How to Calculate Your Payment Processing Costs and Save More

When you run a business in Australia, you usually have to manage a number of costs, including staff wages, stock, rent, marketing and utilities. All of which can severely impact your bottom line.

However, another part of your expenditure that is easy to overlook is payment processing fees, which can run into thousands of dollars a year depending on the number of purchases your customers make.

As the average Australian - according to research by the RBA - makes 650 electronic payments every year (and rising), it follows that the greater the number of credit and debit card payments your business processes, the more it will have to pay in charges.

For this reason, and in particular, cash flow and budgeting purposes, it is good to be able to calculate your payment processing costs for the year and maybe even reduce them.

But how can you do that?

Keep on reading this post to find out more.

What are Payment Processing Fees?

Essentially, payment processing fees are the costs incurred by a business to accept payments via debit cards, credit cards, or other electronic payment methods.

These fees are charged by the provider of the payment processing system you use and can vary depending on several factors.

Some of the main ones are the payment processor you choose, the type of cards your customers use, and how many transactions you administer through their system.

How Much Are Payment Processing Fees?

Typically, most payment processing companies charge Australian businesses either on a percentage basis (usually 1% to 2% for debit cards and 3% for credit cards per transaction) or a flat fee, which will vary depending on the provider. This cost is referred to as the merchant discount rate.

How is the Merchant Discount Rate Calculated?

Generally speaking, this rate is calculated after taking three different fees into account. They are as follows: 

Interchange Fees

This charge is paid to the bank (e.g. ANZ, NAB, Westpac) that issues the debit or credit card to your customer and covers the cost of facilitating the transaction. Often, it is the largest component of your processing fees.

Assessment Fees

This type of charge is imposed by card networks such as Visa or Mastercard to process transactions on their network.

Payment Processor Fees

These fees are charged by the payment processor for handling the transaction and providing related services like fraud protection and reporting.

If this is of interest to you, Smartpay offers one of the cheapest EFTPOS machine solutions for small business.

How to Calculate Your Payment Processing Costs

If you are hoping to process a lot of sales in this financial year, it is a good idea to budget for the costs involved in doing so. That way, you won’t find your cash flow impacted by a disbursement you hadn’t bargained for.

The process for calculating your payment processing costs can be quite complex. But here is a breakdown of what it involves:

1. Identify Your Payment Types

The first step is to determine the types of payments your business processes. For example:

• In-person payments using EFTPOS terminals.
• Online payments for e-commerce transactions.
• Mobile payments through digital wallets like Apple Pay or Google Pay.

Each of these types of payment may carry different fees, so the more you can understand the make-up and cost implications of all your transactions, the clearer a picture it will give you of the ballpark charges you will incur moving forward. 

2. Review the Fee Structure of Your Payment Processor

The next thing to do is look at the fee structure provided by your payment processor, which you will typically find in your monthly statements or on the processor’s website. 

The most common fees you should check for include per-transaction fees, terminal rental fees, admin fees, and chargeback costs in the event of a customer dispute. However, make sure you read the fine print to determine what if any, hidden fees you might be hit with.

3. Calculate the Effective Rate

At the crux of all payment processing charges is what is known as the effective rate, which is the percentage of each transaction that goes toward the act of facilitating sales purchases.

To calculate the effective rate, you should use the following example.

If your business processed $10,000 in credit card sales and paid $300 in processing fees, your effective rate would be 3%. This is calculated by dividing 300 by 10,000 and then multiplying by 100.

4. Compare Rates Based on Card Types

To get a true picture of the costs you incur for processing payments, you should calculate the effective rate for all types of electronic card payments.

Different cards can have different fees. For instance, debit cards generally have lower charges associated with them than credit cards.

Likewise, premium credit cards, such as those which offer rewards points, can also often carry higher interchange fees, while international cards tend to have the highest fees of the lot due to currency conversion and international processing charges.

Tips to Save on Payment Processing Costs

As a business, it is important to recognise that you don’t just have to suck these costs up. Instead, there are several strategies you can adopt to reduce them.

Two of the best are negotiating with your current provider for a better rate or changing to another who will offer you one.

You can also reduce transactions by batching them, so you are only taking one payment and eliminating the chance of facing a chargeback by using some of the fraud protection tools that are designed to protect your business.