How to calculate credit card processing fees
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Credit card processing fees can be a significant expense for businesses, especially those with high transaction volumes. Understanding how these fees are calculated and what factors influence them is essential to managing your business’s budget and maximizing profit. In this article, we will explore the components of credit card processing fees and provide guidance on how to calculate them.
1. Understand the components of credit card processing fees:
Typically, credit card processing fees consist of three main components:
a. Interchange fees: These are the fees charged by the cardholder’s bank (issuing bank), which are usually a percentage of the transaction amount plus a fixed per-transaction fee.
b. Assessment fees: These fees are charged by the credit card network (Visa, MasterCard, etc.) and are typically a small percentage of the transaction amount.
c. Processor fees (markup): This fee goes to the payment processor or merchant services provider handling your transactions. Processors may charge a flat fee, a percentage-based fee, or both.
2. Calculate interchange fees:
To calculate interchange fees, you will need to know:
a. The type of credit card being used (e.g., debit, credit, or premium rewards cards)
b. The method of transaction (keyed-in/swiped)
c. Transaction size
Each card issuer has its own interchange fee structure, and these rates can be found on their websites. For example, Visa’s rates can be found at https://usa.visa.com/support/small-business/regulations-fees.html.
3. Calculate assessment fees:
Assessment fees vary between different card networks but are generally straightforward to find and understand. Consult your network’s website or contact their support team for specific details about their assessment fees.
4. Determine processor markup:
You’ll need to review the contract terms with your payment processor to find their markup fees. Make sure to calculate both percentage-based (also known as discount rates) and per-transaction (fixed) fees.
5. Add up all components:
To find the total credit card processing fee, simply add up the interchange fee, the assessment fee, and the processor markup. This will provide you with a good estimate of how much you’ll pay for each card transaction your business processes.
Example:
Let’s assume you have a $100 transaction using a Visa classic credit card (1.51% + $0.10 interchange fee) with a 0.13% assessment fee and a processor fee of 0.20% + $0.05.
Total fee = (1.51% x $100) + $0.10 + (0.13% x $100) + (0.20% x $100) + $0.05
= $1.51 + $0.10 + $0.13 + $0.20 + $.05
= $1.99
In this example, you would be paying a total of $1.99 in credit card processing fees for the $100 transaction.
Conclusion:
Understanding and calculating credit card processing fees is crucial for managing your costs and staying competitive in today’s business landscape. By staying informed, reviewing contracts closely, and keeping your fees top of mind, you can keep expenses low and maintain healthy profit margins for your business.