The idea of free credit card processing sounds great. Who wants to pay thousands of dollars in transaction fees when you can pay nothing?
But like most things, if it sounds too good to be true, it usually is. And that’s exactly the case with no-fee credit card processing.
If you’re being pitched on the idea of zero-cost processing, read this guide first. I’ll explain how it works and what’s really happening behind the scenes (and why it’s not actually “free” at all).
What Exactly is No Fee Payment Processing?
No-fee processing, also known as zero-cost payment processing, is a card acceptance model where businesses pass merchant fees to the customer in the form of a surcharge.
It’s not actually free. The merchant is still 100% responsible for the costs. The surcharge program just passes your fees to the customer at checkout, so you recoup your processing costs at your customer’s expense.
In the simplest possible terms, no-free processing is just a credit card surcharge program disguised as a clever name that processors use for marketing purposes. Terms like free credit card processing, zero-cost processing, and no-free payment processing all sound more appealing than, “We’ll charge you higher-than-normal rates, but your customer will pay for it.”
How Does Zero Fee Credit Card Processing Work?
No-cost payment processing works by setting up a surcharge program, which means it’s only available to merchants operating in states where surcharging is legal. Your processor will set up your terminal or POS system to automatically add a surcharge fee to every credit card transaction (usually 3%), which your customer pays at checkout.
Here’s what’s actually happening on the backend:
- Interchange rates and assessments are set at the card network level.
- These are mandatory fees on every transaction, passed through from the processor to the merchant.
- Processors also charge a markup to the merchant for the service they provide.
- All of these merchant fees (interchange + markup) cost around 3% per transaction.
- The business is still responsible for paying all of these fees.
- But with “zero-cost processing,” a 3% surcharge is added to the customer’s receipt, which effectively reimburses the merchant for their processing costs.
If you sign up for no-fee payment processing, you’re just forcing your customers to pay for one of your operating expenses in the form of an upcharge at the point of purchase.
No Fee Credit Card Processing vs. Surcharging
No-fee payment processing and credit card surcharging are the exact same thing. The two terms are synonymous.
Zero-cost or no-fee credit card processing is the result of a surcharge. You can’t have one without the other.
The only difference is how they’re marketed by processors. Providers use buzzwords like “zero cost” or “fee free” models to attract businesses seeking cheaper processing.
“Free” Credit Card Processing Isn’t Actually Free
Zero-cost payment processing only covers the swipe fees you’re paying per transaction. If your processor is charging you 3% to accept credit cards, then the 3% surcharge your customer pays at checkout only covers that portion.
But it’s common for no-fee payment processors to include lots of other fees on your statements, including:
- PCI Compliance Fees
- Terminal Fees
- Monthly Service Fees
- Statement Fees
- Annual Fees
- Settlement Fees
- Gateway Fees
The list goes on and on. Processors love to sell you on no-cost processing because they make huge margins on your account.
First, they charge you sky-high processing rates (higher than normal), since you’re “not paying for it.” If the transaction costs were coming out of your pocket and not your customer’s, you’d be much stricter on the terms.
Then on top of the 200% markup, processors add tons of other bogus monthly fees. So you’re still paying hundreds of dollars every month for what was sold to you as “free” processing.
We’ve seen this bring a merchant’s total effective rate upwards of 5%, whereas it should be closer to 2% or 2.5%.
Why Merchants Should Avoid Zero-Cost Payment Processing
Despite the perceived benefits, there are actually lots of problems with no-fee payment processing. It’s not a good fit for most businesses, and here’s why:
You’re Passing Extra Costs to Your Customers
There’s no way around this. If you’re using a zero-cost payment processor, you’re burdening your customers with extra fees. That’s how a surcharge program works.
This can create serious long-term problems for your business, making the extra 3% you’re recouping not worth it.
Over 70% of customers say they actively avoid businesses with surcharge fees. An additional 87% of consumers feel they’re being “nickel-and-dimed” when forced to pay a surcharge fee.
Are you willing to lose your customers over a dollar or two? Because that’s the reality of surcharging, and it’s one of the many reasons why businesses shouldn’t surcharge credit cards.
Your Actual Processing Rates End Up Being Higher Than Normal
This is something that’s rarely talked about with no-fee processing, but I see it on virtually every statement using this model. Your processor will leverage the no-fee structure to set your rates as high as possible.
And since you’re “not paying for it” then you’re less likely to question things.
But if surcharge laws change in your state and you’re no longer able to pass these costs to your customers, you’re going to be left paying astronomically high rates. It’s a risky position to put yourself in when you could just be paying lower processing fees from the beginning.
You Need to Navigate Complex Legal and Regulatory Requirements
Setting up a surcharge program isn’t as simple as your processor makes it sound. And it’s 100% your responsibility to ensure it’s legally compliant.
Surcharge laws vary significantly by location. Some states have an outright ban, while others cap costs or have strict disclosure requirements. Debit card surcharging is illegal nationwide at the federal level, and the FTC has junk fee rules related to surcharges.
On top of that, you need to comply with all of the card network requirements, which vary by network.
As crazy as it sounds, the cost of administering and maintaining a compliant surcharge program might actually exceed the 3% you’re recouping. And a single fine or penalty can easily make this a losing proposition.
Alternatives to No Fee Credit Card Processing
If you don’t want to deal with the hassle of no-fee payment processing, there are still plenty of others that you can implement to lower your costs.
- Interchange-Plus Pricing — Interchange-plus is by far the best pricing model for credit card acceptance. You pay the wholesale rate set by the card networks, plus a small markup to your processor.
- Cash Discounting — Instead of increasing the price when customers pay by card, you can lower the price if they pay with cash.
- Dual Pricing — Similar to a gas station, you can have a card price and a cash/debit price for every item or service.
- Interchange Optimization — This involves capturing and submitting extra data with your transactions to qualify for lower interchange rates.
- Negotiate Better Rates — Your processor’s markup is 100% negotiable, and you could cut this fee in half if you’re a skilled negotiator.
- Identify and Remove Hidden Fees — Beyond the transactional fees, there are likely several other junk fees on your statement that could be removed to save you thousands of dollars.
- Bake Processing Costs Into Your Prices — Rather than passing the costs to customers, you can simply factor in these fees when setting your prices (like you do with the rest of your operational expenses).
Overall, looking for surcharging alternatives is a better long-term decision for your business.
If you need help lowering your costs, contact our team at MCC. We’ll audit your statements for free, identify savings opportunities, and ensure you get the best possible rate without switching providers.
Final Thoughts: Is it Legit or Not?
No-fee processing is only legitimate in the sense that it’s not a scam or a rip-off. But the concept of “zero cost” or “free” is definitely misleading.
You’re still responsible for payment processing costs. You’ll just be passing those fees to your customers in the form of a surcharge.
This isn’t a great option for most businesses. It’s better to just get on an interchange-plus pricing structure with your existing provider and negotiate a lower markup. Doing this is far more sustainable over the long run and helps you take control over your processing costs.