A common question we receive is, "Why does credit card processing cost so much?" A credit card transaction is a complicated process, involving many companies that all charge fees for their part in the transaction. In this article, we’ll dive into why credit card processing is so expensive and provide tips on how to mitigate these costs.

The Basics of Credit Card Processing

When a patient pays for dental services using a credit card, a complex process is set in motion behind the scenes. This process involves multiple parties, each of which takes a cut of the transaction. Here’s a breakdown of the key players and their roles:

1. Merchant Account Provider: This company provides your dental office with a merchant account, allowing you to accept credit card payments. This account is essential for your practice to handle credit card transactions. The role of the merchant account is to act as a holding account for the money from credit card transactions until it is transferred to your business account.
2. Payment Processor: This entity handles the transaction between your dental office and the card-issuing bank. They facilitate the technical aspects of the transaction, from swiping the card to receiving approval from the issuing bank.
3. Card Networks: Visa, MasterCard, American Express, and Discover facilitate the transfer of funds between banks and merchants. They set the interchange fees and rules for processing transactions. These networks are the backbone of the credit card payment system, ensuring that transactions are processed quickly and securely.
4. Issuing Bank: The bank that issued the credit card to your patient. They are responsible for authorizing and approving the transaction. When a patient pays with their credit card, the issuing bank verifies the card details and ensures there are sufficient funds or credit available to complete the transaction.

At a high level, this is how the process works when you process a credit card transaction:

1. Transaction Initiation: The patient swipes, inserts, or taps their credit card at the dental office’s point-of-sale terminal.
2. Authorization Request: The payment processor sends an authorization request to the card network (Visa, MasterCard, etc.).
3. Issuing Bank Approval: The card network forwards the request to the issuing bank, which checks the card details and available credit.
4. Approval or Decline: The issuing bank approves or declines the transaction and sends this response back through the card network to the payment processor.
5. Transaction Completion: If approved, the transaction is completed, and the funds are transferred from the issuing bank to the merchant account, minus the various fees.

Each of the entities involved in this transaction, from the payment processor to the card networks, charges a fee for their services at each step, which collectively contributes to the overall cost of credit card processing.

Components of Credit Card Processing Fees

Credit card processing fees can be broken down into several key components:

1. Interchange Fees: Set by the card networks and paid to the issuing bank for handling the transaction. Interchange fees typically make up the largest portion of the credit card processing cost and can vary depending on the type of card used (rewards cards have a higher interchange fee) and the nature of the transaction (e.g., in-person vs. online). Range: 1.30% to 3.25% of the transaction amount‍
2. Assessment Fees: Charged by the card networks (Visa, MasterCard, etc.) for using their network. They are generally a small percentage of the transaction amount. Range: 0.11% to 0.14% of the transaction amount​.‍
3. Processing Fees: Charged by the payment processor for handling the transaction. They can be either a flat fee per transaction, a percentage of the transaction amount, or a combination of both. Range: 0.10% to 0.50% per transaction, plus a flat fee ranging from $0.10 to $0.30 per transaction​.‍
4. PCI Compliance Fees: To ensure your dental practice meets the Payment Card Industry Data Security Standards (PCI DSS), some providers may charge a fee. Compliance helps protect sensitive card information and reduces the risk of data breaches. Range: $5 to $15 per month.‍
5. Chargeback Fees: If a patient disputes a charge, the card issuer may issue a chargeback, which can incur additional fees for your practice. Chargebacks can also result in penalties if they occur frequently. Range: $15 to $50 per chargeback.‍
6. Monthly Fees: Some payment processors charge a monthly fee instead of, or in addition to, a percentage of the transaction volume. This fee is charged by the payment processor for account maintenance and customer service. Range: $30 to $150 per month​.

Different Models for Charging Credit Card Processing Fees

When it comes to credit card processing fees, there are several models that payment processors use to charge businesses. Understanding these models can help you understand the way your practice is being charged for credit card acceptance.

1. Flat-Rate Pricing:
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   • Description: This model charges a fixed percentage fee for all transactions, regardless of the card type or transaction method.
   • Pros: Simple and predictable pricing, easy to understand and manage.
   • Cons: Can be more expensive for high-volume transactions or lower-risk transaction types.
   • Example: A processor might charge a flat rate of 2.9% + $0.30 per transaction.
2. Interchange-Plus Pricing:
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   • Description: This model separates the interchange fees set by the card networks from the processor's markup. You pay the actual interchange fee plus a fixed markup.
   • Pros: Transparent pricing, often lower costs for businesses with higher transaction volumes or lower-risk transactions.
   • Cons: Can be more complex to understand and manage due to variable interchange fees.
   • Example: If the interchange fee is 1.8%, the processor might add a markup of 0.5%, resulting in a total fee of 2.3%.
3. Tiered Pricing:
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   • Description: This model categorizes transactions into different tiers, such as qualified, mid-qualified, and non-qualified, each with its own fee structure.
   • Pros: Can be beneficial if most transactions fall into the lowest-cost tier.
   • Cons: Lack of transparency, potential for higher costs due to tier classification of transactions.
   • Example: Qualified transactions might be charged 1.8%, mid-qualified at 2.5%, and non-qualified at 3.5%.
4. Blended Pricing:
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   • Description: This model blends different fee structures, such as combining flat-rate and tiered pricing, to offer a customized fee schedule.
   • Pros: Flexibility to tailor pricing to the business’s specific needs.
   • Cons: Can be complicated to understand and manage.
   • Example: A processor might charge a flat rate for certain transaction types and tiered rates for others

Each model has its advantages and disadvantages, and the best choice depends on your practice's specific transaction patterns and volume. For dental practices, we recommend the flat-rate processing model as the best option for businesses seeking simplicity and predictability in their credit card processing fees, as it offers a straightforward, consistent rate for all transactions regardless of card type or transaction method.

Why Are Costs So High?

Several factors contribute to the high cost of credit card processing for dental offices:

1. Risk Management: Higher risk of fraud, particularly with card-not-present transactions, has led to increased fees. We've all had to dispute a fraudulent charge on our credit cards at some point; this happens far more frequently with online transactions. To protect against the risk associated with card-not-present transactions, online transactions have higher fees.
2. Card Types: We all love our credit card points, but these premium and rewards credit cards come with higher costs for the issuing-banks. These expenses are offset by charging higher interchange fees to merchants, which help cover the costs of the rewards programs. As these types of cards become more common, they contribute to higher average credit card processing fees for businesses.
3. Operational Costs: The operational costs for card networks and issuers have risen due to inflation and increased investment in technology and security, contributing to higher interchange rates.

Mitigating Credit Card Costs

As a dental practice owner, you might feel at the mercy of credit card processing fees, but it doesn’t have to be just a cost of doing business. Credit card surcharging allows you to pass the cost of credit card acceptance on to patients who choose to pay by card (check your local laws for surcharging rules, as some states do not allow it). Surcharging involves adding an additional fee, typically ranging from 2% to 3.5% of the transaction amount, to a patient's statement when they pay with credit cards. This way, your practice can offset the impact of these fees on your bottom line.

If you're using Archy as your practice management software, implementing surcharging is straightforward. Archy's built-in payment processing features allow you to easily add a surcharge to credit card transactions. This fee is automatically added to the patient's bill when they choose to pay with a credit card, while patients who opt for other payment methods, such as cash, check, or ACH, are not subject to the surcharge.

While surcharging can effectively mitigate the impact of credit card processing fees, it’s important to consider the potential for patient dissatisfaction. The decision to implement surcharging will depend on your practice's financial situation, patient demographics, and competitive landscape.