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Payment Processing Fees – An Inside Look

How merchant payment processing fees for credit card transactions impact small business bottom line net profit – and what to do about it.

A large part of my job is consulting with small business owners about the payment card industry. The common things I hear are, “Payment processing fees, high credit card rates, they’re just a cost of doing business, right?”, and “They’re like expenses for phone lines, smartphone plans and internet – a necessary service to stay in business”, or “I get a good (or the ‘best’) rate from my bank or processor”, and ” At a couple of percent, the overall impact on my business is low”, “Savings of just a few points are small compared to my total monthly sales revenue”.

The first thing I share is that processing rates are NOT a fixed expense like phone lines or cell plans. They are variable – a fixed percentage of transaction amount. As your sales volume increases, so do processing fees. Doesn’t matter if your sales increase from $50,000 to over $100,000, that fixed expense for your phone line is still just $30 (give or take). So as revenue increases, to a certain extent, the fixed cost expense has lower overall impact on your bottom line. It’s a declining percentage.

Not a Fixed Expense…

Not so with processing fees. (Often called “semi-variable” expense, because there is both a fixed and variable component to these types of indirect costs. It’s important for business owners to understand the dynamics of these costs so they can manage them to their advantage.) If we take a fee from a service popular with small businesses like Paypal, Square or Stripe for instance, that use flat rate plans, the going rate is 2.9% plus 30 cents per transaction. Some others like the big banks, TD Payments or BMO/RBC’s Moneris have flat rates ranging from 2.65 to 2.85% in that same market. So when you, as a small business owner, work hard to improve business and increase sales – using our $50k to $100k example from above – those fees also increased from $1,500 to $3,000.

Here’s a simple chart of revenue versus that flat rate fee of 2.9% – many business owners are comfortable with that relatively small piece of the revenue pie taken up by credit card fees.

Many business might be surprised to learn that the actual fee charged by the payment card industry for those credit transactions is substantially less. Also, that the fees are regulated in Canada by the Financial Consumer Agency of Canada, and that there is a Code of Conduct for the Credit and Debit Card Industry under which merchant businesses have rights with respect to those industry rates. For example, the current base interchange rate for a consumer VISA credit card transaction in the Everyday Needs category is only 1.36%. Here’s another simple chart to illustrate –

credit card fees
Businesses are being charged 215% of cost for those transactions.

Of course, flat rates are more common in the online, ecommerce and mobile payments markets. You still don’t have to pay those exorbitant flat rates – even if you’re selling online (but more about that later). Standard retail stores, consumer facing businesses with brick and mortar operations, are used to seeing a rate labelled a “Discount Rate” by most bank processors – eg. 1.56%, plus extra charges for what they call “qualified and unqualified transactions” plus more for “differential” and “assessment or card brand fees”. From this they calculate an EFR (the overall effective rate) often in the 2.0% to 2.5% range. It’s common for the Canadian bank recommended processors to publish their marked up “discount rates” instead of the actual industry cost (that same 1.36% rate from previous example). Connect with me below to get a copy of a handy Quick Reference Guide to Interchange Rates for VISA and Mastercard in Canada. These interchange rates are publically available in Canada to both merchants and consumers – there’s no need to rely solely upon your processor to see the true cost of processing. You can visit both the VISA and Mastercard websites for a more detailed list,  click these links:  VISA   —   Mastercard

Luckily alternative MSP’s abound

The payment card industry was deregulated several years ago now in Canada to help merchants and consumers with rising credit card processing fees. As a result, BMO and RBC spun off Moneris, TD Canada Trust formed TD Merchant Solutions, CIBC contracted Global Payments and Scotiabank similarly sourced Chase Paymentech. Luckily alternative MSP’s abound. Companies like Zomaron Pay, or Elavon and First Data (Zomaron is my payments channel partner – Canadian owned, with their head office London, ON).  Banks can’t dictate which processor a small business owner selects. For example a TD small business customer could choose Chase as a processor instead of TD Merchant Solutions. Your business banking representative will rarely tell you this.

What is your net profit margin?

Before we look into those rates more closely, I’d like to recommend a better way to measure the impact all the different processing fees have on your business. You need to measure those variable percentage expenses against your actual net profit margin – your bottom linenot a simple percentage of overall revenue. By focusing only on total revenues, you can lose sight of how much profit your business actually gets to retain at the end of every year. As a small to medium sized business owner, you know your net profit margins better than anyone. Here’s a chart of some industries showing average net profit margins as a percentage across Canada. ( source Industry Canada – https://www.ic.gc.ca/app/scr/app/cis/)


You can see net profit ranges from around 2% to well over 30% depending on industry, product and service. Also these rates are averages across all reporting businesses – each business is still unique. For example, although the restaurants show on average a 3.5% net profit, only 65% actually reported showing any profit. Home Furnishing showed an overall average net profit of 5.7%, but 25% of those reporting showed an average net loss of -8%. Hair Stylists and Estheticians reported a healthy average 16% profit, but note that compared to other industries, their total revenue was much lower: on average less than $150k annually.

alternatives to increase their profit

Studies in Canada have shown that 90% of businesses with over $700,000 gross sales are under 10% net profit margin. In 2015, that average net profit in Canada was reported at 8%. So how does that change how we look at merchant payment processing fees compared to net profit? How do you think a new car dealer feels about that bank EFR rate of over 2% compared to their total net profit of 2.4%? You can be sure they are looking for alternatives to increase their profit in a volatile market. Here’s another chart that compares average processing fees, the actual cost of those fees and a net profit ratio of 10% on $10k revenue.

credit card processing fees

Those are substantially larger pieces of the pie when we focus on bottom line. Here’s another clearer example from the restaurant industry:

restaurant industry profit

Using this example, if you could save just 10 points on the processing fee – that is 0.10% or 1/10th of one percent of revenue – that actually represents a 3% increase in net profit. I recently had one new restaurant client whose start-up and renovation costs had pushed his net profit margin below 1.5%. He was pleased to sign up for a 15 point savings in processing fees and saw increased profits immediately.

So now that we have a better understanding of the impact of those fees, what can you do about it? It’s simple – find a merchant services provider that has a cost transparency policy, ie.

  • They don’t hide true fee costs behind multiple levels of markup;
  • They have full disclosure rules about all the various fees and charges that exist, No Hidden Fees
  • They adhere to the rules of the Code of Conduct for the Credit and Debit Card Industry
  • Their processing fees are priced to you the merchant on a “cost plus” basis – they start from published industry cost and fairly price fees based on your specific business needs.

Just a few points can make a real difference. You’ll be surprised when you see the impact. I can do this for you. I start with a detailed line by line analysis of your current processing fees. It’s free and ready in a day. Contact me now on the form below or at info@smbstrategies.ca – better yet, call me at 289-659-6804 and let’s get started on increasing your profit for 2018 and beyond.

~ Thank-you, Andy Coats 

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