The Cost of Doing Business: Hidden Payment Fee Red Flags

Both legacy restaurants and newer establishments can agree that the literal cost of doing business from payment processing can severely hamper revenue growth from the first sale. There is nothing more ubiquitous than cashless payments, but the ease of credit card use for a customer can create a significant cost for restaurants through exorbitant payment processing fees. 

As an increasing amount of consumers use credit cards to pay for dining, the swipe fees continue to mount, eating into razor-thin margins, which average about three to five percent in the restaurant industry. In April, Visa and Mastercard raised transaction fees which are estimated to cost U.S. business owners an added $1.2 billion in fees. To help recoup the cost of accepting cards, some restaurants are raising the prices of menu items, and others (where permitted by state law and merchant services agreement) are adding a credit card surcharge to bills. 

Restaurants must carefully choose their payment processing partners and payment methods to minimize these costs. Negotiating favorable rates and understanding the fee structures are crucial. A laundry list of shorthand and abbreviated terms found in a monthly payment processing statement can be difficult to navigate and even more difficult to decipher. There are multiple signs that restaurateurs should pay attention to mitigate the rising cost of credit card processing, software and service fees.

Payment processing pricing structures often used by restaurants  allow payment processing providers to layer their processing fees on top of other underlying debit and credit card fees. The main component of these underlying fees is the “interchange” fee, collected by the card-issuing bank and set by the card network, based on networks, cards and transaction types. Each of these combinations results in a different amount of underlying fees, which can often be less than transparent. 

Monthly fees can include the “real” fees for software and service subscriptions in addition to “hidden” or “padded” fees that aren’t actually tied to any underlying restaurant payments contract. Hidden fees that don’t offer much benefit, like a regular $10 “statement fee” to simply receive a statement or a monthly penalty for a restaurant that is not PCI compliant, where the processor does not offer PCI compliance services — can quickly eat into a restaurant’s already razor-thin margin over time. 

Here are the top hidden fees that restaurateurs should look out for:

PCI fees

  • These fees will unfortunately be a repeat visitor on most payment processing statements. The only way to remove it is to prove compliance with the payment card industry data security standards (or PCI DSS for short). However, if a business is getting charged more than $20/month for this, the payment processor is biting more into a budget than it should. Businesses can easily avoid this by becoming PCI compliant.

Minimum Fees

  • Much like a typical personal credit card, processors often charge a fee if a client doesn’t process a certain amount throughout the month. Some processors will even charge these on a daily basis, even if the business is closed for the day. This can be incredibly detrimental to a new business and should be avoided when negotiating a contract.

Statement Fees

  • Most processors will charge to read a statement each month. If a business is still receiving paper statements, an easy way to reduce this fee is to make the switch to digital statements. 
  • However, removing paper statements won’t remove these fees altogether. To remove them permanently, a business will have to negotiate it before signing a contract. Whether that time and effort are worth the few dollars saved each month is up to the business; just make sure you’re not paying too much extra for a report that costs processors nothing to create.

Monthly Settlement Fee

  • Batch fees are charged every time a batch of transactions is submitted for processing. In most cases, this occurs once per day and costs about $0.10 per batch. It’s certainly not a large portion of the processing pie, but many processors compensate for that low fee by adding additional batching fees, and monthly settlement fees are exactly that. These fees are larger than a typical batch fee and are charged just once a month, but they don’t coincide with any action on the part of the processor.

Authorization or Transaction Fees

  • Most authorization and transaction fees are regular occurrences and shouldn’t be considered an immediate statement red flag. However, be wary of a processor who tries to sneak both per-transaction and per-authorization fees into a payment processing statement. To the untrained eye, these charges won’t seem out of place in the processing statement but will cause the restaurant to be charged double for no reason. 

While restaurants have no control over the interchange fees set by card companies such as Visa and Mastercard, they can cut costs and improve the bottom line by selecting a payment processing company that tailors merchant services to the needs of each client and spends the money or the time resources available to audit those services as they continue their contract. 

According to the Wall Street Journal, the dollar amount of interchange fees more than doubled from 2012 to 2019, and U.S. merchants paid approximately $62.5 billion in Visa and Mastercard debit and credit card interchange fees in 2020 alone. As the payment industry continues to develop, businesses will begin to see more services dedicated to counteracting these hidden fees through AI-assisted auditing services. Restaurateurs and franchise leads need to perform regular audits and connect with their payment processor service to regain the upper hand against an industry rife with extra fees.