It isn’t quite time for spring cleaning yet, but here’s a good item for the list: Look at merchant services fees. If left unchecked, merchant processing fees can take a big bite out of a company’s profits.
What is a merchant service fee?
A merchant service fee is a cost that businesses pay to process debit and credit card transactions. Each time your business accepts a credit card payment, a percentage goes to payment processors, banks, and card brands. The fee might not seem steep at first glance (for example, maybe it’s 5%), but it quickly adds up. If your customer pays you $120,000 a year for services with a credit card, $6,000 lands in third-party pockets. It’s a slow drip that morphs into a severe drain.
How are merchant service fees calculated?
Merchant service fees are typically calculated as a percentage of each transaction's total value, plus a fixed per-transaction fee. The percentage rate varies depending on several factors, such as the type of card used, the merchant's business type, and the provider's pricing model. The per-transaction fee may be a fixed amount or a percentage of the sale.
What is a good merchant service rate?
A good merchant service rate depends on various factors, including the size and type of business, transaction volume, and card types accepted.
How you can reduce merchant service fees
Don’t think you’re powerless when it comes to merchant processing services. You have options that can help you save money.
1. Look for level 3 processing rates
This level collects payment information such as item quantity, product code, and destination zip code up front—with no extra work needed and lower processing fees. The result is that your company pays less for credit card merchant charges.
Small businesses, however, don’t typically qualify for a level 3 processing rate because of their size. That’s where step two comes in.
2. Lock in a payment gateway that offers level 3 processing rates
Payment gateways have extra benefits beyond the processing rates. Companies can brand them so it looks like their own portal—not a third-party service. Customers receive an electronic invoice, click the link to view it online, and pay from there.
This leads to one of the best ways to cut processing costs.
3. Give your customers multiple digital payment options.
A payment gateway allows you to offer different online payment options. By sharing these options with your customers, you can encourage migration from credit card payments and the steep processing fees that come with them.
ACH transfers represent a particularly attractive form of business payments. Your customer authorizes a transfer from their bank account to your bank account. The money travels from point A to point B, no credit cards needed. Instead of paying 5% for a processing fee, your business owes a flat rate of 50 cents for each ACH payment.
With the payment example above of $120,000 a year, your processing fee would drop from $6,000 to 50 cents—leaving you ahead by $5,999.50
And we’d be remiss not to point out additional benefits that come with payment gateways. For example, when you use the BILL payment gateway, you can also:
- Set your clients up for automatically recurring payments, which is as one accountant described it “cash flow gold.”
- Automate accounts payable and accounts receivable. Imagine taking the grunt work out of AP and AR? Automated workflows would ferry bills through the review and approval process, reminding those who haven’t responded in a timely manner. Payment happens with a completed approval process and a click of a button. For AR, the system automatically creates invoices and sends them electronically to customers. They can click a link and pay online, getting money to you in a quarter of the time it would take to create, sign, mail, and cash a paper check.
- Integrate your AP and AR with your accounting solutions and other apps. You get automatically synced, real-time data at your disposal.
- Pay (and get paid) on the go. With the BILL mobile app, a few taps or swipes on your smartphone lets you close the loop on your AP and AR to-do list.