Payment processing fees are quickly becoming a dirty word for business owners! We're all trying to find a way around them, understand why we even have to pay them, figure out how to make our clients/customers pay them and more...
But, plain and simple, it is just the cost of doing business. That's all it boils down to. EVERY single merchant has to pay payment processing fees, big or small. It's not just us "little people".
First, let's start at the beginning in case you are just newly starting and haven't had a moment to research what payment processing fees are. The Webster dictionary - ha - jk - various services allow you to accept payment from a client, such as Waveapps (this is who I use), PayPal, Stripe, etc. There are tons of them available to you. Whichever service you use will charge a fee to process each payment received. The fees are pretty standard and aligned with each service across the board. Between 2.8% and 3.00% of the total transaction. You may also see that some also charge $0.30 for every $1.00 in addition to the 2.8% - 3%.
Let's say a client pays you $100.00, your service provider will take 3% of that $100.00. You will then be given the remaining balance of $97.00. That processing fee is immediately deducted from the payment and is not a bill that you pay to them per say. You never see that additional $3.00 in your account. That fee is the cost you are charged to use their service. You will not find a free payment processing service, unless you are using a consumer version, which is illegal and will result in you being banned for that provider. (Ex. Using the "friends & family" payment option with PayPal)
Occasionally you may receive a rate discount for the first 30 days after you sign up or for the first $1,000.00 that you are paid, not often, but I've seen it happen. But again, these fees are simply the cost of doing business. NO business is exempt from them, big or small. They are providing us a service and we have to pay for it. Just like us and our clients. The process may seem straight forward and easy peasy so why are we charged so much, blah blah blah - well it's not easy or straight forward. But, I won't bore you with banking details today....
The fees that you pay to the service provider are tax write-offs for your business come tax time. 100% of providers will provide a statement to you reflecting how much you have paid for the year - they're legally required to.
Is there any way around these fees you ask? Yes. Don't jump for joy yet, there are important exclusions to this. Someone has to pay the fee, the only other option is for you to pass that fee onto your client and have them pay it. Meaning, you'd add 3% (or whatever you are charged) to the invoice, they pay it, the service provider collects it, and you receive the full amount that you charged the client. Still...don't jump for joy yet, I'm not done.
Visa & MasterCard (going forward V/MC) mandate these charges and dictate what we can and cannot do with them. V/MC do allow you to pass the fee onto your customer with these requirements:
You can only pass on the EXACT amount you would pay. You cannot profit from passing the fee on
You have to notify V/MC that you intend to pass the fees onto your clients
The fee has to be listed on the invoice for their records
It clearly has to state what it is, you can't be an ass and try to word it in a way that makes them think it's not a processing fee
The client has to know before they pay & agree to paying it - meaning you can't just send the invoice and say "surprise"
If you somehow found the worst payment processor in the world and have insane fees, you cannot pass more than 4% onto your client
If a payment processor does not allow you to pass the fees on to the customer (Ex. PayPal), you legally cannot, regardless of what V/MC says. Doing so will get you banned from the platform and potentially fined from the platform and V/MC
It is illegal to pass the fees on in 10 states, again, regardless of what V/MC says. Don't get sneaky and say well, my client is in this state where it's legal so I'll pass it on. The 10 states are: Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas
You can only pass the fee on if they are paying with a credit card. You cannot pass the fee on to debit cards or for ACH transactions. BUT, if a client is paying online with a debit card, those transactions are processed as credit, as they cannot enter their PIN. A debit transaction and a credit transaction are processed on two different networks, so for online transactions, the debit card clause does not apply. If they are paying in person, with a debit card and enter their PIN, you cannot pass the fee onto them
You cannot add on your own "payment processing" fee
You can offer a small discount if your client pays in cash (or check, etc)
You can add/build in (however you want to phrase it) the percent you are charged into your actual rate to compensate for the processing fees (Ex. You usually charge $100.00, but you now charge $103.00)
If you pass the fee on you can't write them off on your taxes
If you ask others - business owners or non-business owners - you will typically get the response that these fees are "the cost of doing business," or "it's tacky to have your customer pay these", or "I'd NEVER buy from someone who made me pay the fees." Especially if it's a high ticket invoice, it can get expensive. (Ex. $2,000 invoice at 3% is $60.00) There is NO WAY I'd pay an extra $60.00 on a $2,000 invoice.
I know saying that is a catch 22 because I then am paying that $60.00, but that is where adding 3% (or whatever your processor charges you) into your rate. AND you can still write the fee off if you do this! Win-win in my eyes!!
That's all folks - I hope this helped clear up this topic for you and any misinformation you may have heard. You can read V/MC laws on this on their website, always check your payment processors terms to see if they allow you to pass the fee on and do it the legal way if you are lucking enough to be in the right state and on the right platform! No one wants to not have checked and end up having to refund EVERY SINGLE client you passed the fee on to, plus interest on that amount they paid, plus a fine from the processor, plus V/MC and the state if you are in one of those 10 states that don't allow it.
You can read a quick FAQ from V/MC here - there are a few other items on here that are not in the blog such as how to notify V/MC about your intent to pass the fees on to your clients.
I'll see you back here Friday for our last Affiliate Disclosure blog and our CCPA blog for this week - it will be a few days late, I need time to verify a few things on this law. Thanks for hanging in and giving me a few extra days.
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**Although I am a Licensed Business Coach and Compliance Auditor, this post is not legal advice and is educational and informational only. Reading this post and others does not constitute a client-consultant relationship. Should you want to work 1:1 please contact me at firstname.lastname@example.org.