Accepting Credit Cards: A How-To Guide for Dance Studios
By Jon Koerber, President of ClassJuggler Dance.
Merchant processing – accepting credit and debit cards – can be confusing and daunting, especially for busy small business owners. This how-to article demystifies the process.
Merchant Accounts 101
A merchant account is a kind of bank accountdesigned to enable your business to accept payments by debit cards or credit cards. Your merchant account establishes anagreement between you – the merchant – and the merchant account bank on how to settle money you receive in the form of payment card transactions. A key component of any merchant account is its gateway – a kind of verification tool. Think of the gateway as a door guard.Every time you run a card payment, the gateway is responsible for making sure that transaction is allowed to pass. The gateway identifies and contacts the card’s issuing bank to verify that the customer’s card:
- Is active
- has enough available balance to make the payment
- has not been reported stolen
- has not expired
The gateway then confirms or denies the credit request. If accepted, the payment is held until midnight of the same day when your merchant account provider batches together all of the day’s successful payments into a single payment for funding your bank account. The merchant account provider:
- handles all of the risk by funding your account – essentially floating you money as you process transactions;
- is ultimately responsible for making sure money is deposited into your account for all processed transactions, and;
- ensures that all fees for each transaction are deducted from your account.
Credit Card Processing Fees
Fees for your credit card processing include:
- The fixed costs of your merchant account and gateway
- The variable costs of the merchant account and gateway
- Various card industry fees—called interchange fees—that are deducted from each payment you receive
Let’s look more closely at each of these.
Gateway fees vary widely from one merchant account provider to the next. Some providers offer their gateway services at fixed monthly costs, others offer low monthly costs but with additional per-item fees.The gateway provider we use with Class Juggler has relatively lower fees, providing up to 600 transactions for a monthly fee of $29, but gateways can charge as much as $90 or more per month for 600 transactions. Same services, but very different costs—so it’s important to compare what you are paying for.
Merchant account fees
Pricing for merchant accountshas several different parts.
- Providers usually charge a monthly fixed fee between $5 and $10 for your statement and management.
- Providers commonly also change PCI (Payment Card Industry) compliance fees – another $5 to $10 monthly.
- For each credit transaction, the provider charges a transaction fee, an interchange fee, and discount fees.
The per-transaction interchange fees on each transaction will vary, and here’s why; the fee is based on the type of card your customer is using. There are hundreds of different types of credit and debit cards available to consumers with different features and programs.The more programs a card supports, the more that you, the merchant, pay in fees when the customer uses that card to pay you for services or products. For example, a plain vanilla Visa card or MasterCard may have an interchange rate of 1.79%, while a fancy platinum rewards cash-back Visa card might have a rate of 2.9%. In this example, for each $100 you process, between $1.79 and $2.90 are charged to you in interchange fees. This is why it’s effectively impossible to predict your exact monthly interchange fees; because you cannot predict what types of credit cards your customer will use for payment. In addition to interchange fees, you’ll also payDiscount Rates and Per Item fees.Your merchant account provider sets the discount ratescharged to you. It’s the primary way they make money as wholesalers for the big networks: Visa, MC, Amex, Discover, etc. Your merchant account’s discount rate is usually in the range 0.50% to 0.90% of the transaction.This is added to the interchange rate published by Visa & MasterCard to determine your costs for each transaction. Add it all up and a typical $100 transaction using a standard credit cardcomes to about $3.05 in transaction fees. Here’s how:
|Customer pays you||$100.00|
|Interchange 2.20% rate for average Visa or MC||-$2.20|
|Merchant provider discount of .70%||-$0.70|
|Per-item fee (typically 10-15 cents per $100 transaction)||-$0.15|
|What’s left for you after transaction fees:||$96.95|
Your provider accumulates all of the interchange, per-item, and discount fees for each transaction and then deducts them monthly from your bank account, along with any fixed fees. To calculate costs quickly, a good rule of thumb is to assume you’ll pay, on average,a total of between 2.75% and 4% of each transaction in fees. In a follow-up article, we’ll offer you guidance on how to shop for a merchant processing provider. And if you missed it, check out the related article Five Key Reasons to Offer Customers Online Credit Card Payments.