Updated July 15, 2018

Credit Card Processing Fees: What You Need to Know

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Accepting credit cards is crucial for the success of your business. But it comes at a cost - one that could put you in over your head if you aren't careful.

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How much are credit card processing fees? Average credit card processing fees range from 1.5% to 2.9% for swiped credit cards.

Keyed-in transactions have a higher average processing fee of 3.5% to account for the higher risk.

Read on to learn what business owners should know about credit card processing fees, including some smart tips to reduce them.

Credit Card Processing Fee Explained

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  • The processing method matters.
    Card-present (swiped or chip reader) transactions pose a lower risk for banks. They have a lower risk of fraud and/or chargebacks.

    This allows for lower processing fees. Card-not-present transactions (over the phone or internet) have a higher risk of fraud and chargebacks, resulting in higher processing fees.

  • The size of your average transaction matters.
    The lower your average transaction, the more you'll pay in transaction fees. For example, 100 $5 transactions are much more expensive than five $100 transactions.

    If the merchant service provider charges 2% plus $0.15, for example, you'd pay $0.15 one hundred times for the lower transaction. Compare that to the five times you'd pay it for the $100 transactions and you'll see the difference.

  • The type of business you run matters.
    All businesses have a Standard Industrial Classification Code and a Merchant Category Code. These standard codes let card issuers know what type of business the consumer is trying to conduct.

    Risky businesses are often provided higher credit card transaction fees just because of the risk they pose.

What Parties Are Involved in Credit Card Processing?

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When your customers swipe their credit card or insert it into the chip reader, a lot goes on behind the scenes. It's not just a transaction between your store and the credit card company. There are many parties at work, including:

  • Card issuer: This is the issuing bank - the one that provides the credit card to consumers. This is not Visa and MasterCard, but rather banks like Chase or Bank of America (among others).

    The banks work with Visa and MasterCard (the brand) to process the transactions. The bank charges merchants a fee for accepting credit cards. You'll usually see it as a percentage plus a flat fee.

  • Card network: This is the brand of the card, such as Visa or MasterCard. The consumer doesn't receive the card directly from Visa or MasterCard, though. It comes from the card issuer or issuing bank.

    Note: American Express acts as both the card issuing bank and the card network. So the fees are typically higher to process American Express cards. However, there is a new pricing model - called OptBlue - that brings the fees closer in line with Visa and Mastercard.

  • Merchant: This is you, the store or business accepting the credit card, either in person or online.

  • Acquirer: This is your bank, the one that will try to collect the money for the credit card transaction.

    Your bank sends the information from your credit card transactions to the issuing bank through the payment processor in order to collect payment.

  • Merchant account provider or payment processor: The third-party that processes your transactions. This is the "middle man" that stands between you, the merchant, and the consumer's issuing bank. A few common examples are Square, Stripe, SpotOn, and PayPal.

    SpotOn, for example, claims it saves retailers money by providing both a credit card processing capability with tools that make engaging with customers easier. It also promises to beat what its competitors charge for carrying out transactions.

  • Payment gateway: If you conduct business online, all payments go through the payment gateway. The payment gateway encrypts the data and sends the request for authorization to the card issuer (through the merchant account provider).

    The issuer's bank approves or denies the request and the result is sent back to the merchant. This all happens in the matter of a few seconds (sometimes longer for EMV cards).

How the Credit Card Process Works

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In-store transactions and online transactions have slight variations in their processes. We'll cover both below:

Retail Transactions

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The consumer presents you with their credit card. You run it through the hardware provided (swipe or chip reader).

The information is then sent to the payment processor, which contacts the issuing bank for approval. The issuing bank approves or denies the transaction based on the availability of the consumer's funds.

The payment processor lets the merchant know if the transaction was approved or denied. If it was approved, the money shows up in the merchant or acquirer's bank account in a few days.

Online Transactions

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Online transactions go through one more step.

Once the consumer enters the credit card information, it enters the payment gateway. The payment gateway then sends the information to the payment processor.

At this point, the process is the same. The payment processor contacts the issuing bank for approval of the transaction. Upon approval, the issuing bank alerts the payment processor who then alerts the payment gateway.

Finally, the information reaches your website, where you are able to see that the transaction went through.

Once the transaction is complete, you receive the funds in a few days.

Wholesale vs. Markup Fees

You'll hear these terms a lot. Before we get down into the types of fees and pricing models, you'll need to understand them.

For merchant accounts, there are two main fees:

  • Wholesale fees. Also known as "interchange fees", these are fees charge by the issuing bank and the card association (Visa, Mastercard, etc.). These fees are non-negotiable. This fee is the same no matter what processor you're using.

    The rates, however, vary depending on the type of card and transaction. Reward cards will have higher interchange fees. Debit cards have much lower interchange fees than credit cards. Swiped transactions have lower fees than keyed-in transactions.

    Take, for example, Visa: they categorize cards by retail, rewards, corporate, and business. Each type has its own interchange rate. Right now, Visa Rewards Signature cards cost merchants 2.3% + $0.10 of a transaction. So a $100 transaction would cost you $2.40.

  • Markup fees. On top of the wholesale fees, your card processor and payment gateway will charge their own markup. The cost will vary depending on the processor. But this fee can be negotiated. This is the fee you should be comparing when shopping around for a merchant account provider.

    For example, the processor may charge 0.25% + $0.10 per transaction. On a $100 transaction, this would cost you $0.35.

3 Types of Credit Card Processing Fees

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As you can see, there are many entities involved in credit card processing. This means one thing - many fees. Understanding these fees is important so you know what steps to take.

There are 3 main types of processing fees:

  1. Transactions Fees: These fees are charged every time there's a transaction. This will be the largest part of your payment costs. There are several pricing models, which we'll cover below.

  2. Flat Fees: These fees are different for each payment gateway or credit card processor. They're fees for using the service. You may have to pay these fees on a monthly or annual basis. We list the most popular ones below.

  3. Incidental fees: These fees are per-occurrence charges for incidentals, such as when there's a charge-back or non-sufficient funds. You may not have any some months.

Monthly or One-Time Fees

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Merchant account providers charge a variety of fees in addition to the processing fees. They may call them one-time or monthly fees. You may even see them as miscellaneous fees.

You should know the cost of these charges ahead of time to help you choose the right processor. At the very least, if you already signed up, check your statements for any of the following:

  • Set up fees: Some merchants charge a fee to set you up on their network. This could be for a technician to come out and set up the hardware or even for over-the-phone support.

    Not every merchant account provider charges this, but it's worth looking into.

  • Account cancellation fees: Merchant account providers that have a contract may require a cancellation fee if you don't fulfill the contract. Again, reading the fine print is crucial.

  • Monthly subscription fees: Many merchant account providers charge monthly subscription fees. This covers customer support and PCI compliance.

    Some providers charge the monthly fees as an annual charge instead. They may also call it monthly minimum fees, meaning if you don't reach the minimum amount of charges, the provider charges you a fee.

  • Terminal fees: If you have a brick-and-mortar store, you'll need a terminal to swipe customers' credit cards. Some providers charge a one-time purchase fee, while others lock you into a lease and potentially charge cancellation fees.

  • Payment gateway provider fee: If you sell your products or services online, you'll need a payment gateway provider that may charge monthly fees. However, there are several that don't charge.

  • PCI fees: If, and only if, your merchant account provider actively provides PCI support to make sure you are in compliance with the Payment Card Industry rules, should you pay these fees.

    However, a majority of the time, they are "junk fees" that merchants don't even realize are on their statements. You may also see them titled non-compliance fees or data breach insurance.

    In any case, inquire about the fee, ask what you get for it, and if you are non-compliant, ask for help getting compliant to eliminate the fee.

  • Statement fees: Your merchant provider may charge you for statements, whether paper or online. They may call it a processing fee or even a miscellaneous fee.

  • IRS reporting fee: Some merchant providers charge a fee to report your transactions to the IRS and provide you with the required 1099-K. This practice isn't widely accepted and the fee should be disputed if you see it on your statement.

    Many merchant providers charge as much as $3.95 per month per account for this unnecessary fee.

4 Types of Pricing Models

Merchant account providers have 4 main pricing models. We go over them below, as well as what kind of business each is best for.

Interchange-PlusFlat RateSubscriptionTiered
Wholesale & markup fees are separateWholesale & markup fees are blendedWholesale & markup fees are separateWholesale & markup fees are blended
Markup is a % and per-transaction feeAll transactions cost the same, regardless of type and processorMarkup is a per-transaction fee plus a flat-rate monthly service fee Rates vary according to whether the transaction meets certain qualifications
Best for: Most businessesBest for: Low-volume businessesBest for: High-volume businessesBest for: Not recommended

1. Interchange-Plus

This is the most common and transparent model. This usually consists of a percentage of the transaction plus a fixed per-transaction fee. The wholesale fee and markup fee are clearly separated.

Payline Data is one good example.

Let's say the non-negotiable wholesale fee is 1.15% plus $0.10, and the merchant provider markup is 0.5% plus $0.15 on each transaction. On a $100 sale, it would cost you $1.25 + $0.65 for a total of $1.90.

This model works for most businesses. It can potentially come out to be the lowest cost.

2. Flat Rate

Some merchant providers, such as Square, charge a flat fee per transaction. For example, Square charges 2.75% of each swiped transaction. It does not matter what brand credit card or type of credit card the consumer used.

In this model, the wholesale and markup fees are blended together. These fees are the most predictable. You know what each transaction will cost ahead of time.

The downside is that the transaction cost could be quite high. So this is best for lower-volume businesses.

Using the above $100 transaction and hypothetical fees, let's see how this works.

With a flat rate of 2.75%, a $100 sale would cost you $2.75. This is more than the Interchange-Plus fee transaction.

On a $10 purchase, however, the flat fee transaction would cost $0.27, while the Interchange-Plus fee would cost $0.42.

3. Subscription/Membership

With this model, the wholesale cost is charged separately. As for the markup, you pay a small per-transaction fee for each transaction, and then a flat-rate monthly subscription fee for using the service.

So for example, the non-negotiable wholesale fee is 1.15% plus $0.10. The markup could look like $0.25 per transaction plus a $20 monthly subscription fee.

This pricing model could be good for large-volume businesses.

4. Tiered

Perhaps the most confusing pricing model is the tiered fees. The wholesale and markup fees are blended together.

Unlike interchange plus, there are no fixed fees. The amount you pay depends on the type of card charged. This program often has add-on fees that merchants don't recognize, making it an expensive method to process credit cards, and thus not recommended.

Are Interchange fees negotiable? Credit card issuers set the interchange fees on a yearly basis. You cannot negotiate them. What you can negotiate are the markup fees charged by the merchant account provider.

Are Flat Rate or Interchange-Plus Fees Better?

These are the two most popular pricing models. Wondering whether you should choose a flat rate or interchange plus provider?

Unfortunately, the answer is different for each merchant. It depends on your total monthly transactions as well as the individual transaction amount. That's not all, though. You also have to figure in any monthly fees or other add-on fees merchant providers charge.

In general, interchange plus works for most businesses. Flat rate is usually better for low-volume businesses.

Don't forget: You may also have special pricing for certain types of cards. For example, Payline charges the same interchange plus fees for all credit cards except AMEX. Processing AMEX could cost you as much as 0.5% more than any other credit card.

Choosing the Right Interchange-Plus Provider

If your transactions are too high for a flat fee provider to make sense, you'll need to shop around for the right interchange-plus provider.

Obviously, you'll want to find the lowest upcharge. But don't focus on the percentage alone. Look at the merchant provider's requirements. Some have volume minimums you must meet.

If you don't meet the minimum quota, you'll pay the difference in fees. In other words, don't jump at the first merchant provider with the lowest add-on fees. If you can't meet the minimum requirements, you won't enjoy the low percentages.

TIP: Reading the fine print and asking as many questions as possible will help you decide the best provider for your needs.

Some merchant providers charge a monthly or annual fee in addition to their add-on fees. They may also charge miscellaneous fees for things like customer support, training, statements, or PCI compliance.

If you need to integrate your payment processor with your POS or eCommerce, they may charge for that as well.

Negotiating Lower Credit Card Processing Fees

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Remember, you can negotiate markup fees charged by credit card processors and merchant account providers.

High volume sales merchants usually have the best luck negotiating these fees. What you negotiate should depend on the type of sales you make.

For example, large transactions are more affected by the percentage add-on than the per-transaction fixed fee. Using our above example of 0.5% + $0.15, let's see the difference on two transactions:

  • $10 transaction: $0.05 + $0.15
  • $100 transaction: $0.50 + $0.15

The lower the transaction amount, the more sense it makes to negotiate the per transaction fee. If you were to negotiate a lower percentage, you would save a penny or two.

But if you negotiate the per transaction fee, you could save as much as $.05 to $.10 per transaction. That might not sound like a lot, but after 1,000 transactions, you'd save $50 - $100.

Higher transactions, on the other hand, would save you more with a lower percentage fee. If you were able to negotiate a 0.4% fee rather than 0.5%, you'd save $0.10 per transaction.

After 1,000 transactions, you'd save $100. Of course, the higher your transaction amount, the more you save.

Bottom Line

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Credit card processing is a necessary component for a successful business today. However, you should choose your merchant account provider wisely. If you don't understand their fee structure, ask questions.

Compare the flat fee companies to the interchange plus companies on a per transaction as well as monthly basis. Only then will you be able to make the decision that works best for your company's bottom line.

And don't forget to inquire about early termination fees or equipment rental fees.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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How to Apply for a Business Credit Card


How to Use a Credit Card


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