A Guide to Understanding Merchant Services and Payment Processing Fees

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.

Ancillary Fees

When you’re looking for a new provider of payment processing, there are several other fees that you should ask about, some of which you should be able to get waived: 

• Annual fees: Aside from the monthly fee for subscription models, these fees should be waived.
• Application and setup fees: Unless you’re also buying hardware or software, these fees should be waived.
• Batch fees
• Contract terms or early termination fees
• Fees debited monthly or daily
• Monthly service fees
• PCI (Payment Card Industry) compliance fees: A reputable provider will help to ensure that you remain in line with PCI standards. If you’re not compliant, you’ll pay penalty fees.
• Penalties for not reaching monthly minimum transaction amounts: In an ideal case, this shouldn’t occur. This could be quite costly for smaller businesses.
• Statement fees for printing and mailing (or online access to) your statements: Ideally, these are unlikely.

Contract Terms

The best type of payment processing contract is month-to-month. If you already have a longer contract, you should be aware of the time left on it and what early termination would cost you if you decide to switch providers. If a new processor would save you significantly more money, it might be worth inquiring about their willingness to help buy you out of your old contract when you sign with them. Prior to signing, ask if the contract terms can be changed if you do not meet certain revenue or other requirements.

Customer Service

At some point, you will need customer service or tech support from your merchant services provider. This support should be US-based and available 24/7/365 days a year. It should not carry any additional cost. Any downtime of your payment processing system can be costly, both in terms of lost sales and diminished brand reputation, so readily available service is important.

Understanding What’s Best for Your Restaurant

There’s a lot to navigate when it comes to choosing a merchant services provider and understanding credit card processing fees for your restaurant. It’s worth taking the time to do some homework in order to ensure that you’re getting the fairest deal and not crippling your profit margin with excessive fees.

At HungerRush, we are committed to providing complete transparency and guidance with all of our technology. HungerRush works exclusively with credit card processors Worldpay and CardConnect (a division of First Data) to offer customers competitive merchant services that work seamlessly with our POS technology. To find out more, .