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You might be a new business owner who’s thinking about taking credit card payments for the first time. Or you might be an old hand at credit card processing seeking to lower your current rates. Either way, you want a deeper understanding of the ins and outs of the processing business so that unscrupulous salespeople do not swindle you.

This is the article for you.

You’ll need to set aside some time, though. The article is long, but if you stick with it, we promise you’ll have a much better idea about how the complicated world of merchant credit card processing works. You’ll also understand how to protect yourself when you set out to look for a credit card processor.

We’ll give you some average credit card merchant rates that you should keep in mind as you look for credit card processors that might be right for your business. We’ll also explain why these average rates probably won’t work because of the labyrinthine business models these processors use. We’ll help you pinpoint which business model best fits your business.

This article links liberally to other articles on our website, so if you wish, you can dive deeper for answers to your specific questions. If you are a visual learner, consider checking out our infographic article about credit card processing fees.

Let us begin.

What Are Credit Card Merchant Fees?

When you accept credit cards as payment, you are always charged a fee for processing. This fee is what we generally mean when we say “credit card merchant fee,” though it is sometimes referred to as a “discount rate.” The fee is set by your merchant account provider, though a number of different entities make money on each transaction you process. Typically, this fee is a combination of three factors: interchange fees, assessment (or service) fees, and the payment processor’s markup. We’ll get into what each of these factors means for your business in a bit.

While your payment processor is the party that sets the merchant fees, the card issuer and the card network each play a starring role in determining the fees that are ultimately taken from the transactions you process.

What Are The Average Credit Card Processing Fees For A Small Business?

We all know that having an average number in mind is very useful when comparing discount rates. However, there is no single definitive set of universally-accepted statistics showing the average costs of the four major credit card networks. That’s why we’ve created a table showing estimates of the big four card networks’ average costs from three different sources: Payment Depot, Fool.com, and Square.

Payment Depot Fool.com Square Visa: 1.43% to 2.4% 1.29% + $0.05 to 2.54% + $0.10 1.43%-2.4% Mastercard: 1.55% to 2.6% 1.29% + $0.05 to 2.64% + $0.10 1.55%-2.6% Discover: 1.56% to 2.3% 1.53% + $0.05 to 2.53% + $0.10 1.56%-2.3% American Express: 2.5% to 3.5% 1.58% + $0.10 to 3.3% +$0.10 2.5%-3.5%

Additionally, Payment Depot has estimated that when taken together, the average costs for credit card processing are:

1.5% to 2.9% for swiped/dipped cards

3.5% for keyed-in transactions

Please keep in mind that these numbers are rough estimates. Your actual fees depend on many factors, including the type of transaction you process most often (in-person vs. online), your specific type of business (average-risk vs. high-risk), and the size of your average transaction. Once you understand how these factors can affect your rates, you’ll be much better positioned to judge the appropriateness of a quote than you will by merely comparing your quote to a simple “average.”

Everything You Need To Know About Merchant Account Fees

The credit card industry is somewhat antiquated and lacks competition. As such, everyone upstream tries to pass their costs downstream, and typically — due to said lack of competition — they get away with it. The best way to see where these upstream costs are being added is to understand how a payment card transaction works. This way, you can see where a charge might get tacked on to a particular transaction.

When a credit card processor quotes you a price, you’ll usually see a percentage and a flat fee. Let’s start with why you’re being charged in this manner.

Why Merchants Pay A Percentage & A Flat Fee

Once you start taking credit card payments, the first thing you might notice is that you are being charged in a somewhat unusual way: Your cost for processing a payment card is a combined percentage plus a flat fee. There’s a reason for this, and it has to do with the upstream providers’ fixed business (e.g., equipment) costs and financing risk.

To process a transaction, the modern credit card industry uses a lot of computer technology, all connected to form a private computer network. Every player in the industry has costs to maintain their part of this network, including paying for hardware, software, and network connection. Because this maintenance cost is steady, the upstream providers pass it down to you as a flat access/usage fee.

In addition to the computer network, there’s a financing aspect to each card charge. A credit card is really a mini loan a bank makes to the credit card holder, so there’s an ever-present risk that the bank won’t get paid back. Even debit card transactions involve a bit of financing risk in the form of an overdrawn bank account. It’s easy to understand that a bank would eat a bigger loss if someone failed to repay the loan on a $1,500 computer than on a $15 brunch. That’s why the banks want more money for incurring the risk of a greater loss. To do that, that risk is expressed as a percentage of the total purchase.

Thus, for each payment card transaction, the merchant pays:

Processing charge = financing risk charge + fixed business (e.g., computer network) costs

The formula makes sense because it takes into account both the fixed costs and the variable costs involved in using a payment card. (Note that there are some payment processing business models that are only percentage-based. The percentage tends to be nearer the higher end of normal, and the technology-related charges are generally consolidated into the percent charge.)

Next, let’s examine who’s charging what.

Know The Parties Involved In Payment Processing

To understand merchant processing fees, you also need to know about the parties involved in the industry. Let’s discuss the financial “middlemen” between a customer and a merchant. They include:

Credit Card Associations: These are the companies that create credit cards, such as Visa, Mastercard, and American Express. Often called credit card networks, they set all the rules, determining a fair processing rate for each industry, maintain the security and encryption of hardware and software, how and when to advertise to consumers, and so on.

These are the companies that create credit cards, such as Visa, Mastercard, and American Express. Often called credit card networks, they set all the rules, determining a fair processing rate for each industry, maintain the security and encryption of hardware and software, how and when to advertise to consumers, and so on. Credit Card Issuing Banks: These are financial institutions, such as Chase, Citi, and Wells Fargo, that issue credit cards to consumers. Some card associations, such as Discover and American Express, assume the role of an issuing bank as well, developing and issuing their own cards. The issuing banks are the ones that assess a consumer’s creditworthiness before deciding whether to issue a card to the consumer. See our article on issuing banks for more details.

These are financial institutions, such as Chase, Citi, and Wells Fargo, that issue credit cards to consumers. Some card associations, such as Discover and American Express, assume the role of an issuing bank as well, developing and issuing their own cards. The issuing banks are the ones that assess a consumer’s creditworthiness before deciding whether to issue a card to the consumer. See our article on issuing banks for more details. Credit Card Acquirers: These are also known as acquiring banks, though they don’t all have to be a bank in the traditional sense; they could be financial institutions with bank-like characteristics. They set a merchant up with a merchant account, a specialized bank account used solely to receive card payments from issuing banks. Often, a set of preapproved entities, such as a credit card processor, can also draw from the account. Acquirers act as middlemen, communicating with and receiving money from the issuing banks, credit card associations, and credit card processors. We have a detailed article about acquirers if you wish to learn more.

These are also known as acquiring banks, though they don’t all have to be a bank in the traditional sense; they could be financial institutions with bank-like characteristics. They set a merchant up with a merchant account, a specialized bank account used solely to receive card payments from issuing banks. Often, a set of preapproved entities, such as a credit card processor, can also draw from the account. Acquirers act as middlemen, communicating with and receiving money from the issuing banks, credit card associations, and credit card processors. We have a detailed article about acquirers if you wish to learn more. Credit Card Processors: These are the one-stop-shop companies a merchant deals with to set up payment card processing. You can work with them directly, or you might work with one of their resellers. Processors set up the payment processing for you, helping you get a merchant account and making sure you have the right hardware and software to take payment cards. Sometimes, the acquirer and the processor are the same company, but the merchant deals with only the processor part of the business (which means you won’t be able to negotiate down the acquiring side’s wholesale costs). Processors often contract with other service providers and bundle these services to you in one bill. For instance, once you are set up with a processor (usually for an extra fee), you can get a payment gateway to take online payments, an electronic vault to store your customer’s payment card information so that repeat customers can check out faster, hardware and software to allow you to take payment cards with mobile devices, and similar value-added services.

These are the one-stop-shop companies a merchant deals with to set up payment card processing. You can work with them directly, or you might work with one of their resellers. Processors set up the payment processing for you, helping you get a merchant account and making sure you have the right hardware and software to take payment cards. Sometimes, the acquirer and the processor are the same company, but the merchant deals with only the processor part of the business (which means you won’t be able to negotiate down the acquiring side’s wholesale costs). Processors often contract with other service providers and bundle these services to you in one bill. For instance, once you are set up with a processor (usually for an extra fee), you can get a payment gateway to take online payments, an electronic vault to store your customer’s payment card information so that repeat customers can check out faster, hardware and software to allow you to take payment cards with mobile devices, and similar value-added services. Payment Gateways: These are special portals that route transactions to an acquirer, usually in the case of an online shopping cart. Processors typically include some sort of gateway in their offering, so you may not have to find one separately for your business.

Now that we’ve familiarized ourselves with all the major entities involved in payment card transactions, let’s examine what happens when a transaction occurs.

Follow The Money: The Credit Card Payment Transaction Flow

The transaction process begins with a customer using a credit or debit card, whether in-person or online.

Authorization: Once the information on a card is read into the credit card machine or manually entered into a gateway, it’s sent over the internet to your processor for the next step. Your processor acts as a traffic cop and sends the card information to the appropriate card network (e.g., Visa, Mastercard, Discover, etc.) with a request to be processed. The card network then forwards the processing request to the issuing bank of the card, and the bank checks to ensure that the cardholder has enough credit to cover the purchase. If there are enough credits, and if the card is registered as valid, the purchase is approved, and the approval message is sent back to the merchant. All of this is done electronically in a matter of seconds.

Once the information on a card is read into the credit card machine or manually entered into a gateway, it’s sent over the internet to your processor for the next step. Your processor acts as a traffic cop and sends the card information to the appropriate card network (e.g., Visa, Mastercard, Discover, etc.) with a request to be processed. The card network then forwards the processing request to the issuing bank of the card, and the bank checks to ensure that the cardholder has enough credit to cover the purchase. If there are enough credits, and if the card is registered as valid, the purchase is approved, and the approval message is sent back to the merchant. All of this is done electronically in a matter of seconds. Submission: The transaction between the merchant and the consumer takes place (i.e., goods or services are exchanged), and the merchant submits the authorized transaction for payment. The submission can happen immediately or be held up in a batch somewhere along the process and then submitted at the end of the day or after the weekend. The submission first travels to the processor, which, like before, forwards the request to the appropriate card network. The network then sends the submission to the issuing bank. The issuing bank pays the specified amount.

The transaction between the merchant and the consumer takes place (i.e., goods or services are exchanged), and the merchant submits the authorized transaction for payment. The submission can happen immediately or be held up in a batch somewhere along the process and then submitted at the end of the day or after the weekend. The submission first travels to the processor, which, like before, forwards the request to the appropriate card network. The network then sends the submission to the issuing bank. The issuing bank pays the specified amount. Settlement: The payout from the issuing bank travels by standard inter-bank money transfer methods until the money reaches the merchant account. The card network, the processor, and the bank(s) take their cut of the transaction fees. At this point, the merchant can take the money out of the account. If your processor is a third-party processor (also known as a payment service provider), this step is slightly different, but the merchant gets the money in the end.

The payout from the issuing bank travels by standard inter-bank money transfer methods until the money reaches the merchant account. The card network, the processor, and the bank(s) take their cut of the transaction fees. At this point, the merchant can take the money out of the account. If your processor is a third-party processor (also known as a payment service provider), this step is slightly different, but the merchant gets the money in the end. Disputes: Sometimes, a payment card charge is reversed days or months after the process described above. It may be that the merchandise was defective or that the card charge was fraudulent/made without authorization. In either case, the cardholder demands that the charge be dropped. The merchant can either agree to a refund or enter into a dispute process to prove that the charge was not fraudulent. Additional resources between the banks must be devoted to the dispute, so additional costs may be incurred.

Note that the transaction flow described above doesn’t quite describe a PIN/signature/”true” debit card charge. After your machine or gateway accepts the information of a customer’s PIN debit card and transmits the data to your processor, the processor routes the information through a debit card network to the issuing bank, skipping the card associations. At this stage, the issuing bank and the acquiring bank communicate and then transfer the money directly between them once it is confirmed that the customer has the funds to cover the purchase.

Due to the fact that a slightly different path with a simplified computer network is used and because of certain US government regulations (if you’re in the US), PIN debit charges usually cost less to process than typical credit card transactions. You can only take PIN debit if you have the right kind of machine (and a merchant account), but the hassle might be worth it if your customers prefer to pay with debit cards rather than credit cards.

The takeaway from the above process is that each party that touches a payment card transaction will charge you a fee: the card associations, the issuing bank, the acquiring bank, and your processor. You may even be charged by parties you didn’t even know were involved! For instance, the computer networks (and the security and encryption that run on these networks) tend to be run by third parties contracted by the banks, card associations, or your processor. That cost is tacked onto the full processing cost as a set fee (such as a PCI compliance fee). If a repeat customer has ordered merchandise online, and you have stored previous card payment information, you might be charged another per-transaction (or per-month/quarter/year) fee for secure, PCI-complaint storage of that customer’s information.

As you can see, all these fees add up, thus raising the question: How can you negotiate them down?

How Interchange Affects All Of Your Credit Card Processing Fees

We’ve gone over a typical payment card transaction flow to demonstrate that every time an entity touches that transaction, there will likely be a fee (which means an entity may charge you twice because they touched the transaction twice). Now, let’s take a closer look at these fees and discuss which ones you can do something about and which ones you cannot change.

Wholesale Fees VS Markup Fees

The terms wholesale and markup get thrown around a lot in the processing industry. It can be difficult to identify which fees fall into which category. At its core, however, the distinction isn’t too difficult to grasp. The two primary considerations are 1) which of the parties we’ve discussed ultimately collects the fee, and 2) how fixed the cost is across the industry. Here’s all you really need to know:

Wholesale Fees

Go to the issuing banks (interchange fees) and the credit card associations (card association fees)

(interchange fees) and the (card association fees) Are fixed amounts regardless of which processor you use

regardless of which processor you use Are non-negotiable

Markups

Go to your payment card processor , plus any other add-on equipment or software providers (such as a payment gateway provider)

, plus any other add-on equipment or software providers (such as a payment gateway provider) Are different amounts from processor to processor

from processor to processor Are negotiable

As the merchant, you’re the “lucky” one who ultimately must cover all these costs. Meanwhile, your credit card processor is right in the center of the fee-collecting-and-directing process. They choose how to pay the necessary wholesale costs for running your account — while also adding markups to cover their costs, paying other third-party service providers associated with your account, and turning a profit.

With the right processor, markup fees should be modest. With the wrong processor, you can really get hosed. What’s worse is that some processors make it as difficult as possible to know how much markup you’re paying by using obscure terms and pricing models that would stump even the most experienced business owner. For now, just remember that markup fees differ from processor to processor; these are what you should be comparing when preparing to open a new merchant account. Meanwhile, don’t try to shop around for lower wholesale fees or rates from various credit card processors. These rates remain consistent throughout the industry and are not negotiable.

There is something else you should know about wholesale costs: They vary from industry to industry and from card association to card association. They also tend to differ by how the card is used — whether it’s an in-person purchase or an online purchase. The reason for the difference has to do with risk.

Some industries, such as the gambling industry, are simply more prone to instances of impulsive purchases/chargebacks/fraud than, say, fast-food restaurants. It’s also easier to use a stolen card for an online purchase (a.k.a. a card-not-present or keyed-in transaction) than dipping a card in person (a.k.a. a card-present transaction). Everyone along the transaction chain wants to be paid more for taking a higher risk, so your costs will change depending on your industry and how your customers typically pay. Basically, if you compare your pet store’s rates (low risk) with your friend’s CBD shop rates (high-risk) — even if you use the same processor charging the same markup — you’ll discover that your buddy is paying a higher rate.

(Your processing cost also varies by type of card — credit, debit, rewards, corporate — but that has more to do with maintaining profit margins by passing costs down to you than with risk.)

Take a look at this table showing some sample pricing models and whether or not you can easily pull out the wholesale fees and markups from the quoted rates:

Sample Quoted Payment Processing Rates

This brings us to the concept of interchange fees. Earlier, we touched on and defined the term, but let’s further elaborate on this fee.

Where Does Interchange Come Into Play?

We’ve demonstrated that there are numerous parties and places in the process flow that can charge fees. However, most pricing discussions hinge on one particular category of cost: interchange. This is mostly due to the fact that this wholesale fee makes up the majority of the cost of processing cards. Card association fees, also known as assessments — the other main wholesale cost — make up a non-trivial chunk as well, but it’s considerably smaller than the interchange portion.

The interchange fee is strictly a wholesale fee. It uses the formula financial risk charge + fixed business costs. As the formula relates to risk, the interchange fee can be different depending on your industry. Lower-risk industries get a lower interchange fee while higher-risk industries get a higher interchange fee.

To further complicate matters, the interchange fee is set by the card associations, and each card association can assign a different risk number, even to the same industry. In other words, the interchange rate for, say, a shoe shop might be different if a customer uses a Visa card instead of a Mastercard card if Visa and Mastercard have simply decided differently on how much risk they wish to take for the footwear industry. So as we discuss interchange fees below, remember that this number can differ depending on your industry and the card your customer decides to use to make the purchase.

(This industry-dependent risk assessment is called a merchant category code or MCC. Businesses using merchant accounts are assigned an MCC from the list of pre-existing codes provided by the card associations to broadly identify the type of product or service a business offers.)

Despite the card association’s involvement, the interchange fee is ultimately collected by the card-issuing bank. The table below summarizes just a few examples, but there are hundreds of interchange classifications across the card brands. Visit the Visa and Mastercard websites for full lists, but note Discover and American Express do not publish their interchange fees. Interchange fees are reviewed and adjusted on an as-needed basis twice a year by the card associations, in April and October — so yes, your interchange rates can change over time.

Common Interchange Rate Examples

Due to the central role interchange fees play in the processing industry, the pricing models used by card processors are primarily based on how interchange fees are handled. Before going any further, take a moment to compare those big bank debit interchange rates in the table above to the rate of 2.9% + $0.30 or even the 2.75% charged by some flat-rate processors. One begins to see the pitfalls of a pricing model that lumps multiple (or all) card and transaction types together and then slaps on one blanket rate to cover them all. There are pros and cons to each pricing model for different business types. Just be aware of the wide variety of base costs behind the different card and transaction types.

Now, let’s scrutinize the four main pricing models in detail.

Understanding & Identifying Payment Processing Pricing Models

When it comes to selling merchant accounts, there are four popular methods of pricing: interchange-plus, subscription/membership, tiered pricing, and flat-rate. If you already have an account but don’t know your pricing model, you can identify which one you have by examining your statements for key indicators.

The main distinction to be aware of in pricing models is what happens to interchange fees. Are they itemized and charged completely separately from the processor’s markup (“pass-through” or “cost-plus” pricing), or are they blended in with the rate markup (blended pricing)? Take a look:

Pricing Model Overview

For most merchants, we recommend signing up for one of the pass-through models. Otherwise, you won’t be able to see the true difference between wholesale rates and processor markups.

Bearing the above in mind, let’s look at the various pricing models currently being used by credit card processors.

Interchange-Plus Pricing

This is the most transparent pricing model with the most understandable terms and fees. Interchange-plus itemizes wholesale fees and markups and clearly lists them on your monthly statement. This may make your statement a bit more difficult to read overall, but it’s worth it since you’ll know the precise difference between your wholesale fees and rate markups. Interchange-plus rate markups usually consist of both a percentage markup and a per-transaction fee markup, both of which are applied to all your transactions.

Subscription/Membership Pricing



This is a newer pricing system, but it’s been gaining acceptance lately. It’s similar to interchange-plus in that the wholesale cost of each transaction is charged separately from the markup. The difference is that you do not pay any percentage markup on transactions. Instead, you pay just a small per-transaction fee. Then, additional markup is charged as a flat monthly subscription fee. Merchants processing large transactions stand to save lots of money under this kind of pricing without decreasing transparency. Check out Payment Depot for a great example of this variety of pricing.

Tiered Pricing

If you aren’t lucky enough to be on interchange-plus or subscription pricing, you’re probably tied up in a tiered or bundled pricing model. Even with the increased popularity of the above “cost-plus” models, most business owners are on a tiered plan. Tiered statements may appear simpler at first, but in reality, this model makes it difficult to understand your rates and fees thoroughly.

Tiered pricing plans categorize credit card transactions into three categories:

Qualified

Mid-qualified

Non-qualified

Generally, qualified rates are the lowest. The transaction rates increase for mid-qualified and are highest for non-qualified transactions. Qualified transactions must meet all of the processor’s criteria for processing, such as an in-person swipe/dip with a batch settlement the same day. Failure to meet one or more standards may result in a ‘downgrade’ to mid-qualified or non-qualified tiers.

The shadier processors will take advantage of this opaque pricing plan to charge merchants excessive markups. You can end up paying high rates with little way to determine precisely what you are paying for. These processors often fail to disclose which tiers the merchant’s transactions are falling into, making it nearly impossible to determine the true markup rates over interchange.

Flat-Rate Pricing

This is like tiered pricing, but without the tiers. Instead, all transactions cost the same percentage and transaction fee, regardless of the wholesale cost. All costs are blended together to create one consistent rate and fee. This tends to make the transaction cost very high, especially for debit transactions. Since processors using flat-rate pricing tend not to charge a monthly fee, this pricing model often makes sense for low-volume businesses.

One thing you’ll notice when comparing third-party processors (a.k.a. payment service providers) in particular is that many of them feature similar flat-rate pricing schemes. For instance, Stripe, PayPal, Square, and Shopify (at its most basic subscription tier, anyway) all charge 2.9% + $0.30 per online transaction. These processors’ rates vary slightly for in-person transactions, but the differences are generally small.

For the full scoop on the pricing policies of the leading third-party processors, check out our articles on the following:

We put together a comparison table using a few different types of business models together with numbers plugged in, allowing you to see the individual charges:

Test Case #1 Test Case #2 Test Case #3 Pricing Structure: Subscription Interchange-Plus Flat-Rate (Blended) POS & Other Features Included: Yes No Yes Negotiable Fees: Yes Yes No Sample Interchange Rate*: 1.51% + $0.10 1.51% + %0.10 N/A Retail Processing Rate: interchange + 0.0% + $0.10 interchange + 0.2% + $0.08 2.6% + $0.10 Monthly Fee: $50 $15 $0 Fees Paid On 100 x $50 Transactions: $145.50 $118.50 $135 Markup Paid: $60 $33 $54.50 Fees Paid On 200 X $50 Transactions: $241 $222 $280 Markup Paid: $70 $51 $109 Fees Paid On 200 x $100 Transactions: $392 $393 $540 Markup Paid: $70 $71 $218.00 Fees Paid On 200 x $200 Transactions: $694 $735 $1,060 Markup Paid: $70 $111 $436 * Sample interchange based on Visa non-grocery retail rate for standard cards. Rewards cards incur a higher interchange rate, and a merchants’ overall interchange rate will vary, affecting total processing costs. While not every merchant can predict their interchange costs, they can use an estimated number of transactions and average transaction size to calculate markup. Flat-rate processing markup determinations were made using the same assumed interchange rate. Companies that offer flat-rate pricing (such as third-party processors) don’t always disclose how much of their costs are markup, so the numbers are an approximation.

Be warned that these are estimated numbers using a single interchange rate. Real-world numbers will vary because you will encounter many different cards with different rates, and some transactions may be keyed instead of swiped, incurring a higher interchange. Nonetheless, it’s possible to draw some conclusions here. For example, at a high volume, a subscription pricing model is often the best deal, particularly if it includes any software subscription fees. An interchange-plus model might get the lowest rates but may not include all the extra software, meaning you’ll need to pay extra for it. Finally, a flat-rate blended model is often a good deal for low-volume merchants, though it becomes more costly as a business grows.

Common Merchant Fees For Small Business

Now that you have some insight into the business models used by the payment card industry, let’s look at your processing statement and see how we can generalize and categorize these charges. There are three types of charges:

Transactional

Scheduled

Incidental

We’ll elaborate on each below. For now, know that any entity can charge each fee in the transaction flow. The bulk of your fees, though, are likely to be transaction fees, which can be charged by the banks, the card associations, and your processor.

Below, we’ve compiled a list of the most common fees in the processing ecosystem, along with their typical price ranges, for your general reference. Your pricing model and your specific processor determine which of the individual fees come through to you on your account. If you’ve got every single one, there’s a problem!

As we delve into the details, keep in mind the big picture concepts regarding wholesale and markup costs:

A markup is anything beyond the established wholesale fees from either the card-issuing banks or the card associations.

Wholesale fees from the card-issuing banks come in only one form: interchange fees — all of which are transactional. Card association fees (assessments), on the other hand, can be transactional, scheduled, or incidental.

Many markup fees are negotiable, while wholesale fees are not.

A wholesale fee can be passed through to you by your processor “at cost,” marked up by your processor, or absorbed into the overall cost of running your account by other means. The same goes for costs associated with other add-on service providers — passing the fee straight through, marking it up, or absorbing the cost into another blanket fee are all possibilities.

Don’t exclusively focus on your processing rates or any one particular fee. You must consider the entire markup amount by looking at all the rates and fees on your account to ascertain your true cost.

Transaction Card Payment Fees: What You Pay For Every Customer Purchase

These fees are assessed every time you run a transaction. Your processing fee, for instance, is a transaction fee. Transaction fees usually comprise the biggest cost of accepting payment cards. Credit card transaction fees come in two forms: 1) percentages (e.g., 2.19%, 0.25%), or 2) per-item dollar amounts (e.g., $0.20, $0.0195). Often, both forms are charged on a given transaction.

Wholesale Transaction Fees

Interchange Fees: These are the fees the card-issuing banks charge for each transaction, and they represent the largest expense merchants (should) pay per sale and per month. Interchange fees typically consist of a percentage of each transaction accompanied by a flat per-transaction fee (e.g., 2.10% + $0.10). The exact cost per transaction depends mainly on the type of card (e.g., rewards, corporate, personal, etc.) and how it’s processed (e.g., swiped/dipped/keyed). The card associations set these fees for the banks, and Visa and Mastercard publish the interchange fees online. Discover and American Express require permission from your acquirer to access their equivalent fees.

These are the fees the charge for each transaction, and they represent the largest expense merchants (should) pay per sale and per month. Interchange fees typically consist of a percentage of each transaction accompanied by a flat per-transaction fee (e.g., 2.10% + $0.10). The exact cost per transaction depends mainly on the type of card (e.g., rewards, corporate, personal, etc.) and how it’s processed (e.g., swiped/dipped/keyed). The card associations set these fees for the banks, and Visa and Mastercard publish the interchange fees online. Discover and American Express require permission from your acquirer to access their equivalent fees. Assessments: These are the fees the card associations collect for each transaction. These fees make up a smaller portion of your total card processing costs than interchange fees. Assessments are based on a percentage of the total transaction volume for the month. Depending on the card association, the main assessments currently range between 0.12%-0.15%, while an additional assessment percentage is charged on international transaction volume. Meanwhile, one or more small, flat per-transaction fees are also charged across your whole processing volume. These have different names depending on the association — APF (Visa), NABU (Mastercard), and Data Usage Fees (Discover) are the primary ones. Visa and Mastercard don’t publish assessment fees at all (though some processors do publish), Amex publishes a few, and Discover restricts access. We suggest using our full list for reference.

Markup Transaction Fees

Processor’s Rate Markup: Every processor adds some form of markup to the wholesale interchange rates of processing transactions. The markup may either be blended with interchange or kept separate. With interchange-plus, for example, your processor will quote you something like 0.25% + $0.10. That is their markup over interchange — the amount they will add to the wholesale interchange rates. Alternatively, if you’re on a tiered pricing plan, you’ll get a quote with qualified, mid-qualified, and non-qualified rates. Those quotes have the markup baked right into the rate, thus obscuring the processor’s true margin. See our Understanding & Identifying Payment Processing Pricing Models section for more details.

Scheduled Card Payment Fees: Regularly Occurring Costs

In addition to credit card transaction fees, you may be charged some predictable, flat fees. They vary by name, value, and applicability, but at least some of them will show up on your monthly statements.

Wholesale Scheduled Fees

Fixed Acquirer Network Fee: Otherwise known as the FANF, this is a card association fee from Visa. While the exact amount varies quite a bit based on your business type and monthly volume, it’s still a predictable, flat fee. Your processor chooses how to pass this along to you, but it’s typically assessed once per quarter.

Otherwise known as the FANF, this is a card association fee from Visa. While the exact amount varies quite a bit based on your business type and monthly volume, it’s still a predictable, flat fee. Your processor chooses how to pass this along to you, but it’s typically assessed once per quarter. Merchant Location Fee: Mastercard charges an annual $15 per merchant location fee if you’re using a traditional processor. This is the wholesale amount, but how and when your processor charges you will vary. You’ll often see this fee as a $1.25 per month fee. The fee is waived for merchant locations with less than $200 in Mastercard gross monthly volume, charitable organizations (MCC 8398), or religious organizations (MCC 8661).

Mastercard charges an annual $15 per merchant location fee if you’re using a traditional processor. This is the wholesale amount, but how and when your processor charges you will vary. You’ll often see this fee as a $1.25 per month fee. The fee is waived for merchant locations with less than $200 in Mastercard gross monthly volume, charitable organizations (MCC 8398), or religious organizations (MCC 8661). PIN Debit Network Fee: PIN debit, which is not universally accepted by businesses, operates on separate (but associated) networks to Visa and Mastercard (e.g., Maestro, Accel). Some of the main networks currently charge an annual network access fee of $12-$14/year to the processor for each merchant using the network. Depending on exactly how many networks are at play, this typically totals between $50-$62/year. If you accept PIN debit, this fee may be passed through to you.

Markup Scheduled Fees

Monthly Fee: These are service fees charged monthly, usually to cover call center costs. Ironically, most of the phone calls that come in are the result of mistakes made by the merchant account providers, making them the cause of their own fees. If you’re looking for the lowest monthly fee possible (we recommend this if you have a low volume), take a look at Payline Data. Also, if you’re on a subscription pricing plan, your monthly fee will be significantly higher. This helps cover the markup over interchange that you’d otherwise be paying with an interchange-plus or blended plan.

These are service fees charged monthly, usually to cover call center costs. Ironically, most of the phone calls that come in are the result of mistakes made by the merchant account providers, making them the cause of their own fees. If you’re looking for the lowest monthly fee possible (we recommend this if you have a low volume), take a look at Payline Data. Also, if you’re on a subscription pricing plan, your monthly fee will be significantly higher. This helps cover the markup over interchange that you’d otherwise be paying with an interchange-plus or blended plan. Annual Fee: These are fees charged each year to cover the basic use of a provider’s services. This is generally a BS fee unless you are paying it instead of, not in addition to, a monthly fee.

These are fees charged each year to cover the basic use of a provider’s services. This is generally a BS fee unless you are paying it instead of, not in addition to, a monthly fee. Statement Fee: These fees are charged to cover printing and mailing costs for credit card statements. Some merchants bypass these costs by using e-statements, but others charge as much as $15/month for miscellaneous processing costs.

These fees are charged to cover printing and mailing costs for credit card statements. Some merchants bypass these costs by using e-statements, but others charge as much as $15/month for miscellaneous processing costs. Online Reporting Fee: These are alternatives to statement fees, charged to merchants who choose to view their statements online. Most providers will not charge this kind of fee, and those that do usually lump it together with others.

These are alternatives to statement fees, charged to merchants who choose to view their statements online. Most providers will not charge this kind of fee, and those that do usually lump it together with others. Monthly Minimum Fee: These are fees charged to merchants who fail to reach a certain transaction total for the month or year. The minimums vary by provider, but most of them are around $50,000 a year in volume and a $25/month minimum fee. The better merchant account providers, such as Dharma Merchant Services, tend not to impose this fee.

These are fees charged to merchants who fail to reach a certain transaction total for the month or year. The minimums vary by provider, but most of them are around $50,000 a year in volume and a $25/month minimum fee. The better merchant account providers, such as Dharma Merchant Services, tend not to impose this fee. Terminal Fee: These are charged to merchants who have physical stores where cards are directly swiped/dipped. If you run a business online, you won’t have to worry about this. Some providers try to lock merchants into terminal leases, but as we’ve mentioned before, don’t lease a terminal. Most of our favorite providers will encourage you to buy your card reader outright for a low one-time fee. This can save you thousands of dollars in the long-term. See Fattmerchant for an example.

These are charged to merchants who have physical stores where cards are directly swiped/dipped. If you run a business online, you won’t have to worry about this. Some providers try to lock merchants into terminal leases, but as we’ve mentioned before, don’t lease a terminal. Most of our favorite providers will encourage you to buy your card reader outright for a low one-time fee. This can save you thousands of dollars in the long-term. See Fattmerchant for an example. POS Software Fee: If you purchase or subscribe to point of sale (POS) software through your processor, this fee covers that. In some instances, basic POS software is included with retail merchant accounts at no additional charge beyond the main monthly service fee.

If you purchase or subscribe to point of sale (POS) software through your processor, this fee covers that. In some instances, basic POS software is included with retail merchant accounts at no additional charge beyond the main monthly service fee. Payment Gateway Fee: These are similar to terminal fees, but they are applied to eCommerce businesses instead. Some processors have in-house payment gateways that are free of charge (CDGcommerce). Otherwise, gateways typically come with a monthly fee — and occasionally a per-transaction fee as well.

These are similar to terminal fees, but they are applied to eCommerce businesses instead. Some processors have in-house payment gateways that are free of charge (CDGcommerce). Otherwise, gateways typically come with a monthly fee — and occasionally a per-transaction fee as well. PCI Compliance Fees: These are fees paid to your processor for compliance with standards set by the Payment Card Industry. In the case of compliance, you pay the merchant account provider (monthly or annually) to make sure you remain in line with the regulations. Unfortunately, some merchant services providers charge for this service without actually providing it, so you need to make sure you are being cared for at all times. PCI non-compliance fees, on the other hand, are incidental fees imposed when you don’t follow your processor’s requirements to maintain PCI compliance.

These are fees paid to your processor for compliance with standards set by the Payment Card Industry. In the case of compliance, you pay the merchant account provider (monthly or annually) to make sure you remain in line with the regulations. Unfortunately, some merchant services providers charge for this service without actually providing it, so you need to make sure you are being cared for at all times. PCI non-compliance fees, on the other hand, are incidental fees imposed when you don’t follow your processor’s requirements to maintain PCI compliance. IRS Reporting Fee: Merchant account providers charge these fees in exchange for reporting transaction information to the IRS (1099-K).

Incidental Fees: Occasional & Per-Occurrence Costs

Scheduled fees are always charged, but incidental fees only appear per occurrence. For example, when a chargeback occurs, you are charged a chargeback fee. Some months you may not have any chargebacks, so you won’t be subject to the fee at all.

Wholesale Incidental Fees

Processing Integrity Fees: Whereas the main fees from the card associations are assessed on your every transaction, some fees are only charged as a penalty when you haven’t met the requirements for authorizing and/or settling transactions properly. These card brand fees typically include “integrity” or “misuse” as part of the fee’s name. They resemble transaction fees, as they are just a few cents per instance (Amex’s is a percentage), and tend to be grouped together on a statement with the rest of the more regular credit card transaction fees. It’s common to incur a handful of these charges each month, but watch out if they become excessive. Again, see our full card brand fee list to better identify these fees.

Markup Incidental Fees

Application/Setup Fee: Most good providers don’t charge a setup or application fee, except for certain high-risk account providers. Look for a provider that doesn’t charge this fee or negotiate its removal.

Most good providers don’t charge a setup or application fee, except for certain high-risk account providers. Look for a provider that doesn’t charge this fee or negotiate its removal. Early Termination Fee (ETF): This fee is charged if you cancel your contract early, and it’s one you definitely want to avoid. Take special care to ensure there’s no liquidated damages clause.

This fee is charged if you cancel your contract early, and it’s one you definitely want to avoid. Take special care to ensure there’s no liquidated damages clause. Account Closure Fee: Different and much lower than an ETF, this is charged regardless of when your account is closed.

Different and much lower than an ETF, this is charged regardless of when your account is closed. Address Verification Service (AVS): If you have an eCommerce or telephone order business, beware of the AVS fee. It will be charged on every single transaction. Retail businesses that occasionally key in card information don’t need to worry about it as much. However, AVS is an important fraud-fighting tool, so keep that in mind.

If you have an eCommerce or telephone order business, beware of the AVS fee. It will be charged on every single transaction. Retail businesses that occasionally key in card information don’t need to worry about it as much. However, AVS is an important fraud-fighting tool, so keep that in mind. Voice Authorization Fee (VAF): Rarely, you may be required to call a toll-free number to verify certain information before a transaction is authorized. This is relatively uncommon, so don’t be too concerned about it.

Rarely, you may be required to call a toll-free number to verify certain information before a transaction is authorized. This is relatively uncommon, so don’t be too concerned about it. Retrieval Request Fee: Each time a customer initiates a dispute on a charge from your business, it sets into motion the chargeback protocol. This retrieval request is the first step. The fee covers any expense related to the retrieval request.

Each time a customer initiates a dispute on a charge from your business, it sets into motion the chargeback protocol. This retrieval request is the first step. The fee covers any expense related to the retrieval request. Chargeback Fee: After the retrieval request, the actual chargeback may occur, circumstances depending. If it does, expect another fee on top of losing the money from the sale.

After the retrieval request, the actual chargeback may occur, circumstances depending. If it does, expect another fee on top of losing the money from the sale. Batch Fee: Every time you submit a batch of transactions, a batch fee (or batch header) is charged. It only happens once or twice a day, and it should only be an extra dime or two.

Every time you submit a batch of transactions, a batch fee (or batch header) is charged. It only happens once or twice a day, and it should only be an extra dime or two. NSF Fee: If you lack the funds in your bank account to cover your merchant account expenses, you will be assessed an NSF (non-sufficient funds) fee.

If you lack the funds in your bank account to cover your merchant account expenses, you will be assessed an NSF (non-sufficient funds) fee. PCI Non-Compliance Fee: This fee will start kicking in monthly if you don’t meet PCI standards. It’s possible to be required to pay a PCI compliance fee and a non-compliance fee at the same time.

Credit Card Processing Fees FAQ

What Are Merchant Fees? The term “merchant fees” covers all the costs of payment processing that are passed on to merchants. These fees include interchange fees, assessment (or service) fees, and the payment processor’s markup. How Much Are Credit Card Processing Fees? It’s impossible to say how much you “should” be paying in processing fees because your rates will depend on the nature of your business. The fees you pay depend on whether most of your transactions are in-person or online, whether your business is considered average-risk or high-risk, and the size of your average transaction, among other factors. However, looking only at averages, Payment Depot estimates that when taken together, average card processing costs range from 1.5% to 2.9% for swiped/dipped transactions and 3.5% for keyed-in transactions. Can You Negotiate Credit Card Processing Fees? You can negotiate certain credit card processing fees, but not others. Interchange fees and assessments are non-negotiable, while other fees, such as the fees that constitute the payment processor’s markup, are often negotiable. What Is The Cheapest Way To Process Credit Cards? Things you can do to minimize what you pay for credit card processing include choosing a processor that offers interchange-plus pricing or flat-rate pricing, avoiding tiered pricing, avoiding long contracts and extraneous nickel-and-dime fees, choosing an integrated payments system, keeping keyed-in transactions to a minimum, and selecting a processor with fees that fit your business’s size and type. Can You Charge A Fee To Use A Credit Card? Yes and no. Shifting processing fees onto your customers is called surcharging. There are strict rules governing surcharges, and these rules differ by state. Read our article on surcharging, where we weigh the pros and cons of this strategy. A convenience fee is another way to recoup your costs under certain conditions — we recommend reading that article too. How Can I Reduce My Credit Card Merchant Fees? One of the biggest keys to this is finding the processor that offers an appropriate pricing scheme for your business. For instance, the simple flat-rate pricing offered by Square and PayPal works well for smaller merchants but may be unnecessarily expensive for higher-volume merchants. And if you’re shopping for a merchant account provider, remember to negotiate down the markup fees as best you can. Which Credit Card Processing Is Cheapest For Small Business? Read our article on the cheapest credit card processing companies to see our opinion on the matter. Payment Depot, Fattmerchant, and National Processing all provide excellent value if you’re looking for a traditional merchant account provider, while Square and Shopify are our favorite third-party processors. What Is A Good Effective Rate For Credit Card Processing? To calculate your effective rate, divide all the fees you pay in a given month by your total sales volume. This is the most important percentage you need to know since every processor’s rates and fees work differently. Speaking generally, a good effective rate for credit card processing is around 3-4%, though again, the particulars of your business may mean that your ideal effective rate is different. And while a low effective rate is good, consider the overall value of the services the provider offers as well.

The Final Word On Finding Credit Card Processing Services

Each credit card processor has a different set of costs associated with its services. Many are unavoidable, but others can be negotiated. We recommend pass-through pricing (interchange-plus or subscription) to most merchants. Remember that many of the typical scheduled and incidental fees — not just your processing rates — are negotiable. If you process a lot of transactions, don’t hesitate to bargain with your processor. With that in mind, there are several processors out there that are very transparent with their fees and are more than happy to give you interchange-plus credit card processing fees. The majority of our highest-rated processors do just that.

We hope this article has given you a place to start to find the best payment card processor for your business. Remember that there’s no overall “best” or “cheapest” payment processor, only the best/cheapest processor for your particular business. Making that final determination takes some sales data from your business and doing some math, but we promise that the time you spend analyzing the numbers will more than pay for itself.

And if you’re already in business but think you could find a better deal, check out our complete guide to analyzing your processing statement to discern if you’re paying too much for your specific situation. Then, check out our cost analysis workbook. It walks you through a complete apples-to-apples comparison between providers using your specific numbers. In the end, you’ll have to do the math for your situation. There’s no getting around it!

If this article has benefitted you in any way, please give us some feedback and let us know. If you have more questions about the payment card processing business, ask away. We might add your question the next time we update this article!