5 ways to reduce your merchant processing fees

For any small business operating online, it’s a highly competitive landscape. That’s why managing merchant processing fees is paramount for those looking to maximise their profit margins.

However, by first understanding the intricacies of various fees, exploring seamless integration options, and considering the partners you choose, the platform is set to optimise your payment processes and pave the way for greater financial success in the dynamic world of eCommerce.

Let’s dive in.

Small Business Pro allows you to build your own sales pipelines with our tool which has been specially tailored for small businesses – all at a fraction of the cost of other CRMs.

It will also help with the heavy lifting of taking payments, insurance, finance and HR, plus you’ll get a host of personal wellbeing benefits.

You can find out more about Small Business Pro here.

Types of merchant processing fees

The first step in this process is to understand what the different merchant processing fees are. Without a clear comprehension of these fees, businesses may risk overpaying, miss potential cost-saving opportunities, or could encounter unexpected expenses which may dent profitability and financial stability.

Interchange fees

Interchange fees are charges imposed by card networks, such as Visa and Mastercard, for processing transactions. These fees can vary, based on factors like the card type used, such as credit or debit, and the industry the business operates in. For example, if a customer uses a rewards credit card to buy food at a supermarket, the interchange fee might be higher compared to using a debit card for the same transaction. Interchange fees are paid by the small business’s bank (acquirer) to the card network and are an essential part of the cost structure for payment processing.

Assessment fee

An assessment fee is imposed by card networks to cover their operational expenses and maintain the payment infrastructure. Card networks typically charge a percentage of the transaction amount as assessment fees. For example, if a customer makes a £50 purchase using a Visa card, a small percentage of that transaction amount would be allocated as an assessment fee, which contributes to supporting the global payment network and maintaining security measures.

Discount fee

Finally, discount fees (or markup fees) are the revenue earned by the payment processor or payment service provider (PSP) for their services. Payment processors charge these fees to cover their operating costs and generate profit. The fees are added on top of the interchange and assessment fees. For example, a payment processor might charge a flat fee per transaction or a percentage of the transaction amount as a discount fee, which accounts for the specific services provided by the processor, such as fraud protection, customer support, or integration tools.

To achieve lower merchant processing fees, sellers must understand the intricacies of payment processing fee structures – below is a summary of the common payment processing price models:

  • Flat-rate pricing: This fee structure charges a fixed fee for every transaction, regardless of the actual interchange cost, often leading to hidden and inflated fees.
  • Tiered pricing: This pricing model offers an enticingly low rate for “qualified” transactions but significantly higher rates for “mid-qualified” and “non-qualified” transactions, with the processor determining the categorisation at their discretion.
  • Interchange-plus pricing: This pricing structure provides transparency by itemising fees, combining interchange fees with card network assessments, and providing a contracted markup that remains consistent for all payments.

The essential guide to point of sale (POS) systemsIn this guide, we take a look at everything small business owners need to know about buying a point of sale (POS) system

Which fee structure should you choose?

Each fee structure has its advantages and disadvantages. Selecting the right one can make a substantial difference in both costs and operational efficiency. My advice here is to work with those payment processors committed to empowering businesses with comprehensive fee information that enables informed decisions tailored to their specific needs.

Transparent processors offer simplified pricing models, eliminating hidden charges and providing cost visibility.

Additionally, value-added services and cost-effective solutions further reduce expenses, including fraud prevention tools, customised integration options, and exceptional customer support, helping to streamline financial operations.

How to reduce your merchant processing fees

The first step is to negotiate better rates with your existing payment processor, as businesses can use their transaction volume and industry reputation as powerful bargaining tools, as well as to show value to their payment processor.

What’s more, emphasising your loyalty and desire to continue a mutually beneficial partnership can foster a collaborative approach during negotiations. I’d also recommend researching competitor rates and industry standards to advocate for more competitive terms.

#1 – Install robust fraud detection tools

Implementing fraud prevention measures is another step to take in reducing merchant processing fees. This is because high chargeback ratios indicate a higher risk of fraudulent transactions and customer disputes, which in turn leads a payment processor to classify the merchant as high-risk. As a result, payment processors may impose higher processing fees to compensate for potential losses. Mitigate these risks through robust fraud detection tools that can help identify suspicious transactions in real time.

#2 – Integrate payment gateways and shopping carts

Integrating payment gateways and shopping carts can lead to reduced merchant processing fees through increased efficiency and optimised transaction processes. By seamlessly integrating these systems, merchants can eliminate the need for manual data entry and reduce the risk of errors, leading to quicker transaction processing and fewer chargebacks.

Best buy now, pay later platforms for small businessesMore people are now using the buy now, pay later method as a direct result of the rise in cost of living. Here are the best platforms to use for your small business

#3 – Embrace tokenisation and P2PE

As a result of improved data security and reduced fraud risk, businesses utilising innovative technologies such as tokenisation and point-to-point encryption (P2PE) may gain trust from customers and payment processors, potentially leading to negotiations for lower processing fees.

Tokenisation replaces payment card information with tokens, ensuring that sensitive data is not stored, reducing the risk of data breaches, and complying with security regulations.

P2PE encrypts payment data from the point of sale until it reaches the payment processor, safeguarding it against potential breaches during transmission, and creating a more secure and cost-effective payment processing environment.

#4 – Compare providers

Comparing providers can mean better pricing and improved services for businesses and customers. When researching and evaluating providers, it’s important to prioritise their reputation, track record, and industry experience.

Businesses should also assess their service offerings, such as transaction fees and any potential hidden costs, to ensure they are both competitive and sustainable for their transaction volume.

Additionally, firms should look for providers which offer valuable supplementary services such as fraud protection, subscription management, and robust international payment support, as these can significantly enhance business operations.

#5 – Consider a specialist PSP

Finally, considering a “specialist” PSP that caters to a specific industry, sector or business type brings a multitude of benefits for businesses. Such providers offer tailored solutions that address the unique needs and challenges of specific sectors, ensuring a more seamless and efficient payment process. For example, a travel-focused provider could offer multi-currency support and adaptive payment options for global travellers.

Why it’s important to reduce merchant processing fees

The importance of consistently reviewing and optimising merchant processing fees cannot be underestimated for profitability. By implementing some of the tips I’ve provided above, such as leveraging specialised industry knowledge, utilising transparent fee structures offered by reliable providers, and partnering with reputable PSPs, it will help to lower merchant processing fees, ensuring long-term cost savings and operational efficiency for your business.

Bob Kaufman is founder and CEO of payments gateway ConnexPay

More on taking payments

Shopify alternatives for UK businessesOver 180,000 UK businesses use Shopify for their ecommerce platform. However, there are alternatives to Shopify out there which are cheaper or even free

Avatar photo

Bob Kaufman

Bob Kaufman is founder and CEO of payments gateway ConnexPay.