Credit cards: How can small businesses cut down on merchant fees for transactions?

Using a credit card is considered convenient, but not a free service. Apart from annual fees, joining fees, etc., credit cards also include merchant fees, which are fees charged to businesses. Merchant fees are essential fees that might be complicated for some to understand.

What are merchant fees?

A merchant fee is a charge that sellers or brands have to pay to accept credit card payments. It is a combination of various charges and is usually a percentage of the total amount.

What does it include?

Merchant fees consist of charges such as assessment fees, interchange fees, incidental fees and payment processor fees.

Assessment fees: These are the charges paid by credit card networks to cover the costs of operating and managing the networks. They are also called pass-through fees.

Interchange fees: These are the charges the seller’s bank pays to the credit card issuing entity when the card is used for payments. Credit card networks determine this fee. It covers costs incurred for maintaining the account, issuing cards, approving transactions, and tackling debt or unauthorised transactions.

Incidental fees: Incidental fees in credit card transactions are additional charges when specific events, such as customer disputes and insufficient funds, are triggered.

Payment processor fee: Payment processors charge a fee for processing transactions. This fee is usually a percentage of the total transaction value, or it can be fixed for every transaction. Sometimes, it may be a combination of both. This fee considers various factors such as payment method, type of transaction, total amount of transaction, type of credit card, etc.

How to minimise merchant fees?

1. Auditing: Make sure to audit your merchant statements consistently to avoid discrepancies.

2. Negotiate well: Try to negotiate for lower rates from your payment processor. This becomes important when you have high sales numbers to avoid higher fees.

3. Minimum limit: Always try to set a purchase limit on credit card sales to avoid paying higher merchant fees.

4. Limit incidental fees: Manage credit card transactions carefully to avoid incidental fees as much as possible.

5. Incentives: Give incentives to people through financial tools that charge lower merchant fees.

Factors affecting merchant fees

• Type of business: Some businesses will have higher merchant fees due to the risks involved in transactions.
• Average transaction value: Average transaction value (ATV) is a key performance indicator (KPI) that can be used to evaluate a company's sales operations, while average monthly sales volume is a metric that can be used to evaluate a merchant's risk
• Transaction methods: Payment methods affect merchant fees due to the risk factor involved. Offline transactions are considered less risky and, hence, charge lower costs compared to online or mobile transactions. Mostly, online transactions are more prone to fraud, and hence, the risks are higher.

Merchant fees are essential, but a proper understanding of various elements that trigger them and the factors affecting them will help you minimise them effectively.