Saving on credit card processing fees

Jennifer Hudson
January 10, 2020
Saving credit card fees

It's super convenient to have students pay you online with a credit card.

On Ubindi, payment processing happens with Stripe, where money flows directly into your bank account.

For this service, Stripe charges "processing fees" that are actually put in place by the credit card companies themselves (Visa, Mastercard, AmEx, etc).

These fees are unavoidable for any merchants anywhere in the world that accept credit cards, until we all start using crypto-currencies and transacting in Bitcoin. Of course, that's why credit card companies are very profitable.

However, you can minimize your credit card processing fees by understanding how they work.

Stripe fees vary from country to country — find your country on Stripe's global list here.

As an example, if you're in the US, regular credit card fees are 2.9% + 30 cents.

At a glance, this might seem pretty small... but things can add up. In addition to the regular fees, there can be additional charges. For instance, if clients pay you in a different currency. Thankfully, Stripe will automatically convert all funds into your "home currency" — but they will also charge you extra for this convenience.

To help you reduce credit card costs as much as possible, here are some guidelines and tips:

A) Encourage students to buy passes & memberships

Credit card processing fees are actually larger when the cost of something is smaller.

That's because the "+ 30 cents" in the Stripe fee structure adds up to a larger percentage of the total payment amount

For example, on a $10 yoga class, 2.9% is only 29 cents. But the "+30 cents" amounts to an additional 3%! This means that Stripe will collect 59 cents, or nearly 6%, on a single class booking.

By contrast, if you're selling a 10-class pass for $80, 2.9% is $2.32. Add to to that the 30 cents ($2.62), in percent that comes to 3.3% of your total price — that's about half the total percentage fee you pay on a $10 class.

Things get worse for classes that are priced even lower than $10.

Many teachers are pricing their online classes much lower than their in-person classes, which can make sense: for online classes, your overhead is very low, you can accommodate lots of students in one "room", and perhaps the online experience is not as great as a live, face-to-face class.

Or, another common scenario where small transaction amounts happen is with "donation based pricing": on Ubindi you can set your classes to be 'by donation', where clients might choose to pay a very small amount for a class, for example $2.

Well, for a $2 charge, Stripe will take 20% of your earnings! And when someone pays you $1, more than a third of it goes to Stripe. The following chart illustrates this:

In short, if you have lots of people paying you small amounts for many individual class registrations, you might be handing a big part of your revenue over to the credit card companies.

So to reduce the total fee you pay when taking online payments, you should offer packages to students, and encourage their usage by offering people discounts in your packages.

Of course packages have lots of other advantages, like automatic billing for your students, and for you increasing class attendance, generating regular revenue, as well as money earned in advance.

B) Make sure your currency is set correctly

Additional credit card fees happen whenever currency conversions are involved.

Ubindi payments work in most countries, but the default pricing currency for your classes and passes is in US Dollars.

So, if you're outside of the USA, you can and should change the currency that your offerings are priced in.

In addition, some teachers might connect their Stripe account with a bank that's located in a different country from where they or most of their students are located... this can lead to additional costs.

If the bank account for your Stripe account is in one currency, but you've set the currency of your offerings to another currency, Stripe will convert all payments into your "home" currency automatically. That's a great service — but they will charge you 1% for it.

And if a student pays for something using a card that's normally in a different currency from the currency you accept, Stripe charges ANOTHER 1% (since the student is using an "international card").

This means if you set up Stripe with a UK bank account, but your classes are in US Dollars, and then your clients are in the UK paying with a UK card, you will end up paying an additional 2%, on top of the normal fees in the UK (1.4% + 25p). And for no reason: the student payment in Pounds is converted to US Dollars which is then converted back into Pounds to get to you!

C) Memberships (subscriptions) carry a small extra fee

Recurring (subscription) charges carry an additional 0.5% in Stripe processing fees.

This is really just for your information — we still highly recommend that you offer memberships to your students, where they are billed automatically each month or each year.

Recurring revenue generally is a great way to boost to your business, and the monthly payments amounts are (usually) large enough for the extra 0.5% processing fees to only make a small dent in your bottom line.

<span class="special tip"><span class="materialicon tip">lightbulb</span>Want more tips? Read more about how to price your classes and offerings.</span>

Caveat: avoiding fees but getting into legal troubles 

Much as we all hate fees, and would go a long way to avoid them, it's to get your business payments set up in a way that doesn't get you into legal trouble further down the line.

Using a proper system, albeit one where you pay fees, saves you time and headaches not just  in your daily operations — but when it's tax time, it can mean the difference between a quick and stress-free form filling or a giant nightmare. 

On Ubindi you get your own fully functional Stripe account with an easy-to-use dashboard. You can download all your transaction records, and that makes your accounting a walk in the park. 

The Stripe interface will even provide you with completed 1099 tax forms.

If in order to avoid fees, you do decide to take payments in cash or through personal payment platforms like PayPal or Venmo, or directly to your personal bank account, things can become very complicated, rather quickly. 

Also, you should be aware that as of January 2022 you won't get away with not reporting these things any longer: in the United States, all of the peer-to-peer payment platforms will report your earnings to the IRS if the total amount of payments coming in throughout the year reaches just $600.

That means with just $600 coming in, where you "saved" $30 or so in processing fees... you are now confronted with having to untangle and account for all these transactions for your tax return. The government already knows what you earned, so they will come knocking. 

We're all in favor of keeping as much as possible of the money we earn, and not getting bogged down in paperwork and bureaucracy.

But by trying to save on fees (and possibly taxes?) by getting paid in various "unofficial" ways, you are potentially exposing yourself to quite a lot of trouble. The IRS know that you didn't report the income that these peer-to-peer payment platforms are now reporting about you. 

So be wise when you choose what the fees you pay a payment platform are worth. Consider not only the greatly reduced admin chores for yourself, the convenience for your students who can pay you online, the ease when it comes to accounting, but also the possibility of getting in trouble with the tax man.

Instead of trying to avoid fees altogether, as a business owner it surely is better to understand how to minimise them, while enjoying all the conveniences that come from being able to take online payments.

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