If you are thinking of buying a franchise, then you should know how credit card processing for franchises could help you make or break your business. If you are already running one as a fast-food restaurant, a supermarket company, or an internet-based franchise, you would be familiar with how cash sales have replaced credit cards as a large part of your revenues and transactions.
Today, all over the world, trading through cards is practically worth billions of dollars, providing customers and suppliers almost unprecedented ease, enabling the exchange of all goods and services through this magnetic strip swipes or with just a few clicks. This facilitates business transactions for both the consumers and retailers, but you are also paying some card processing fees after every transaction.
Although it may not seem like much, paying a small percentage of this card processing amount may lead to thousands of dollars in reduced profits each year. This is why you should be careful and research well before making credit cards a primary means of business transactions. To study how card processing fees work, continue reading further.
What are the Credit Card Processing Fees for Franchises?
It is crucial to know what credit card merchant fees are and how it works, especially when you run a franchise to keep your profit level as high as possible. If you accept credit cards from your customers, you have to pay a processing fee after every transaction. Following is a general view of average credit card processing fee for small businesses:
- 1.5% to 2.9% for swiped cards
- 3.5% for pin transactions
In addition, the lowest possible rates of credit card processing according to payment depot for the four main card networks are:
This average estimate depends on many factors, including the types of transactions you make, your specific business type, and the transaction amount. Let us look forward to how these transactions affect the processing rates.
All You Need To Know About Credit Card Processing for Franchises
The credit card industry does not possess many competitors. Almost everyone tries to downstream their cost, and it is possible due to a lack of competition. The easiest way to approach where these upstream fees are introduced is to learn how card payment transactions work and where a tax may be applied. While listing a credit card processor, you will usually see a percentage charge and a flat fee. Let us see why you face these charges.
Why Do Traders Pay A Percentage And A Flat Fee?
When you register to receive credit card payments, the first thing you would notice while managing your card payments is the percentage fee and a flat fee. The justification for this is given that the fixed business cost of the upstream suppliers, along with the financial risk involved.
Fixed Business Cost
Every transaction involves complex technology. Each participant in the card industry incurs costs, including equipment, software, and network connection. These operating and maintenance charges remain fixed, which means you earn a flat payment from upstream suppliers.
Financing Risk Charge
Along with computer networks and equipment, there is a financial risk factor for every credit card transaction. A credit card is a mini loan a bank allows the cardholder, so there is always a risk of reimbursement. It is easy to comprehend that a bank would lose more money if someone could not pay back the loan of a thousand dollars than on a ten-dollar transaction. Therefore, the banks charge more for more significant risks, and in doing so, it charges a percentage of the total payment.
Concluding, for every credit card transaction, the traders have to pay the processing fee:
Processing fee = Fixed business cost financing risk charge
Therefore, it makes sense, as the formula uses both the fixed amount and the variable cost associated with the card payment.
Let us now have a deep insight into who is involved in this payment processing.
Parties Involved In Payment Processing
To understand the card processing fees, you need to know the “middlemen” involved between a customer and a trader:
- Credit Card Associations: Credit card companies like Visa, MasterCard, etc. are also known as credit card networks. They develop all the laws, create reasonable prices for individual industry and market type, management of equipment and software security and product marketing, etc.
- Banks Issuing Credit Cards: These financial companies provide credit cards to consumers. However, some credit card associations issue banks as well, like Discover and American Express. Before issuing cards to the consumers, these banks determine the financial health of the customer. When the customer makes a payment, the bank’s responsibility is to verify if the payments are legitimate and if the cardholder has enough credits to make purchases. The bank may allow or reject a price and compensate the money to the merchant. It is basically, payment of loan between the issuing bank and the holder of the card.
- Credit Card Acquirers: These are not real banks but just institutions with a bank like characteristics. Also known as acquiring banks, they set up franchisers with merchant accounts to receive card payments from banks. They take part in the purchasing phase after the issuing bank pays the payment but before the retailer receives its product. In case of a payment reversal, they bear the financial risk with the issuing banks. They also determine the merchant’s reputation and the stability of their business before approving credit cards to traders.
- Credit Card Processors: Processors help in the credit card processing system and support you with your business account, ensuring that you have the correct credit card hardware and applications. Often, the acquirer and the processor are the same, but the credit card processors do only the business’s processing portion.
- Payment Gateways: There are unique channels while doing online shopping via credit cards for the purchasers. However, you do not need to get separate gateways for your business today, as most of the processors mostly include some sort of them.
Now that we are familiar with all the parties involved in card payments let us briefly look into how they proceed.
The Transaction Flow
A transaction begins as soon as a customer uses a payment card, whether at a store or online:
- Authorization: Once the credit card machine reads the card information, it reaches the processor to proceed to the next step. The processor sends the card information to the specific card network and requests them to proceed. The card network requests a credit card issuing bank, and the bank checks if the cardholder has enough payment money to make the purchases. The purchase gets approval only if there are enough credits available at the backup. Soon, the merchant receives an approval message. This computerized procedure takes seconds to process.
- Submission: The submission of payment takes place at the moment or in portions at the end of the day or earlier at the weekend. The submission travels to the processor who forwards the request to the card network. Eventually, the network system sends it to the issuing bank, which then pays the amount needed.
- Settlement: From the issuing bank, the payment travels to the inter-bank money transfer policy and reaches the business account. This transaction will allow the card network, the processor, and the bank to cut their fee, which will make the merchant receive its payment.
- Dispute: Sometimes, this procedure may take days or months due to several reasons. It could be because of a defective purchase or an unauthorized charge. In both cases, the cardholder demands a drop in the payment. In this case, the trader can agree to compensate or request a dispute to ensure there is no fraudulent activity.
Looking at the above information, we can see that every party that is involved in a credit card processing charges a fee, and every processor has different costs associated with it. You cannot avoid these charges; however, some are negotiable. It is important that you get to know and bargain with your processor to make possibly higher revenues for your franchise. For more information, feel free to reach out to our team. Our experts here at Payline can help you with any queries you may have.