Don’t let your business get ambushed by unexpected credit card processing fees

Getting your business set up so that clients can pay you online can be a major game changer. You’ll get paid faster and more easily. But it comes with costs. Our awesome, free invoicing app will integrate with the payment gateway of your choice for free, but these shrewd financial institutions that provide the cash flow pipeline are going to get their cut, one way or another. Hey, they’re entitled, and this is their business model, after all – gateways make most of their money from monthly fees, transaction fees and various extras.

Some structure their fees in ways that are more transparent and otherwise friendly towards small businesses than others, while others may slam you with “gray charges,” billing you without you even realizing what you are paying for. In order to avoid overpaying for credit card processing, pay special attention to their terms of service and other details. Read the fine print as well, to see what you will end up paying for.

The processor’s angle

When you sign up for an online payment gateway, you will generally see a list of free features and a list of paid ones. No need to get overly excited over the free ones, though – these are generally services which should automatically come with the payment gateway, such as a trusted merchant seal that you can publish (which is really just an image), free setup and free customer support. But make sure to also look carefully at the gateway’s paid services, which often include hidden fees you may not notice at first glance. Here are some of our “favorite” examples.

  • Some gateways will charge you separately for a merchant account. Most small businesses that bill customers in low volume don’t actually need a dedicated merchant account, or can benefit from free merchant accounts that some gateways include for free in their monthly fees. Often, the large print will say that there are no cancellation fees, but the fine print will distinguish between the payment gateway and the merchant account. So when you cancel, you end up paying exorbitant fees you didn’t realize you agreed to, for cancellation of the merchant account.
  • If your customer disputes a charge on his credit card, you will be charged a chargeback fee. When disputes arise, this charge is pretty hard to avoid, since sellers never win these disputes, and will get charged even if they manage to settle the matter personally with the customer. Find out how your gateway handles chargebacks, and do everything you can to avoid them.
  • While some payment gateways bill merchants on a strictly per-transaction basis, others charge a monthly fee, and some of the supposedly “free” ones have a minimum charge of $10. So if you make no sales, you will be charged the $10 anyway.
  • Virtually all merchant account providers charge a statement fee. A basic statement will run you about $10, and a more detailed summary will be more expensive.
  • Each time you sell something online, you are charged two types of fees. The first is a percentage of the sale and the second is a fixed fee. This is typically something like 2.9% plus $0.30 per transaction. However, the rate quoted by companies is always the lower, “qualified transaction” rate. A qualified transaction is one that basically involves zero risks of chargebacks – it’s domestic, all the billing information is correct, the CCV code (the last three or four digits on the back of the card) matches, and the credit card offers no rewards of any type. How many transactions of this kind are you likely to have? Very few, as most of your customers will be using credit cards which offer them rewards and perks. So most of your transactions will be “non-qualified” and billed at the higher, less-prominently-advertized rate.
  • Many payment gateways are also adept at sneaking PCI compliance fees into your annual payment. All companies that accept credit cards must be PCI compliant (meeting the Payment Card Industry Security Standards Council’s regulations for maintaining customers’ privacy), so you can’t get out of this fee either. It can be as much as $35 to $100 tacked onto your bill at the end of the year.

How to avoid extra fees and cut down on processing expenses

The best way to do this is to sign up with a payment gateway that offers an all-in-one price, so you know how much you are actually paying. You can also consider using a payment gateway that supports bank transfers and bypasses credit cards altogether.

To compare the prices of the various payment gateways, use this simple formula:

monthly cost = (monthly fee) + (per-transaction flat fee x number of transactions) + (per-transaction commission x total billed)

If you are already running a business, you have an idea of how much you sell per month, so this is easier to calculate. If you are just starting out, start with a conservative estimate or choose a gateway with free setup until you get a better idea of number of transactions. Setup fees are generally non-refundable, so you don’t want to spend that money unnecessarily.

If you expect to handle a large volume of transactions, look into payment gateways which lower your per-transaction commissions (also known as your “discount rate”) once you pass a certain threshold of sales. Also note that many gateways charge extra for auto-billing. If you are doing your subscription billing through another service (Invoice Ninja supports auto-billing, for example), or don’t need to bill recurring customers/clients, you can cut down on fees by choosing not to include this service. It’s easy to lose track of what you are paying for, so make a point of reading the statements from your payment gateway and merchant account on a regular basis. You may find charges that can be removed or reduced, or a reevaluation may show you that it’s time to switch to a different provider.