As a business owner, you will have to pay fees to a payment processor* to accept credit and debit card payments. It can be difficult to get a clear understanding of the different fees involved and how they change based on your processing volume, debit vs. credit volume and contract terms. However, as card acceptance is a necessity in most industries now, it pays to have at least a basic understanding of the typical fees and where you can make significant savings. In this guide, we’ll take a look at the different parts of your card processing bill:
1. The cost of the terminal and gateway costs
- In the UK, very few suppliers will sell a terminal upfront without a monthly or yearly commitment. A merchant will most likely pay a monthly subscription of £10 to £40 (in average around £15-17), depending on the provider, the merchant’s commitment period, the terminal type, the service level and sometimes the cost of the integration of the terminal to the POS.
- It is however possible find suppliers like StoreKit to buy terminals upfront with prices starting at around £200 – just like you can buy a phone outright and avoid any commitment with a specific operator. Just make sure you understand post-sale service levels and warranties if you decide to buy a terminal upfront
- If you are using an integrated terminal, the monthly fee might also cover the gateway costs. The gateway is the software that can collect and encrypt card data, and connects the terminal to the payment processing platform and the POS software.
2. The direct costs of processing payments are calculated per transaction and typically include three components:
- Card Scheme fees: the schemes are the card brands such as Visa, MasterCard, American Express, Diners, UnionPay… Scheme fees are the revenue of these brands. For every transaction processed through a scheme, this scheme will charge the acquiring bank*, which will in turn pass this cost over to the merchants (and sometimes slightly more :$). The level of the card schemes fees are negotiated by the acquiring bank with the Schemes and must be indicated on your month-end statement by your acquirer*.
- Interchange fees: these are fees collected by the issuing bank of the card used for the payment. So for instance, if a customer banks with Lloyds and pays in a cafe with his Lloyds Visa card, Lloyds will receive this interchange fees as revenue. Interchange fees are publicly accessible (e.g. see here for Visa) and must comply with the recommendations of public authorities such as the European Union. As a result, these fees have been going down for most merchants over the last few years. Like the card scheme fees, Interchange must also appear on your month end statement as a separate item.
- Acquirer’s revenue. This is what your payment processor makes, in general between 0.3% and 0.5%. Out of the 3 processing costs, it is the only one that can be lowered through negotiation and can vary greatly depending on the volume put through and your negotiation.
How can you use this knowledge to your benefit?
When negotiating your rates, you should always negotiate with 2 or 3 different payment processors and provide them with the following information:
- Spread of transactions by Card type; as a rule of thumb, we consider that a typical retail or restaurant business in the UK will see about 75% of Visa personal debit card, 5% of MasterCard personal debit card; 5% of Visa personal credit cards; 5% of MasterCard personal credit cards; the remaining 10% is divided between other types of cards (Credit cards business, Amex, etc.). However, if you are a lunch restaurant in the City, you might anticipate a higher-than-usual proportion of business credit cards.
- Volume: this is how your projected card turnover.
- Your Average transaction paid by card (ATV). Use your average spend per head and time it by 1.5 to get a proxy (as one card can pay for several people).
Once you know these, make sure you know what the interchange rates are for the most typical card types. For instance, for the most common Visa Debit Cards, here is how the cost of processing can be broken down:
- as at June 2017, the Visa personal debit Interchange for intra-UK, in-store transactions is 0.2%
- Card schemes for a Visa Debit card will generally be around 0.01% and 1p
- So anything you will pay on top of this is the revenue (not the profit!) of the acquirer. Expect to pay about 0.3 to 0.5% in general, unless you are turning over a few million per annum.
Note that payment processors will tend to simplify the pricing structure and procide a simplified quote e.g. Personal Debit Card: 0.4%+ 3p. So if your average transaction is worth £10, this means your actual rate is 0.7%, not 0.4%. Spend some time with a calculator! Finally, obtain a formal written detailed quote and beware of payment processors and sales people who will only write a few percentages in an email.
Finally when comparing suppliers, make sure you compare the bottom-of-the bill amounts: include in your cost estimations ancillary costs such as PCI compliance, authorisation fees, per click fees, extra costs for International cards (EU or non EU…) etc.
* Payment processor, Acquirer (Acquiring bank), ISO, Payment facilitators: they are all different breeds of the same animal. As a merchant, here is the main thing: they generate the Merchant ID that allows a merchant to accept card payments and they are the ones providing services to the merchant.