When you accept credit and debit card payments, you must pay a number of associated fees for each sale; these are collectively known as credit card processing fees. It’s important to understand how these fees work so that you can choose the most advantageous credit card payment processor for your business.
What are credit card processing fees?
When your business accepts payment via credit or debit card, you must pay credit card processing fees on the sale. When businesses accept card transactions, the process involves three parties: the card issuer (bank or financial institution that issues the card to your customer), the card network (Visa, Mastercard, Discover, or American Express), and the payment processor (the company that allows you to accept card purchases and processes the transaction). Each of these companies receives a portion of the credit card processing fees.
Credit card processing fees are broken down into a number of separate fees. They are typically charged as a percentage of the purchase amount plus a flat fee for each transaction. The fees can vary depending on the card issuer, card network, and payment processor. It’s important to understand credit card processing fees and how they work, as this can help you select a payment processor with favorable rates, allowing you to save money on fees.
How do credit card processing fees work?
Credit card processing fees consist of transaction fees, which must be paid with every transaction, plus additional flat fees.
Transaction Fees = Interchange + Assessment + Payment Processor Fees
Transaction fees are made up of three fees: interchange fees, assessment fees, and the payment processor’s fees, and they each go to different parties in the transaction process. These fees are typically charged as a percentage of the purchase price plus a flat fee. Average transaction fee costs are between 1.5% and 3.5%. For example, you might pay a transaction fee of 2.5% plus $0.10 on each transaction.
Interchange Fees
Interchange fees go to the card-issuing bank (e.g., Chase), and they are meant to cover the costs the bank takes on by offering lines of credit and fraud mitigation. Interchange rates are set by the card network and are updated twice a year, in April and October. Interchange fees can vary depending on the type of transaction (online or in-person), type of card, what type of industry the business operates in, and more.
Both Visa and Mastercard make their interchange rates publicly available, while Discover and American Express do not. Below are links to the most recent available interchange rate tables:
What factors affect interchange fees?
There are several factors that affect the costs of interchange fees, including:
- Card type. Typically, cards with more benefits, perks, and protections have higher interchange fees. Credit cards also generally have higher fees than debit cards.
- Processing method. In-person point-of-sale transactions usually have lower fees than online transactions, as there is a higher chance of fraud occurring online.
- Business type. Costs are higher for businesses that are considered riskier, such as gambling; these companies are likely to have to pay costlier interchange rates.
Assessment Fees
Assessment or service fees are fixed fees charged by the card network (e.g., Visa, Mastercard) for every transaction, and they are usually a small percentage of each transaction. Below is a list of current assessment fees by network:
| Card Network | Assessment Fee |
|---|---|
| Visa (credit) | 0.14% |
| Visa (debit) | 0.13% |
| Mastercard (<$1K transaction) | 0.1375% |
| Mastercard ($1K+ transaction) | 0.1475% |
| Discover | 0.13% |
| American Express | 0.16% |
*The assessment fees listed are current as of the date of publishing. Rates may have changed since this article was published.
Processor Markup Fees
Payment processing companies (e.g., Square, Stripe) charge a markup fee in exchange for processing payments for you. Since these fees are set by the payment processing companies, you may be able to find lower rates by comparing plans offered by different providers. Below, we cover the different types of pricing models that payment processors offer, and we outline how their markup fees are structured.
How are credit card processing fees structured?
Credit card processing fee pricing can be structured in three main ways. Merchants may be able to choose which type of pricing works best for their business.
Interchange Plus (Pass-Through)
Example fee structure: Interchange + Assessment + 0.2% + $0.15
Interchange plus plans charge merchants interchange and assessment fees plus an extra fee per transaction. For example, you could pay the interchange and assessment fees plus 0.2% plus $0.15. Payment processors will typically also charge a nominal monthly fee for their service and may offer volume discounts for high-volume businesses.
Interchange plus plans have the benefit of providing a fairly transparent fee structure. As a merchant, you’ll know exactly what was paid in interchange versus processing fees for every transaction. In addition, you can benefit from the differences in interchange fees for different types of cards. If your business tends to accept more debit than credit, you’ll benefit from the lower rates on debit cards.
| Payment Processor | Transaction Cost | Monthly Fee |
|---|---|---|
| Helcim | 0.30% + $0.10 + interchange | N/A |
| National Processing | 0.18% + $0.10 + interchange | $9.95 |
| Payline | 0.20% + $0.10 + interchange | $10 |
*These rates reflect in-person, retail transactions and are current as of the date of publishing. Rates may have changed since this article was published.
Flat Rate
Example fee structure: 2.6% + $0.10
Flat-rate plans charge the same rate for every transaction, and this pricing model has become more popular because of its sheer simplicity. The fee is typically a percentage of the transaction amount plus an added flat fee of around $0.10 to $0.30.
For merchants, the simplicity and convenience of a flat-rate pricing model can be attractive, as you won’t need to be concerned with the various interchange rates per transaction or card type, and it will be easier for you to forecast and predict how much you’ll be spending on processor costs overall. However, it’s likely that you’ll end up paying more, as the payment processors don’t disclose how much their markup is—the interchange, assessment, and processor markup fees are all hidden behind the “flat rate.”
| Payment Processor | Swiped Transaction Cost | Keyed Transaction Cost |
|---|---|---|
| Square | 2.6% + $0.10 | 3.5% + $0.15 |
| PayPal Zettle | 2.29% + $0.09 | 3.49% + $0.09 |
*These rates are current as of the date of publishing. Rates may have changed since this article was published.
Tiered (Bundled)
Tiered plans charge different rates depending on the type of transaction, and transactions are bucketed into multiple tiers. There are usually three tiers (or six for both debit and credit): qualified, mid-qualified, and non-qualified. Qualified transactions are typically the least risky and have the lowest fraud rate (e.g., an in-person, no-rewards card purchase), while non-qualified transactions are the riskiest (e.g., online, rewards-card purchase). The qualified tier will have the lowest fees, while the non-qualified will have the highest.
Tiered plans may be somewhat easier to understand for the merchant, as fees are neatly bucketed into just a handful of tiers. However, there is a loss of transparency, as exact interchange fees may not be disclosed, so it’s impossible to tell what sort of markup the processor is charging. Additionally, tiered plans may end up being more expensive, as many different types of transactions are grouped together and you may end up paying more for a transaction than you would have on a different pricing model.
| Payment Processor | Swiped Transaction Cost | Invoiced | Keyed |
|---|---|---|---|
| Intuit QuickBooks | 2.4% + $0.25 | 2.9% + $0.25 | 3.4% + $0.25 |
*These rates are current as of the date of publishing. Rates may have changed since this article was published.
Subscription (Membership)
Example fee structure: $0.10 + Interchange + Assessment + $99/month
Subscription pricing models charge interchange and assessment fees plus a flat fee per transaction, in addition to a monthly membership fee. This pricing model is similar to interchange plus plans, but instead of a percentage fee on each transaction, you pay the monthly membership fee.
Subscription plans may be most suitable for merchants with a high volume of transactions. You’ll be able to benefit from the low per-transaction fees, and with enough transactions, you can recoup your costs on the more expensive monthly membership fee.
| Payment Processor | Transaction Cost | Monthly Fee |
|---|---|---|
| Payment Depot | $0.10 + interchange | $99 |
| Stax by Fattmerchant | Swiped: $0.08 + interchange Keyed: $0.15 + interchange | $99 |
*These rates are current as of the date of publishing. Rates may have changed since this article was published.
Additional Payment Processor Fees
Payment processing or merchant services companies may also charge a variety of additional fees, which can be charged monthly, yearly, or as a one-time fee. What fees are charged can vary depending on the processor. When comparing payment processors, make sure you pay attention to the additional fees you may be charged and consider your total effective cost.
Common fees include:
- Account fees. Monthly or annual fees that you must pay to keep your account active.
- Account setup fees. Fees paid when you first open an account.
- Monthly minimum fees. Some providers require you to meet a minimum monthly amount of sales and will charge fees if you do not meet this amount. However, not all providers charge these fees.
- Statement fees. Some providers charge fees for providing online or paper statements.
- Withdrawal fees. These fees may be charged for moving funds from your payment processor account into your bank account.
- Fees to lease or purchase equipment. You may need to lease, rent, or buy a credit card terminal from the payment processor. In some cases, you may be able to negotiate to receive equipment for free.
- Cancellation fee. There may be a fee for ending your contract with a payment processor early.
- Retrieval fees. You may be charged a fee if a customer or their issuing bank initiates a retrieval request to verify a transaction.
- Chargeback fees. If a customer initiates a chargeback with a credit card company in order to receive a refund, you may be charged a fee.
- Disputed transactions. If a cardholder disputes a transaction, you may be charged a fee.
- Payment gateway provider fee. Payment gateways are part of the encryption and authorization process for online sales. Some providers charge an extra fee for this, while others include it as part of their service at no additional charge.
- Payment Card Industry (PCI) fees. Businesses that take credit cards are required to follow PCI data storage standards. Some processors may charge a PCI non-compliance fee if your business does not adhere to PCI standards, and others may also assist businesses in adhering to these requirements and may charge a PCI compliance fee for that service. You should only accept a PCI compliance fee if the processor actually provides assistance with meeting PCI standards.
Final Word
Accepting credit and debit card payments is necessary for most businesses, but the fees involved can become costly. It’s wise to make sure you understand what the fees are and how they are determined. This can help you choose the credit card payment processing system that will be most beneficial to your business.
