Credit card processing fees are a necessary cost of doing business. Small businesses accepting credit card payments in person typically pay around 2% per transaction in processing fees, while the average cost of accepting online and card-not-present payments is closer to 3%. Show
New businesses and occasional sellers will typically pay higher fees, whereas large businesses can negotiate lower fees through volume discounts. Indicate your total monthly sales and how much you pay in processing fees each month in the calculator below to find out your current effective rate. Most small businesses can expect an effective rate of around 3% when starting out; once a business is processing more than $20,000 monthly, the rate should decrease to closer to 2% (perhaps as low as 1.7%). However, high-risk businesses will always pay higher rates—as high as 5%. How to Calculate Credit Card Processing Fees & Your Effective RateThe best way to get a handle on what you are paying (and whether it’s too much) is by calculating your effective rate. This represents the real rate you pay for each transaction, taking into consideration all transaction, monthly, and incidental fees and markups based on your actual sales volume. What’s Included in Credit Card Processing FeesThere are typically three parts that make up your credit card processing fees—interchange, assessment, and merchant services markup fees. They go to either the card network (Visa, Mastercard, Discover, and Amex), the card-issuing bank ( Chase, Fiserv, Bank of America, etc.) or the payment processor (Square Payments, PayPal, Stripe, etc.). 1. Interchange FeesInterchange fees are transaction fees merchants must pay to the customer’s card-issuing bank to cover handling costs and risks associated with approving the transaction. This fee is set by your card network and is based on a percentage of your monthly transactions. While the card associations set the default interchange fees, they are paid out to the bank that actually issues the credit card. These typically range from 1.29% to 3.5% per transaction. For example, if your customer uses a Chase Visa credit card, you will be charged interchange rates set by Visa that are then paid out to Chase for handling the transaction. Interchange fees make up 70% to 90% of the total transaction fee. In the news: Earlier this year, Visa and Mastercard made adjustments to their card processing fees. In March, Mastercard announced that it was lowering payment processing fees for merchant transactions lower than $5. Meanwhile, Visa is implementing a 10% decrease from its current 1.5% to 2.4% charge per transaction for merchants with $250,000 or less credit sales volumes. American Express launched its OptBlue program that offers small merchants lower processing rates. 2. Assessment FeesAssessment fees are set, charged, and collected by credit card associations for the use of their credit card brand. These are added into individual transactions along with the interchange fees and are based on your total monthly sales per card brand. Assessment fees are also known as Card Brand Fees, Card Association Fees, or Network Access and Brand Usage Fees (NABU). Unlike interchange fees, which go to the banks, these fees stay with the credit card associations. These typically range from 0.13% to 0.16% per transaction. 3. Merchant Services MarkupsMerchant services markups are the fees merchant account providers and payment processors collect from businesses to process card payments. These fees are based on a percentage of your total monthly transactions and the only type of fees that you can negotiate to lower the cost of payment processing. Merchant services markups are the most variable part of credit card processing fees. Processing services, such as Square or PayPal, that businesses use to accept credit cards also charge a fee for their services. However, unlike interchange and assessment fees, which are fairly standardized, payment processors use a whole mix of different fee structures, which can make it hard to compare options and find an affordable solution. It’s important that you consider your business type and sales profile, so you can match it with the right payment processor to get most out of your payment processing fees. Types of Merchant Service MarkupsIn general, merchant service providers fall under one of four fee structures: Merchants pay a set amount for every transaction they process, regardless of card type. This fee structure is easy to budget for and offers a lot of transparency—however, because the structure includes interchange fees, it does not show you exactly how much you pay for in markup. Flat Rate Example: 2.6% + 10 cents Who should use it?New and small businesses In this model, merchant service providers pass along the direct interchange and assessment fees along with a percent and/or flat-fee markup. Companies that charge a flat-fee markup instead of a percentage are usually a better option. Interchange-plus Example: Interchange plus 0.10% + 5 cents Where: Who should use it? Growing businesses Similar to interchange-plus, in this pricing model, businesses pay a flat monthly fee, direct interchange and assessment fees, and typically a small flat fee (such as $0.05 to $0.10) for each transaction. Membership pricing example: $59 per month, Interchange + 8 cents Where: Who should use it? Growing and established businesses Also known as bundled pricing, this model separates transactions into three tiers: qualified, mid-qualified, and non-qualified.
Tiered Pricing Example: Non-Qualified: 3.35% plus 31 cents Where: Interchange-plus vs Flat-rate Pricing ModelsLet’s assume you’ve made a bunch of sales of a $100 item at your brick-and-mortar shop and online. Here’s how much you might pay in fees, based on typical processing fees (and in different payment methods). *We used an average percentage based on typical rates for merchant accounts offering interchange-plus pricing for each type of card. At first glance at that chart of averages, it seems that choosing a merchant account that offers interchange-plus pricing for your credit card processing is far less expensive than with Square, for example, which offers flat-rate fees. You’re not wrong. However, there are many rules, exceptions, and other fees that go into the total amount you pay with interchange-plus pricing. What you pay as a merchant varies greatly depending on the type of transaction, your customer’s card type, and your type of business. Square’s flat fee may be a better choice for small businesses because the fees are transparent and more stable. Plus, many merchant accounts that offer interchange-plus pricing have strict application processes, and often, monthly fees or minimums that would disqualify or not be practical for small businesses. It will take some shopping around to find the cheapest credit card processing for your business. Why Businesses Should Avoid Tiered Pricing Models The fees merchants pay in a tiered pricing model can vary wildly depending on the type of card your customer uses. This can result in paying higher fees than you would under a different model. For this reason, we recommend businesses stay away from tiered pricing models and instead choose a flat-rate, interchange-plus, or membership model merchant service account. The Federal Trade Commission cautions small business owners, “Scammers know that small businesses are looking for ways to reduce costs. Some deceptively promise lower rates for processing credit card transactions.” Merchant service providers offering tiered pricing models will typically advertise “Rates as low as X%.” The advertised rate will be the qualified tier, which may not be the price you actually pay on most transactions. Factors That Impact Transaction FeesThe main consideration for every factor that determines the transaction fees is the risk involved in accepting different types of payments. Credit card associations, card-issuing banks, and merchant service providers impose higher rates when the risk of fraud and chargebacks are more likely for a payment method.
Tips To Lower Credit Card Processing Fees
There are ways to get essentially free credit card processing, often referred to as “zero-cost” processing. However, it involves passing the cost of processing on to customers. Laws on this vary by state. Cash discounting is legal in all US states; however, credit surcharging is not legal in some. While more and more merchant services providers (including Stax) are offering zero-cost processing, it’s important to carefully consider your options and the effects of each alternative before signing up for this program. Credit Card Processing Fees Frequently Asked Questions (FAQs)Why are there different pricing models for credit card processing fees?Not all credit card processing fees are the same because a business’ requirement for accepting payments and remaining operational depends on its size.
How much do credit card networks charge for processing fees?Card networks have a long list of processing fees that vary depending on payment method, card type, product or service type, and merchant type among others. Considerable updates to fees have been made in April of this year. While you can find the list for Visa, Mastercard and American Express on their website, you can check out updates for Discover on Chase Payments Solutions website. Why are American Express processing fees higher?This is because American Express is both a card network and a card-issuing bank, resulting in higher processing fees if compared side-by-side against other card networks. However, American Express recently introduced a new program called OptBlue, which will allow small merchants that process less than $1 million annually to accept payments with a similar pricing structure as Visa and Mastercard. Is it legal to pass credit card fees to customers?The most popular methods of passing credit card fees to customers are cash discounting and credit surcharging. Unlike cash discounting that is acceptable in all 50 states, credit surcharging is not acceptable in certain locations. Any merchant looking to sign up for a credit surcharging program will have to make sure that this method is legal in both their state and that of their customer. Read more about free credit card processing here. Bottom LineCredit card processing fees or transaction fees are a significant expense for any small business. Because every processor operates slightly differently, it can be hard to tell what kind of rate you are getting. Knowing all the key players and where the different fees come from makes it easier to ensure you are choosing a fair provider. You May Also Like …
What is a reasonable processing fee?According to industry analysts, the average credit card processing fees range from 1.5 percent to 3.5 percent of each transaction, although the final percentage depends on a host of factors. Also, be aware that credit card processing fees are entirely different from the fees consumers pay for carrying a credit card.
How much does a credit card company charge for a transaction?Credit card processing fees can typically range from 2.87% to 4.35% of each transaction, not including merchant service provider fees. As a small business owner, these fees can add up and take a bite out of your profits.
|