of all global e-commerce by 2023. These forms of payment became more prevalent during the pandemic because they're contactless, which is more attractive to consumers.
While credit card processing fees are an unavoidable cost of doing business, understanding how they work can help you take steps with your payment acceptance process. By doing what you can to reduce your costs, you can keep more of your hard-earned sales.
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Zelle® and the Zelle® related marks are wholly owned by Early Warning Services, LLC and are used herein under license.
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.