Accepting credit cards is essential for businesses, as customers are more likely to spend more money when using cards over cash. However, an increase in credit card usage can also put pressure on a business's margins, as merchant service providers charge fees for processing payments. If your business wants to reduce its overheads, you might consider no-fee credit card processing.
While no-fee credit card processing is a service advertised by many merchant service providers, it's not always the best option for businesses. While zero-fee processing allows businesses to avoid credit card fees, it passes the costs onto the consumers. This pass-through approach can lead to negative customer sentiment. Still, if credit card fees are weighing heavily on your business, it's a pricing model worth exploring.
This guide explores zero-fee processing, how no-fee credit card processing works, the differences between surcharging and no-fee credit card processing, the cheapest way to accept credit card payments, and other related topics. Read ahead to explore methods your business can use to reduce its payment processing costs.
What is Zero-Fee Processing?
Zero-fee processing is a payment processing pricing model designed to eliminate a business's exposure to credit card processing fees. Traditionally, when customers pay for goods and services with a credit card, the merchant pays a fee to the credit card processor for facilitating the transaction. With no-fee credit card processing, the merchant passes this cost onto the customer as a surcharge.
By adding a surcharge to a purchase, the business charges the customer for using their credit card to complete the transaction. This cheap credit card processing strategy can benefit businesses in two ways: It ensures the merchant doesn't pay credit card processing fees and encourages customers to use cash.
How Does No-Fee Credit Card Processing Work?
How no-fee credit card processing works depends on your payment processor and POS provider. However, in most cases, it resembles the following process:
- Step 1: A customer proceeds to the checkout counter to pay for goods or services.
- Step 2: The business notifies the customer of a surcharge for using a credit card. This will usually include signage outlining the surcharge amount. For example, a sign may indicate: "All credit card transactions carry a 5% surcharge."
- Step 3: The merchant's POS system automatically adds a surcharge to cover the payment processing costs. This ensures the process is swift and doesn't involve any manual calculations from staff members.
- Step 4: The customer pays the order total with the surcharge. The surcharge revenue covers the cost of the payment processing fees incurred from the transaction.
Differences Between Surcharging and No-Fee Credit Card Processing
If you're exploring avenues for reducing your credit card processing fees, you've probably come across the terms no-fee credit card processing and credit card surcharges. These terms refer to the same type of pricing strategy. No-fee credit card processing involves surcharging customers to cover transaction fees. When someone refers to no-fee credit card processing, they're referring to a surcharging program.
Another pricing strategy to minimize small business credit card processing fees is a "cash discount program." With a cash discount program, customers using credit cards pay the listed price for a product or service, but customers paying with cash receive a pre-defined discount.
Legal Considerations to Zero-Fee Credit Card Processing
If you want to utilize zero-fee credit card processing within your business, there are legal considerations to understand before implementation. Firstly, you cannot surcharge debit card transactions — only credit cards are eligible for no-fee credit card transactions. Secondly, surcharging is not legal in some parts of the country. The following states do not allow surcharging for credit cards:
- Connecticut
- Massachusetts
Likewise, some states that don't ban surcharging outright still have regulations restricting aspects of its use. States with partial restrictions include Texas, California, Florida, Kansas, Maine, and New York.
Best Types of Businesses for No-Fee Merchant Services
Let's explore some business types suitable for no-fee merchant services:
Low-margin businesses
If your business operates in a low-margin industry, credit card processing fees can significantly impact your profitability. To keep margins viable, some low-margin businesses consider no-fee merchant services.
Cash-heavy businesses
While only one in five payments are made with cash throughout the United States, this doesn't mean all businesses have the same cash payment rates. If your customers prefer using cash, you stand to lose less if you surcharge customers for credit card payments.
Enterprise businesses
Enterprise businesses processing large volumes pay significant amounts of money in payment processing fees. They can generate considerable revenue when they pass these costs onto customers.
High-risk businesses
Businesses in high-risk industries face higher credit card processing fees. Merchant account providers charge more fees to high-risk businesses as they face increased chargeback rates. By passing payment processing fees onto customers, high-risk businesses can avoid the costly nature of high-risk transactions.
Point of Sale (POS) System Requirements
If your business implements no-fee credit card processing, it's critical to use a compatible point of sale (POS) system. Ensure it has surcharging features to automate the surcharge process. Your POS system must automatically add a surcharge to the order total of anyone using a credit card for payment.
Issues may arise if you don't have access to a POS system that can automate the surcharging process. Firstly, your staff will have to manually add surcharges to transactions, which slows down the purchasing process. Secondly, it leaves your business exposed to mistakes, which may result in additional costs and unhappy customers.
Reducing Costs and Hidden Fees
While no-fee credit card processing might sound useful for reducing your costs, it can harm your business's reputation. Modern consumers expect hassle-free credit card payments and don't want to pay fees for using their preferred payment method. Fortunately, there are some tips and tricks to reduce costs and hidden fees:
Use a dedicated merchant account
Using a dedicated merchant account helps merchants access better payment processing fees. Many merchants with dedicated merchant accounts have access to Interchange Plus pricing, which tends to be more affordable than flat-rate and tiered pricing.
Take chargebacks seriously
Chargebacks occur when a customer disputes a payment (this may result from a stolen credit card being used for purchases). Unfortunately, merchant service providers charge fees for chargebacks, and accumulating too many payment disputes may result in higher processing costs. By taking payment security seriously and reducing exposure to chargebacks, your business can maintain affordable payment processing fees.
Review your merchant agreement
Next, take a look at your merchant agreement to check if there are any hidden fees or charges. Some payment processors add fees to increase revenue. Many merchants don't realize they're overpaying for payment processing. So, what are some examples of hidden fees?
- Monthly Minimum Fees: Some merchant account providers charge fees if you don't process a monthly minimum. If you're a low-volume business, this is likely damaging your company's bottom line.
- Statement Fees: Some merchant service providers charge statement fees. However, considering statements are now primarily digital, this is a fee you should question.
- PCI Compliance Fees: Merchant account providers may charge PCI compliance fees, but this is a redundant charge, considering all payment providers must be PCI compliant.
- Retrieval Fees: Merchant account providers occasionally charge retrieval fees when a merchant requests information about a specific transaction or statement period. However, there are merchant account providers with robust customer service departments that don't charge for assisting their merchants.
Assessing the fees within your merchant agreement is a useful way to determine whether your business is overpaying to process credit card transactions. If you believe your merchant service provider is using hidden fees to drive up your costs, contact them for clarification.
Compare multiple merchant service providers
Lastly, compare multiple payment providers before you sign up for credit card processing services. If you feel your business currently pays too much for payment processing, it's likely because you have never compared your merchant service provider to its competitors. Request multiple quotes to find the cheapest credit card processing.
Final Thoughts on Free Credit Card Processing
Zero-fee credit card processing helps businesses reduce exposure to credit card processing fees. However, with more than 60% of consumers stating they're more likely to shop with a business that offers their preferred payment method, it's risky to add a surcharge to credit card transactions. Unhappy customers can impact your bottom line much more than payment processing fees.
Regardless of whether you choose to use free credit card processing for small businesses, it's critical to partner with a merchant service provider you can trust. By using a reputable merchant account provider, your business can benefit from dedicated support, lower processing fees, chargeback prevention tools, and a range of other benefits. Choosing the right payment processor is the best way to keep your processing costs low!
FAQs About Free Credit Card Processing
