In the world of business, success is often a game of inches, where even the smallest overlooked factor can make a big difference in your profitability. A common profit predator lurking in the shadows of your business is credit card fees. Many of our clients see them as “a part of doing business” but the truth is these seemingly insignificant charges can quietly drain away your hard-earned profits, leaving you wondering where all your money went.

Understanding credit card processing fees

Before we dive into the specifics of credit card processing fees, let's first gain a basic understanding of how they work. When a customer makes a purchase using a credit card, the transaction needs to be processed by a payment gateway. This process involves several steps, including authorization, settlement, and funding. Each of these steps incurs a fee, which is typically a percentage of the transaction amount or a fixed fee per transaction.

Credit card processing fees can be divided into several categories. The most common types of fees include interchange fees, assessment fees, and processing fees. Interchange fees are charged by the credit card networks, such as Visa, Mastercard, and American Express, and are a percentage of the transaction amount. Assessment fees, on the other hand, are charged by the card brands themselves and are also a percentage of the transaction amount. Lastly, processing fees are charged by the payment processor or merchant service provider and can be either a percentage or a flat fee per transaction. 

According to industry data, the average credit card processing fees range from 1.5% to 3% of the transaction amount. However, these fees can vary depending on various factors, such as the type of business, the average transaction size, and the volume of transactions processed. The bottom line is that if you take credit card payment, someone is going to have to pay these costs. 

Credit card processing fees still might be necessary for your business

The use of credit cards can be a double-edged sword for businesses. While credit card fees eat into profits, they are sometimes a necessary cost for businesses that require a faster influx of cash. For businesses dealing with a high volume of transactions or those looking to attract more customers, accepting credit cards can be crucial. The convenience and flexibility offered by credit cards can often outweigh the associated fees, but this doesn’t mean you have to blindly accept them. We recommend being proactive and minimizing these costs with your eyes wide open. 

Identifying profit leaks caused by credit card fees

Now that we have a good understanding of credit card processing fees and why we might need them, let's discuss how they can create profit leaks in your business. The first and most obvious way credit card fees impact your profitability is by reducing your profit margin. If you have a tight profit margin to begin with, even a small increase in credit card fees can have a significant impact on your bottom line. Additionally, credit card fees can also lead to hidden costs, such as chargebacks or disputes, which further erode your profitability. The time spent managing credit card fees and reconciling transactions can also be a drain on your resources, taking away valuable time that could be spent on growing your business. So what can you do about it?

How to minimize credit card processing fees

Here are a few strategies you can implement today to minimize these fees:  

Negotiate with Your Payment Processor: Your payment processor or merchant service provider wants your business and are sometimes willing to work with you to find a mutually beneficial solution.

Compare Processors: When it comes to choosing a credit card processing provider, it's important to compare their fees and offerings to find the best fit for your business. Three popular providers in the market are Square, PayPal, and Stripe. Square offers a simple and transparent pricing structure, with a flat fee per transaction and no monthly fees. PayPal, on the other hand, offers a tiered pricing structure, with fees based on your monthly sales volume. Lastly, Stripe offers a pay-as-you-go pricing model, with fees based on a percentage of the transaction amount. It's important to carefully consider your business needs and transaction volume when choosing a provider.

Pass the Fee onto Your Customers: Another strategy is to pass on the credit card fees to your customers by implementing a surcharge. Credit card surcharges are optional fees added by the merchant when customers choose to use a credit card to pay at checkout. Surcharges are legal unless restricted by state law. Remember to check the bylaws in your state and keep it legal.

To accurately calculate the credit card processing fees charged to your customers, you need to understand the fee structure and apply it to each transaction. Let's say your credit card processing provider charges a 2% fee per transaction. If a customer makes a purchase of $100, the fee would be $2. This means that the customer would be charged $102 in total, with $100 going to your business and $2 going towards the credit card processing fees. It's important to factor in these fees when setting your prices to ensure you are covering your costs and maintaining profitability.

Take ACH Instead: Consider using alternative payment methods, such as ACH or eChecks, which often have lower processing fees compared to credit cards. 

Accounting for credit card processing fees in your financial statements

To ensure accurate financial reporting, it's crucial to account for credit card processing fees in your financial statements. One way to do this is by creating a separate expense account for credit card processing fees. This will allow you to track these fees separately and have a clear understanding how much you spend on these fees every month. Additionally, you might also consider including a line item for credit card fees in your cost of goods sold (COGS) or operating expenses, depending on the nature of your business. This will give you a more holistic view of the impact of credit card processing fees on your profitability.

Taking control of your business's financial health

Credit card fees can be a significant drain on your business's profitability, but by understanding how they work and implementing the right strategies, you can plug the leak and maximize your profitability. From negotiating with your payment processor to exploring alternative payment methods, there are several steps you can take to minimize credit card processing fees. By being proactive and regularly reviewing your financial statements, you can take control of your business's financial health and ensure long-term success. So don't let credit card fees eat into your profits any longer – take action today and say goodbye to credit card fees for good.

Want to learn about other silent profit killers? At Oracle Profitability, we’re highly focused on profitable bookkeeping and we get a thrill when we’re able to find sneaky profit leaks and put that money back in your pocket. Book your free consultation today.