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How to calculate your credit card processing fees and how to lower them

What is the formula for calculating credit card processing fees?

The first step of calculating your credit card processing fees is finding your effective rate. First, you’ll need to pull out your credit card statement. Next, you’ll need to take the total amount deducted for processing and divide it by the amount of your total monthly sales that paid using credit cards. 

The result is your effective rate, the total amount your credit card company is charging you.

This chart shows the effective rate breakdown. Effective Credit Card Processing rate is total deducted for processing divided by total monthly sales. that number is then multiplied by 100 to equal the effective rate.

How does my effective rate compare to others?

When the typical B2B organization initially looks at their effective rate, it’s usually between 2.5% and 3%. Within that effective rate are several different types of fees:

Interchange rate: Makes up the largest portion of the fee. Goes to the issuer (usually issuing banks) to fund cardholder operations and rebates. 

Markup: Goes to the merchant processor which the supplier uses to accept card payments. 

Assessment:  Goes to the network (Visa, Mastercard, Discover, American Express) for allowing the issuer to transmit the payment from the cardholder to the merchant.

If your organization simply accepts these fees as the cost of doing business, it’s time to rethink that position.

How to lower my effective rate

You can lower your effective rate and total credit card fees by defining a smart credit card acceptance policy along with implementing technology that will lower your monthly fees and costs associated with credit card transactions such as cash application. 

A smart credit card acceptance strategy combined with innovative automation can help you slash those fees up to 1%.

How to create a credit card policy

Defining your company’s credit card acceptance policy is tough. Buyers love paying with credit cards – and everyone wants to make their customers happy. But the rebates and additional lines of credit that your buyers enjoy come with costs for you: Credit card processing fees and manual labor. 

Some suppliers choose not to accept credit cards, but in challenging economic environments or competitive industries being willing to accept credit cards is a competitive advantage

To make a cost effective credit card acceptance strategy, a company needs to first understand exactly how much they’re spending each month to process their customers’ credit cards. 

Are there different pricing models for processing fees?

Because of specific ranges for each major credit card network, credit card processing fees may fluctuate. In fact, the average credit card processing fee may change over time. One reason for fluctuations is due to pricing models. Merchants may be able to accept one that best fits their needs. Here are the different pricing models:

Tiered pricing: As the name implies, credit card transactions may be available in different buckets or tiers.

For instance, certain transactions may be charged at a higher or lower percentage in fees. Merchants who process most of their credit card transactions in the lowest tier may find the tiered pricing model works best for them.

Flat rate pricing: A credit card processor will charge merchants a flat or fixed rate for each credit card transaction plus a small fee ($.20 to $.30 per transaction).

Merchants with a flat-rate pricing model have a better chance of anticipating their credit card processing costs over time.

Interchange Plus pricing: This model from card networks includes the interchange rate for each credit card transaction plus any predetermined add-on fees.

With the Interchange Plus pricing model, merchants may pay the interchange rate plus a smaller fee per credit card transaction or an additional percentage.

What influences credit card transactions fees and the various percentages charged by card issuers?

Since many factors may influence the pricing models, it’s why transaction fees from various credit card issuers (or other financial institutions and fintech companies) may be assessed at different percentages. For instance, American Express may charge between 2.5 percent to 3.5 percent because they’re a closed network meaning they are the only one that can issue credit cards. VISA® and Mastercard® can be issued by other banks.

Keep in mind that there are many costs involved in credit card processing fees, which can affect the total cost of accepting credit cards over time. Anything you can do to reduce costs, for example, implementing accounts receivable automation software, may give you a better return on investment (ROI) in the long run.

How do I accept credit cards and increase margins at the same time?

Here are a few tips that can help you develop your own efficient and cost effective credit card acceptance strategy:

Tip 1: Make sure your credit card solution is processing your customers’ payments using Level 2 or Level 3 credit card data. 

Level 1 data is what you would commonly transmit in a retail purchase, with just basic information about the buyer, the seller and the transaction. Level 2 and Level 3 transactions contain many more points of data, like item SKU numbers, addresses and tax information.

Card processors consider transactions that come with more data to be more secure and less likely to be fraudulent or in error, so they reward Level 2 and Level 3 transactions with lower fees. 

This chart lists out the Credit Card Transaction level data requirements by level.

Tip 2: Design smart payment policies to encourage buyers to pay quickly and prevent them from using credit cards outside of the early payment window. 

This is easier to do than you think. More and more buyers are using AP providers to handle their accounts payable. These AP providers are often issuers of credit cards themselves and are eager to pay via virtual credit cards on behalf of their customers.

At Billtrust, we have heard from many customers that their buyers’ AP providers are able to promise credit card payment within 7 days of the receipt of invoice, while warning that paper check payments could come as late at 60 days from receipt of invoice.

This isn’t all good news, because credit card payments do come with fees (monthly fee) and manual processing requirements. But the difference between receiving a payment within 7 days and having to wait up to 60 days for payment is enormous. There are major cash flow and working capital advantages to getting paid faster. More and more Billtrust customers are starting to embrace card payments as they work to maximize their benefits and minimize their drawbacks.  

Tip 3: Leverage AR automation to eliminate the manual work of processing emailed virtual credit cards.

Many buyers transmit their virtual card payment information by email or phone. This not only exposes sensitive payment data, but it requires AR professionals to open emails, key in payment information and manually match payments to invoices.

AR automation like Billtrust’s Business Payments Network (BPN) eliminates the manual work of processing emailed virtual credit cards and the security risks. BPN retrieves payment data directly from your customers’ payment sources, whether it be card numbers emailed to a secure inbox, pulled from a supplier-hosted self-service portal or an accounts payable provider portal. 

And BPN ensures that Level 2 or Level 3 payments are realized on every transaction to help bring down your payment costs even further.

Reducing credit card processing fees (monthly fee) with automation

Automation removes the resources needed to process emailed credit cards, adds Level 2 and Level 3 interchange savings and you’ll be able to see the value of automation each month in your credit card statement as your effective rate decreases over time.

Virtually any automated process will be faster, more efficient and cost less than the manual alternative. This is especially true for your accounts receivable team’s payment acceptance process.

Accounts receivable management software can lower costs

To learn how accounts receivable automation can help lower your workload and costs when accepting credit card payments, please contact a Billtrust team member.

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