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How Payment Processing Directly Impacts Your Budget And Your Business.
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Each day I’m asked by organizations “how much does your software cost?”. While most software companies offer a minimum base cost, there are numerous additional charges and options, which include using third party service providers to consider. The most substantial and important additional service cost is payment processing.
In some cases, the cost of processing payments online may be greater than the fees you pay for the software. That’s why it is vital to investigate the various pricing models and educate yourself on which structure will support your business best.
Some software platforms will require you to use their payment provider, while others will allow you to bring your own payment processor if it is compatible. Each of these scenarios have different costs associated with them and most payment providers have a different fee structure. For you to accurately estimate your cost, you will need to have an idea of how much money you expect to process via credit cards and ACH (bank to bank) payments.
Most software platforms support ACH transactions in addition to credit cards. ACH payments use the customer’s bank account information to make a onetime or recurring payment directly from their bank account to yours. It does take a little longer for the transaction to clear (2-3 days longer than a credit card), but the cost savings might be worth it. Costs usually hover around 1% with a per transaction cost similar to a credit card ($0.30 – 0.50 each).
Some payment providers use a “Flat Rate” pricing model. This is the easiest pricing model to calculate your estimated processing costs, and it is not always the cheapest. Fees under this model might be “3% of each transaction and $0.30 per transaction”.
You can easily use last year’s transaction volume to ascertain what types of fees you would incur, and you will also need to consider that that your software company likely has some fees of their own for processing credit cards through their platform.
In the Cost Plus model, per transaction you would pay:
- A card specific interchange rate,
- Your payment processor’s fixed markup,
- And per transaction fee.
- There is also a one-time annual fee.
This may seem complicated and harder to predict but it tends to be less expensive than the flat rate, specifically for organizations that process a high volume of transactions per year.
The interchange rate is non-negotiable and is set by individual credit card networks, like Visa or Mastercard, and individual card rates can vary greatly from 0.5% – 2.8%. For example, the interchange rate for a Visa debit card might be 0.85% while the interchange rate for a preferred rewards Visa credit card might be 2.25%. In theory, the interchange rate together with the payment processor’s markup could cost you 1.25% for the debit card and 2.65% for the preferred rewards card.
Similar to the flat rate pricing model, the per transaction cost is typically fixed across all types of cards. The last fee to consider is the annual fee, which can often be significant ($300 – $500), which is why this pricing model may not be the best option for small organizations that don’t process a large volume of credit card payments in a year.
You are an organization who will sign up 400 participants at $500 per person. Some of your customers opted to use the payment plan option so their $500 fee was divided into 4 separate transactions. In the end, you processed a total of $200,000 in 1000 transactions and various types of credit cards were used.
Your Flat Rate cost
$200,000 x 3.0% = $6000
1000 x $0.30 = $ 300
Total cost to your organization: $6,300
Your Cost Plus cost
$200,000 x 2.6% * = $5,200
1000 x $0.30 = $ 300
Annual Fee = $ 350
Total cost to your organization: $5,850
*Using an average fee we see when all card types are factored in.
If 30% of your customers paid by ACH instead of a credit card, you would save around $600. With savings like that you would want to ask each software platform if ACH payments are an option.
In the above card transaction examples, Cost Plus is the cheaper option and as the volume increases the savings would be greater as well. In turn if your volume goes down the savings decrease and eventually disappear.
Ultimately, if you are searching for a software solution for your camp, school, or facility, there are many questions to ask when deciding what tools to invest your money in, but most software platforms don’t include payment processing in their base cost, which can have a monumental effect on your business. That’s why investigating your options and educating yourself on how payment processing would work in action will positively impact your business and your budget.
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