What Are Processing Fees?
Payment processing fees are what an organization pays to a merchant processor. They are the intermediary between banks, your business and your customers. Fee structures vary by the processor but are usually a percentage of the transaction amount. Some have caps; others do not.
Many other things can impact this fee, including if it’s for card-not-present (CNP) transactions, which make up most electronic payments to media companies. The type of card also can impact these costs.
There are two models for these: tiered or flat. Let’s look at the differences.
What Are Tiered Processing Fees?
In a tiered scenario, there are three levels:
These are the lowest fees and include debit cards and non-reward credit card transactions.
These are midrange and consist of standard credit cards.
These are the highest payment fees, usually for business and reward cards.
So, how does the tier affect what you pay on transactions? Here are some other factors often present in this fee type.
- Card-present or swiped cards, like transactions at retailers, have their own rate, ranging from 1.5% to 2.9%.
- For keyed-in transactions, the rate is also different, ranging from 2.1% to 3.5%.
- CNP transactions, the most common for online payments, have the highest rates, ranging from 2.4% to 4.0%.
These variances in costs make it hard to predict what you’ll have to remit each month. Thus, tiered pricing isn’t very transparent and can influence your cash flow budgeting.
What Are Flat Fees?
Flat fees are as you’d expect — one percentage rate for any transaction, no matter how you accept it or the type of card a company uses to pay. As a result, you can have a very clear picture of fees with no surprises. With flat pricing, you have only two rates to know:
- ACH transactions, which are around 0.75%
- Credit cards, inclusive of all types and transaction types, which average around 3.06%
Are Processing Fees the Only Fees for Electronic Payments?
Beyond processing fees, there are other costs associated with electronic payments. Additional fees may include:
- Assessment fees: These charges relate to remittance to card networks that you accept, including Visa, Mastercard, Discover and American Express.
- Interchange fees: Interchange is the fee credit card companies charge businesses to accept their cards. You’re paying these organizations for the convenience of taking this payment method. Costs vary based on factors like card brand, type of card and how you accept payments (i.e., CNP or swiped).
- “Hidden” fees: These are not apparent except in the details and can consist of annual or security charges.
In looking at all the fees you may pay, you’ll want to define your effective rate, which is the total fees divided by the total amount processed for the month. It’s inclusive of every type of cost. The percentage from the equation is your effective rate.
Here’s an example:
Total amount processed: $10,000
Total fees paid: $500
Effective rate: 5%
A “good” effective rate is 4% or less, and tiered pricing can move you to a higher-rate tier.
Tiered vs. Flat Processing Fees: Get a Better Rate with Flat
In general, tiered processing fees are higher. They are also unpredictable. Competitive flat prices make the math much simpler, and, in most cases, you’ll pay less. You can learn about fees and more by reading our e-book, Modernizing the Payment Ecosystem for Media Companies with Streamlined, Consolidated Electronic Payment Solutions.
You can also request a meeting to review our payment solution, PayNow. It offers flat fees, an integrated solution and much more!