The ultimate guide to credit card processing fees
No business can survive without accepting credit cards. But every time you accept credit card payments, you'll be subject to credit card processing fees that can take a bite out of your bottom line.
While these fees are small, they can really add up. Just ask the owners of Bump 'n Grind, a Maryland-based music and coffee shop. In 2020, they spent less on beans ($12,827) than on credit card processing fees ($18,645).
This article will help you better understand how credit card fees work, so you can better plan your budget and even take steps to reduce the amount you spend on processing costs.
What are credit card processing fees?
A credit card processing fee is the price you pay to receive the funds from a credit card transaction.
While this sounds simple enough, it can actually get a bit confusing. For starters, credit card processing fees comprise three distinct fees:
- Interchange fees (go to the issuing bank)
- Assessment fees (go to the credit card companies)
- Payment processing fees (go to the payment processor)
Ultimately, your merchant account fees are determined by your merchant account provider. But the credit card issuer and credit card network both play a major role in the final amount of money you pay during the transaction. This setup means that rather than pay a flat fee, it's possible to see a range of transaction fees on your monthly statement.
Adding to the confusion is the terminology used to refer to these credit card processing fees. You may see them listed as "merchant account fees" or even "discount rate." Don't let the name fool you. Your discount rate simply refers to the amount of the sale that goes toward paying credit card processing fees.
Average credit card processing fees in 2022 (1.3% to 3.5%)
How much can you expect to spend on credit card processing fees, on average? The exact percentage can vary due to a range of factors, but processing fees usually range from 1.5% to 3.5% per transaction. The payment processor will usually have an additional fee on top of this percentage.
Here is the breakdown in credit card processing fees for each of the four major credit card networks:
- Visa: 1.29% + $0.05 to 2.54% + $0.10
- Mastercard: 1.29% + $0.05 to 2.64% + $0.10
- Discover: 1.48% + $0.05 to 2.53% + $0.10
- American Express: 1.58% + $0.10 to 3.45% + $0.10
The numbers above reflect the interchange fee as well as the assessment fee, though the fee you pay to the payment processor can vary widely depending on who you use.
To understand this better, let's break down these costs into their constituent parts:
Interchange fees (1.5% to 3.3%)
Interchange fees go to the bank that issued the credit card. The interchange fee will typically make up the bulk of the transaction cost. Interchange fees are usually presented as a percentage, plus a fixed amount.
For example, here are the average interchange fees for the four credit card networks we highlighted above:
- Visa: 1.15% + $0.05 to 2.40% + $0.10
- Mastercard: 1.15% + $0.05 to 2.50% + $0.10
- Discover: 1.35% + $0.05 to 2.40% + $0.10
- American Express: 1.43% + $0.10 to 3.30% + $0.10
Compare these fees to the total averages above, and it's easy to see how the interchange fee makes up the majority of your credit card transaction fees.
Assessment fees (0.14%)
The assessment fee represents the cut taken by the credit card issuers. These fees are usually quite low. Here's a breakdown of average assessment fees for each major credit card network:
- Visa: 0.14%
- Mastercard: 0.1375% (for transactions under $1,000); 0.01% (for transactions of $1,000 or more)
- Discover: 0.13%
- American Express: 0.15%
While American Express has the highest assessment fee on the list, the difference between these fees is negligible, at least compared to other credit card processing costs.
Payment processing fees
Finally, there are fees you pay to your payment processor. As a business owner, you don't have a lot of influence over the other fees you pay, but you have options when it comes to your merchant service provider. Here are the four main pricing models available from most payment processors:
With flat-rate pricing, the payment processor charges a flat fee for each transaction. This fee includes:
- The interchange fee
- The card brand fee
- The processor's own fee
Flat-rate pricing provides merchants with predictable monthly costs, but it also means less flexibility. For example, it's possible to expand your sales volume to lower your interchange fees. But with a flat-rate model, you'll be locked into the same price indefinitely.
Tiered pricing is the most popular fee structure in the United States. Merchants are attracted to this model because it divides your transactions into tiers:
- Qualified tiers (lower price)
- Mid-qualified (higher price)
- Non-qualified tiers (highest price)
But looks can be deceiving. Frequently, the lower tiers are reserved for certain types of credit and debit cards, which means that merchants may find themselves defaulting to higher-priced tiers. Rewards cards, for example, will almost invariably fall into a higher tier. You'll need to decide what types of cards you'll be regularly taking before you choose a specific pricing plan.
Interchange plus pricing
The interchange plus pricing model offers the best of both worlds. The payment processing provider will use the lowest possible interchange fee then charge you an additional fixed fee.
Interchange plus pricing offers a similar benefit to the flat-rate pricing model in that you'll have some predictability over the processing fees. But you'll also receive the lowest possible interchange fees, though these fees can vary widely.
Finally, your merchant account provider may offer a subscription rate, also known as membership pricing. In this model, you'll pay your payment processor a monthly fee to cover the cost of your membership, as well as a fixed fee for each transaction.
Like flat-rate pricing, this model gives merchants some predictability over their credit card processing fees. But that doesn't necessarily guarantee savings.
This pricing model works best for those with enough credit or debit card transactions to see the benefit. Low-volume business owners may find themselves paying more in monthly fees than their actual transaction fees.
Other credit card processing fees to consider
While we've been focusing on individual transaction fees, there are other costs to consider when accepting credit or debit cards. These incidental fees can include:
- Voice authorization fee (when calling to authorize a transaction manually)
- Chargeback fees
- Equipment rental fees
- Setup fees
- Card-not-present transactions
- Address verification services (AVS)
- Early termination fee
Fortunately, these fees are usually not recurring, though they can add to the total cost of your payment processing platform. Make sure to leave some room in your budget to cover the cost of things like setup, installation, and the rental/purchase of equipment.
What determines my interchange fees?
While assessment fees are relatively minor, higher interchange fees can result in a higher cost for every credit or debit card transaction.
But what determines your interchange rates? Higher interchange fees are usually the result of one of three factors:
Merchant category code (MCC)
Payment networks charge different interchange rates based on your merchant category code or MCC. Your MCC corresponds to your business type. This setup means that a retail store will pay a different interchange fee than a grocery store or other type of business.
Type of card used
You've probably already noticed that credit cards vary widely, even within their respective networks. Rewards cards promise their users cashback or points toward a vacation, but for the merchant, this translates into higher interchange fees.
Interchange rates also depend on the actual method you process the credit or debit card purchase. Specifically, interchange rates will differ based on whether the card was:
- Keyed in
- Card not present (common in online transactions)
The lowest interchange rates will apply to credit and debit cards manually swiped. Unfortunately for online retailers, credit card processing fees will be higher for card-not-present transactions.
How to reduce credit card fees
On the one hand, credit card processing fees are the cost of doing business in an increasingly cash-free society. On the other hand, these processing costs can really add up. In 2019, small businesses spent a total of $116 billion in processing fees alone.
If you're looking for ways to avoid paying higher processing fees, there are a few strategies you can employ:
1. Avoid flat-rate pricing
Don't be taken in by the promise of a flat-rate pricing model. On the surface, it offers predictability, but it completely eliminates any possibility of reducing your interchange fees.
For example, if you increase your sales volume, you qualify for lower interchange rates. But with a flat-rate model, you'll be stuck paying the rates set by the credit card processing company.
2. Minimize fees
This approach sounds easier said than done, but most credit card processors will communicate the fees they charge for things like account maintenance, equipment rental, and more. Some even charge a monthly minimum fee regardless of your sales volume.
Try to avoid these costs when you can. You might even be able to contact your credit card processor to negotiate a better rate for some or all of these fees and maybe even avoid some altogether.
3. Avoid chargeback fees
What are chargeback fees? A chargeback fee occurs when a customer disputes a charge. Usually, the customer will contact the credit card company directly, claiming they did not make the purchase. When credit card companies accept the chargeback, merchants will have to pay a fee, which can be hefty.
How can you avoid these fees? Take a look at the way you process transactions. You're less likely to receive these fees when the customer pays using a card reader with chip protection or contactless methods. When possible, avoid payment methods where the credit card is not physically present.
4. Evaluate subscription pricing
Finally, think about the rate at which you typically process credit card payments. Subscription pricing makes a lot of sense for businesses that see a lot of sales volume, reducing the average transaction cost. But be cautious.
If you aren't making a lot of individual transactions, you could be paying more in monthly fees than in the other credit card processing fees associated with other plans. Look at the pricing options offered by your merchant service provider, and decide on which best fits your business.
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Frequently asked questions
For specific questions about credit card processing rates, contact your card issuer or your merchant service provider. However, here are answers to common questions about credit card processing fees.
Some business owners charge extra to cover their credit card processing fees, a practice known as "surcharging," though it might be called a "credit card convenience fee" by certain retailers. This approach saves the merchant from paying their own credit card transaction fees, but the practice is NOT legal in the following states:
- New York
International laws can be even trickier, so if you have overseas clients, consult an attorney for specifics.
You're unlikely to negotiate with your credit card network for lower fees, and your assessment fees are relatively small in the first place. However, you may be able to contact your credit card processor to avoid paying certain merchant account costs such as installation, setup, or equipment rental.
When the card is present, contactless credit cards receive the same interchange rate as a card that was swiped or inserted. Basically, contactless credit cards will not have a higher transaction fee than other card types and will also receive similar interchange rates when the card is not present.