What Are Credit Card Processing Fees?
Credit cards have become a staple of modern life. They’re used for everything from making large, one-off purchases like jet skis to more banal, weekly expenses like groceries.
This is just as true for merchants as it is for consumers. It’s pretty rare these days to shop at a place where credit cards aren’t accepted.
If you’re running a legal practice, there’s a good chance that most of your clients, if not all of them, will expect to be able to pay for your services with a credit card.
And this means you need to understand the intricacies of working with credit cards.
Credit card processing fees, also known as credit card transaction fees, are charges that are paid by merchants whenever they accept a credit card payment. This is in exchange for having the payment securely processed by a credit card network.
In most cases, credit card processing fees will run between 1.5% to 3.5% of the total value of a transaction. A $1,000 transaction, therefore, could have fees ranging from $15 up to $35. The overall impact depends on your margins. If your total profit on a given transaction is $40, then a credit card processing fee could eat up nearly all of it.
Because credit cards are ubiquitous and there are subtleties to accepting credit card payments, it’s pivotal to understand credit card processing fees and how they work before choosing a processor.
Why do Providers Charge a Processing Fee for Credit Cards?
Getting and using a credit card isn’t free. To get a credit card, you usually have to submit an application, which can involve filling out paperwork, going through a hard credit check, and more. Besides the time involved, a hard credit check can also cause a temporary decrease in your credit score.
All of this is part of paying for the convenience credit cards offer. If there are costs to using credit cards, it shouldn’t come as a surprise that there are costs to accepting them as well.
The technical infrastructure that Visa, Mastercard, and other credit card networks use to process credit card transactions has to be built, maintained, and upgraded—all of which costs money.
Processing fees for credit cards are what credit card networks charge in exchange for making this infrastructure available to merchants. Rather than hiring engineers to build a processing system for your legal practice, you can use theirs, in exchange for a fee.
What Are The Three Credit Card Processing Fees?
If you research ‘fees for credit card processing,’ you’ll discover that they aren’t singular values, they’re made up of several different parts. The financial side of your business will run more smoothly if you understand these parts, how they interact, and who is responsible for each one.
Let’s start with the discount rate. The discount rate is a broad term for the total fraction of a sale that goes toward a processing fee. If you’re charged $30 to process a $1,000 transaction, $30 is the discount rate.
Discount rates have three primary components:
- Assessment fees
- Interchange fees,
- Payment processor fees
In the sections which follow, we’ll discuss the structure of each of these fees for credit card processing and what they mean for your business.
1. Assessment fee
The assessment fee is a relatively small part of the discount rate, and it is paid directly to Visa, Discover, MasterCard, or one of the other credit card networks.
Networks vary in how they calculate assessment fees. They may charge higher rates for high-volume transactions, for example, or they might offer lower assessment fees for debit cards versus credit cards.
2. Interchange fee
Interchange fees are the largest part of the discount rate, and they go toward credit card issuers, such as banks and other financial entities. In many cases, interchange fees are calculated as a percentage of the total transaction, with a fixed amount added on top.
As with assessment fees, interchange fees differ between issuers. Important factors can include whether a transaction was done with a debit card or credit card, what category the merchant belongs to, and the credit network being used (i.e., it might be different when using Discover versus American Express.)
3. Payment processor fee
These days, it’s become common for credit card transactions to involve an intermediary who handles the behind-the-scenes technical challenge of processing a credit card payment. If you’ve been to a coffee shop recently, you might’ve paid for your drink by swiping your card through a little white square that your server had plugged into their phone. That device is manufactured by a payment processing company called Square.
If you use Square, Helcim, Stax, or a similar service, there will be an additional surcharge added to your discount rate.
Payment Processor Pricing Structures
Credit card payment processors have a few different ways they handle pricing. Each has various pros and cons you should be aware of.
1. Tiered Pricing
Tiered pricing comes in three varieties.
The ‘qualified’ tier applies to debit cards and credit cards which don’t have a rewards program. The ‘mid-qualified’ tier applies to credit cards with select types of rewards programs. The ‘non-qualified’ tier applies to corporate credit cards or credit cards with especially large rewards programs.
As you’d expect, the lowest rates go to cards in the qualified tier, the highest rates go to cards in the non-qualified tier, and the rates for cards in the mid-qualified tier are often in between.
Tiered pricing is generally set up as a percentage of total transaction value, with a flat fee added on top. If you use tiered pricing, you’ll have to keep in mind that it will cost you different amounts to process a credit card transaction, depending on what tier the card falls into.
As a general rule, tiered pricing will tend to be slightly cheaper than flat-rate pricing and slightly more expensive than interchange-plus pricing.
2. Flat-rate pricing
In a flat-rate pricing structure, the processor charges you a single, consistent rate for handling credit card transactions.
The benefit of this arrangement, of course, is its predictability. You should always have a pretty clear idea of what fees you’ll be paying on a monthly basis, however large the volume of credit card transactions is.
The downside is that there’s nothing you can do to make your fee lower. If you’re operating on a tiered pricing structure you could cut back on fees by refusing to accept cards in a certain tier, for example. With flat-rate pricing, this isn’t possible.
3. Interchange-plus pricing
With interchange-plus pricing, the payment processor will charge you whatever interchange fee is lowest—with an additional fixed fee added on top.
Savings will result from always getting the lowest interchange fee, and you’ll also know what fixed fee will be added to your bill. Interchange-plus pricing, therefore, makes understanding your monthly credit card processing fees relatively straightforward.
But multiple factors still impact your fees, including transaction volume, your merchant categorization, etc. Take this into account when shopping around for credit card processors.
How Much are Credit Card Processing Fees?
Conceptually, calculating your credit card processing fee is relatively straightforward: you just need to know the total value of the monthly credit card payments your firm will accommodate, and you multiply that value by the discount rate.
If you’re lucky enough to have $1,000,000 in credit card transactions per month (good for you!), then a total discount rate of 2% means you’ll owe $20,000 in fees.
There are, of course, many factors to consider. Because discount rates are made up of different kinds of fees that vary between credit card networks, pinning down your exact discount rate can be challenging.
Many financial websites include a built-in calculator for this purpose (here’s nerdwallet’s). These can help you track the subtleties of your discount rate and get a pretty good estimate of what your monthly credit card processing fees will look like.
How Can Credit Card Processing Fees Impact Your Legal Practice?
Like anyone who wants to get paid for their work, lawyers need a way to accept payments. With credit cards becoming even more embedded into budgets and spending patterns, there’s a good chance that your clients will want to pay with one.
It’s therefore important that you understand how credit card processing fees work, the different ways fees can be structured, and how that will play out in your particular circumstances.
If your practice only handles a few cases at a time, for example, it makes no sense to consider volume discounts when comparing credit card processors. However, if you expand considerably, that could change.
How to Decrease Credit Card Transaction Fees for Your Law Firm
There are a few ways you can minimize credit card transaction fees. First, think carefully about flat-fee pricing as you can sometimes end up paying more than with other pricing models. With LawPay’s transparent pricing, you know exactly what you’ll be paying and can make a decision accordingly.
If you’re going to opt for interchange-plus or tiered pricing, be sure you clearly understand how fees are calculated. Credit card transaction fees will only actually be minimized if certain specific conditions are met.
One final way that you could decrease your fees is through surcharging. With Surcharges, you add your own small fee on top of whatever you charge the customer in exchange for letting them use a credit card.
The LawPay Advantage
If you’re considering credit card payments for your legal practice, LawPay makes it easy. With a wide variety of customizable payment options, a user-friendly interface to manage payments, and no special card-reader equipment required, LawPay can make integrating credit cards a breeze.