What Can Be Done to Reduce Merchant Processing Fees?
If you're not careful, merchant processing fees can easily chip away at your margins, especially if you operate a DTC-first CPG brand or a winery selling directly to consumers and/or trade accounts. Whether you use Square, Stripe, Shopify, or another platform, there's a good chance you're paying more than you should.
Over the past 10 years, I've advised multiple brands on how to lower payment processing costs. As the Accountant Manager Team Lead at BBG, I've also helped business owners save thousands of dollars per year by switching processors, renegotiating, or changing how they handle payments.
In my experience, business owners often overlook merchant fees as a controllable expense. To help you avoid this mistake, I've outlined how merchant processing fees work, where the hidden costs live, and what you can do to reduce merchant fees without compromising your customers' payment experience.
Understand the Real Cost of Merchant Processing Fees
Many founders assume they're paying a single processing fee for each transaction, but the situation is more complex. Interchange fees, assessment fees, and processor markups all have an effect on your costs. Here's how they work:
Interchange fee. The interchange fee goes to the bank that issued the customer's credit card.
Assessment fee. Assessment fees go to the card network (e.g., Visa or Mastercard).
Processor markup. Processor markup covers the costs associated with maintaining gateway access and providing reporting tools. These fees go to your merchant service provider or payment processor (e.g., Square).
Spotting Hidden Fees
Interchange, assessment, and processor markup fees are all legitimate. However, some companies try to hide fees in their pricing models or terms of service. If you don't look for these hidden fees, expect your profit margin and other key performance indicators to take a hit.
One common tactic is to use interchange-plus pricing. This model combines the interchange fee with the processor markup. Although there's nothing wrong with using interchange-plus pricing, some companies jack up your fees by adding excessive markup to the base interchange fee. You also need to watch out for junk fees, such as regulatory fees or platform access fees. These fees drive up your costs without delivering additional value.
Finally, you need to understand how tiered pricing affects your costs. Processors typically classify each transaction as qualified, mid-qualified, or nonqualified. Here's why that matters:
Qualified transactions. A qualified transaction has the lowest level of risk, so it costs the least. However, transactions only count as qualified if the customer swipes their card or uses the chip reader.
Mid-qualified transactions. Mid-qualified transactions are either riskier or more expensive for processors, so they come with higher fees. For example, if a customer keys in their credit card number on your website, you'll have to pay the fee for a mid-qualified or nonqualified transaction.
Nonqualified transactions. Nonqualified transactions carry the highest level of risk for processors. One example is the use of a credit card issued by a foreign bank. Transactions are also classified as nonqualified if they're expensive to process. For example, if a customer uses a credit card that offers a high percentage of cash back, it may be classified as a nonqualified transaction.
Some processors lure you in with low qualified rates, but then, you end up paying more than expected because all your transactions are classified as mid-qualified or nonqualified.
Choose the Right Processor for Your Sales Channels
When it comes to payment platform optimization, wineries and CPG brands have very different needs. If you operate a winery, you have to think about age verification and alcohol shipping laws. CPG businesses don't have the same restrictions, making it easier to choose a processor.
Here's what you need to know about three of the most popular options:
Square. Square works with cash registers, iPads, and contactless readers, so it's one of the most flexible options. However, it doesn't have a built-in subscription system, so it may not be the right fit if you want to set up a wine club or charge for some other type of recurring membership.
Stripe. Like Square, Stripe is highly customizable. It also gives you access to Stripe Billing, making it ideal for any business owner who wants to incorporate subscriptions into their business model. The main drawback is that Stripe doesn't have its own POS system.
Shopify Payments. Shopify makes it easy to create an attractive website and optimize it for the search engines. Once you set up your site, you can use Shopify Payments to process transactions. Unfortunately, Shopify restricts the sale of alcohol and other age-restricted items. Although there are workarounds, it may be easier to choose a different payment processor if your company sells wine.
Stripe is ideal for wineries, while Square and Shopify Payments are a better fit for CPG brands. If you need more compliance and subscription features, consider using a processor built specifically for wineries. Examples include Commerce7, WineDirect, and Vinoshipper.
How Transaction Size and Sales Channel Affect Your Costs
Some processors charge a flat fee for each transaction, while others charge percentage-based fees. Before you choose a payment processor, review recent sales data to determine which pricing scheme is likely to benefit your company.
For example, assume that a processor charges $0.50 per transaction. If your average transaction is $100 or more, $0.50 is negligible. However, if you sell organic granola by the pound, your average transaction may not be more than $5 or 10. In that case, a $0.50 fee represents 5% to 10% of the transaction amount.
The sales channel also matters. As I explained earlier, qualified transactions cost less than mid-qualified transactions. If you have a winery with a tasting room, customers will be able to swipe their cards or use the chip reader on your payment terminal, reducing processing fees on those transactions.
For some businesses, it makes sense to use different payment processors for each channel. If you operate a winery, you might choose a processor with low qualified rates for all in-person transactions and a processor with lower nonqualified rates for your online transactions.
Negotiate Rates or Explore Lower-Cost Alternatives
Many founders don't realize that payment processing rates are often negotiable. Even flat-rate platforms may offer better rates if you ask nicely. In fact, BBG recently helped a winery doing $5 to $6 million in annual revenue save $250,000 simply by advising them on merchant fee negotiation.
Note that you can't negotiate interchange fees or assessment fees, as they're determined by issuing banks and credit card networks. However, you can negotiate the processor markup on each transaction — if you have the volume to support your position. The exact volume needed depends on your processor.
Before you attempt to negotiate credit card processing fee savings, gather the following information:
Monthly sales volume
Average transaction size
Chargeback rate
Sales breakdown by channel
Current effective rate
Benchmark rates for your industry
If you don't qualify for a volume-based discount, ask your processor for lower nonqualified rates, especially if you don't do any in-person transactions. Another option is to switch to a processor with the interchange-plus pricing model. This works best for low-margin businesses.
Optimize Payment Behavior to Reduce Fees
You can also reduce payment processing fees by changing your behavior. If you do real-time processing, you have to pay a fee for each transaction. Batch processing allows you to group many transactions into a single group, saving you money. I also recommend enabling ACH and e-check payments for wholesale orders. ACH fees typically range from $0.26 to $0.50 per transaction, making them cheaper than credit card fees.
If you aren't already doing so, encourage customers to use debit cards instead of credit cards. When someone pays with a debit card, the money comes right out of their bank account, making the transaction less risky for the processor. This may help you qualify for lower rates.
Changing your POS setup can also help you reduce your costs. For example, if you have a tasting room, consider setting up an in-person card reader instead of keying in credit card numbers on your computer. You'll qualify for qualified rates on each in-person transaction.
Reduced Merchant Fees and Reclaim Margin
Whether you operate a winery or a CPG company, managing cash wisely is one of your top priorities. Merchant fees aren't just another cost of doing business; they're a negotiable, optimizable part of your operations. With the right knowledge and support, you can reduce your effective rate and free up cash for the things that actually grow your brand.
Lowering your rates isn't about small savings — it's about maximizing your margin on every transaction. Instead of viewing merchant fees as something out of your control, start seeing them as a strategic area of improvement.
BBG can help you with many aspects of finance and accounting, including platform audits, cost negotiations, and cost reduction planning. Contact us today for personalized support.
Author: Eileen Vasko
Eileen Vasko is an accomplished Accounting professional with over 10 years of experience in financial management, cost accounting, and compliance. As a former Controller at Iron Horse Vineyards, she excelled at managing complex financial operations, including inventory cost accounting. As the Accountant Manager Team Lead at BBG, Eileen specializes in building highly efficient accounting processes including accounts payable/receivable, payroll, and tax reporting. Eileen is highly skilled in using advanced accounting platforms and tools to drive efficient processes.
