Credit card processing fees you should know about for your business

Payment processing fees naturally come with the territory of owning a business. On average, merchants pay around 2% or more anytime a customer uses their credit card. And with different types of payment processes come extra fees and rates. Credit cards are a more expensive option for business owners, especially when compared to debit cards and cash. 

That being said, there are a total of 9.68 million Visa and MasterCard cards in circulation in Canada right now. It could be beneficial to your small business if you start accepting credit cards at your place of business.

Before accepting credit card payments from clients, you need to know about credit card costs like interchange and assessment fees. In this article, we explain what credit card processing fees and electronic payment methods are and what it takes to lower them in Canada.

What is a credit card processing fee?

Credit card processing fees are the fees businesses pay every time customers use a credit card to pay for their products or services. There are many types of fees associated with transactions and they depend on the type of credit cards your business accepts.

Types of credit card processing fees

There are a few different types of processing fees to be aware of. Here are some of the most common fees associated with credit card transactions (from the business side):

Assessment fees 

Assessment fees are the fees businesses pay to credit card networks. This allows merchants and business owners to charge their customers with these specific types of cards. Credit card networks provide businesses with the necessary communication systems that allow them to process credit card payments – they move the payments between customers, businesses and their respective banks.

Payment gateway fees

This type of fee exists if your business has an app or website where you can accept online payments from customers. Payment gateway charges are a percentage of an online payment amount and depend on the online payment method of the customer. 

Payment gateways are a great way for businesses to expand their presence online and offer more flexibility to their clients. They enable your business to manage incoming payments instantaneously, offer instant refunds and real-time bank settlements. 

Incidental fees

Incidental fees aren’t always as common. They occur when a transaction is disputed, a customer has insufficient funds, or a business doesn’t meet their monthly minimum requirements.

Terminal fees

These types of fees apply to merchants and businesses that use POS systems that process credit card transactions. In Canada, a lot of business owners rent their terminals. However, you can buy your own terminal through your service provider or a third party seller – which will save you from ongoing charges.

Two happy coffee owners side by side in shop

More ways to get any job paid

See your hard work pay off. Give your customers flexible payment options, so it’s easier for you to get paid—no matter where you work.

Credit card transaction costs in Canada

So how much do fees really cost per transaction in Canada? We’ll break down how credit card fees work and how you can calculate them from a credit card processing statement. 

For merchants, the average cost of a credit card fee is between 1.5% and 3.5%. Thankfully, an announcement was made by the Canadian government to help decrease credit card processing fees for business owners – specifically interchange fees.

Let’s take a deeper dive into the average cost for major credit card companies in Canada.

Credit card processing fees.

How to calculate credit card processing fees

The first thing you need to do for processing credit card fees is finding the effective rate. You calculate the effective rate by dividing the total amount deducted for processing by the total monthly sales. This will give you the effective rate – the amount your credit card company is charging you for accepting credit card payments.

Effective rate formula:

Effective rate = Total fees charged / Total amount processed x 100

What are the different pricing structures available by payment processors? 

There are a few other things to look at outside of credit card processing fees. Depending on your payment processor, there are different pricing structures available to you. Let’s take a look below.

Flat pricing:

Flat pricing is a pricing where your small business pays a percentage of the transaction in addition to a flat fee. For example, if the rate is 2.3%, you add 15 cents to the calculation for credit card payments. 

Tiered pricing (MDR):

For those that fall under the tiered pricing category, this means the charge depends on the type of credit cards used and the type of transaction that took place. There are three types of tiers:

  • Qualified
  • Non-qualified
  • Mid-qualified

Interchange-plus pricing

In general, interchange-plus pricing is the least expensive option out of the three. However, the charges depend on the card network and the type of credit card. Because of all the variables, this type of pricing can be more confusing compared to the other two.

How to lower your credit card processing fees for your small business

Credit card processing fees are part of the cost of running a business. In general, a lot of customers prefer using credit cards so it’s not recommended to avoid accepting them. But, there are some things you can do to help reduce your processing fees. 

  • Choose the best pricing model for your business
  • Reduce credit card fraud
  • Use an address verification service
  • Set up your terminal correctly

How to Reduce Credit Card Processing Fees

Credit card processing fees can add up, but there are many ways to mitigate some of these fees in the way you accept payments, negotiate with your merchant account provider, and more. Here is what you need to look out for when determining the pricing models of your chosen credit card processors.

1. Promote debit or cash transactions with a discount

A lot of companies deter their customers from paying with their credit cards by offering a discount for purchasing products or services with cash or debit cards. Before you make this decision, it is important that you take a couple of things into consideration. First, you should research what the norm is for your industry. 

If you own a convenience store or a bakery, it is quite common to offer a discount for paying in cash because of the lower cost of your products. But if you are selling high-end products like luxury clothing or spa treatments, it wouldn’t be likely that your clientele would be paying in cash. There is also the time it takes to count the cash you receive as well as the time it takes to deposit it into your bank account.

2. Consider adding a credit card surcharge

The flip side of offering a discount for customers who pay in cash is to charge a surcharge for those who use their credit cards. This will make your customers think twice about using their credit card when purchasing a product or service from you. It will also deter your clients from making small purchases that could be less than the credit card processing fee.

3. Set a minimum for credit card payments

When accepting credit cards, you wouldn’t want someone to purchase a product that is less than your credit card processing fees. To make credit card usage worthwhile, it is a good idea to set a minimum amount for credit card transactions. 

Say you own a convenience store, and someone buys a pack of gum for $0.99, it is not worth the processing fees to allow this customer to purchase the pack of gum on a credit card. You can set your minimum to whatever dollar amount you like; it can range from $5 to $25.

4. Reduce your risks of chargebacks

Chargebacks happen when customers dispute a charge made by your business and ask the card issuer to reverse it. Chargeback fees can impact your credit processing fees because banks will consider your small business a higher risk. A good way to minimize chargebacks is to get your customers to sign a credit card authorization form, this will allow you to charge the card on an ongoing basis.

5. Negotiate your merchant account terms

When first setting up your merchant account, it is important to negotiate your payment processing fees with your bank of choice. They will often make adjustments to your fees upfront because once you have entered an agreement, you will have to wait for the contract to end. This means it is crucial to negotiate fees before you make a commitment.

At the end of the day, the best thing you can do is dig deep into your business finances and find a structure that works for you. Learn about QuickBooks streamlined online payment platform and find ways to reduce your business costs. Join the millions of small business owners across the globe who have taken control of their finances.

Related Articles

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

Firm of the Future

Expert advice and resources for today’s accounting professionals.

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.