If you’re opening a new restaurant, one of the startup essentials is setting up an account with a merchant services provider (a.k.a. credit card processor) so that you can accept credit and debit card payments. If you own an established restaurant and are looking for ways to improve your operating costs while increasing your profit margin, you should re-examine your current payment processing fees to make sure you aren’t paying more than you should.
In any case, payment processing fees are a complex topic, because there are several factors that determine these fees, and each restaurant has unique payment processing needs. Here are some general guidelines to keep in mind when analyzing payment processing fees and selecting a merchant services provider:
Pricing Models for Credit & Debit Card Processing
For every credit or debit card transaction, there are several parties collecting fees: the credit card brands or associations (Visa, Mastercard, Discover), the card-issuing banks (Bank of America, Citi, Capital One), and the credit card processors or merchant services providers, which act as the middlemen between the brands, issuers, and merchant. The fees that go to the brands and issuers are known as wholesale or interchange fees. These fees are set and non-negotiable. They are usually a percentage of the transaction total plus a flat fee (for example, 1.5% plus $0.10 per transaction). The fees can vary according to different factors such as the type of card used (debit, basic consumer credit, rewards, or corporate) and how the transaction is processed (in-person swipe/chip or keyed-in/online). The brands can also charge assessment fees.
Payment processors collect these fees and add their own, which are called “markups.” These also vary according to several factors, but they are negotiable. Respectable providers are clear and upfront about their fees and spell them out for you. Payment processors use one of these four pricing models:
- Flat rate: The provider combines the interchange and markup fees into a single rate charged for all transactions, regardless of type. PayPal and Square use this model, which is simple and tends to work best for businesses with low volume and small ticket values. The cost per transaction may be higher, but there likely won’t be as many ancillary fees.
- Tiered: In this model, processors also bundle wholesale and markup costs together, again using factors such as card type and amount, then dividing transactions into three tiers: qualified, mid-qualified, and non-qualified, with different rates for each. This model, though commonly used, is least recommended, because it can be quite difficult to determine exactly what you’re paying. There can be more hidden fees, and merchants may not realize the majority of their transactions are being categorized into the more expensive tiers.
- Subscription:In this newer model, payment processors charge separately for wholesale and markup costs, and instead of paying the percentage on the markup, merchants pay only the per-transaction amount, plus a flat monthly subscription fee. Restaurants with high volume and large ticket sizes can save money with this choice.
- Interchange-plus:This is generally the recommended model for most business types. Processors charge wholesale fees and markups separately and itemize them clearly on your statements, providing complete transparency. Markups usually include both a percentage and a per-transaction amount, but you know exactly what you are paying for.
