The ability to accept debit and credit card payments is critical to the success of most small businesses. If your customers can’t use their credit cards to pay for your products or services, you could miss out on sales opportunities and run into other problems.
To accept credit cards, you’ll need to set up a merchant account for your business. You’ll also pay credit card processing fees each time a customer pays you with plastic.
What Are Credit Card Processing Fees?
Credit card processing fees are expenses a business must pay to process credit or debit card payments. Your company must typically pay credit card processing fees whenever it accepts a card featuring one of the following logos:
- American Express
Processing costs aren’t set in stone. So, the fees you pay may differ depending on several factors. Your company’s transaction volume, type of business, transaction type (e.g., card-present or card-not-present), average sales amount, and other details could all affect the cost of processing credit and debit card transactions.
Here’s a look at the estimated average credit card processing fees charged by each of the four major credit card networks (as of July 2021).
|Credit Card Network
|Average Processing Fee
*Average credit card processing fee estimates are curated by Value Penguin.
How Does Credit Card Processing Work?
As a consumer, you probably don’t think much about how credit card payments work behind the scenes. You simply insert your chip, swipe your card, or key in your account number online when you want to use your card for a purchase.
However, small business owners should understand the system that powers credit card transactions. And in order to understand credit card processing, it helps to know the players.
- Merchant: The business that wants to accept a credit card payment from its customer in exchange for goods or services.
- Credit Card Issuer: Credit card issuers are financial institutions like Chase, Capital One, Citibank, Barclays, Bank of America or Wells Fargo. The issuing bank is in charge of actions like approving or denying the transaction based on the customer’s available credit and other factors.
- Credit Card Network: The four major credit card networks are Visa, Mastercard, Discover, and American Express. (Discover and American Express are credit card issuers and networks.) The credit card network serves as a bridge between card issuers and merchants.
- Payment Processor: The payment processor, or merchant service provider, is the entity you’ll communicate with as a merchant. It helps you set up a merchant account with an acquiring bank so your business has a place to receive funds. The payment processor also collects payment details (card number, expiration date or security code) and relays them down the processing timeline. Some examples of payment processors are Stripe, Square, and Payline. Financial institutions, like Chase, Wells Fargo, etc., often offer payment processing services too.
- Payment Gateway: The payment gateway is a secure tool that enables the transfer of encrypted data online between the credit card issuer and the merchant account provider.
- Merchant Account: Your company’s account with an acquiring bank is where you receive funds for approved credit card transactions.
The Credit Card Processing Timeline
Here’s how credit card processing works.
- Customer presents a credit card or debit card to pay for a transaction with merchant.
- Merchant uses payment gateway to securely communicate with the payment processor. (A point-of-sale system completes this step for in-person transactions, and a virtual terminal serves this function for phone sales.)
- Payment processor sends the cardholder’s information to the credit card network.
- Credit card network forwards the cardholder’s details to the issuing bank.
- Credit card issuer approves or denies the transaction.
- If the card issuer approves the transaction, it places a hold on the funds in the customer’s account.
- Then, the card issuer communicates approval to the credit card network which, in turn, communicates with the payment processor and acquiring bank.
- The merchant “batches out” all approved transactions (typically at the end of the day).
- The payment processor communicates the settlement request to the payment network which forwards the request to the credit card issuer.
- The issuing bank accesses the customer’s funds it placed on hold earlier and releases them to the merchant’s acquiring bank.
- The processor subtracts credit card processing fees from the transaction and deposits the remaining amount in the merchant’s bank account.
The steps above demonstrate the complexity of credit card processing. However, when systems work as they should, the customer and merchant should experience a speedy and convenient checkout process.
How Much Will It Cost Your Business To Accept Credit Cards?
Every party involved in the payment processing timeline above needs to get paid for its services. That’s where credit card processing fees come into play. Below are some of the fees you may incur in order to accept credit card and debit card payments from customers. (As a merchant, you might not realize you’re paying all of the processing fees below because your merchant account provider may bundle costs together.)
- Transaction fees:
- Interchange Fees
- Assessment Fees
- Payment Processor Markup Fees
- Other fees:
- Recurring Fees
- One-time Fees
- Incidental Fees
Transaction fees are the cost your business incurs every time it runs a credit or debit card payment. Collectively, these fees are called the discount rate, and fit into three categories.
1. Interchange fees
Interchange fees go to the issuing bank to help it cover its risk and operation costs. They make up the bulk of the transaction fees you’ll pay.
You may see interchange fees listed as a percentage plus a fixed amount. For example, interchange fees might look like 2% + $0.15 per transaction.
Despite the fact that credit card issuers charge interchange fees, it’s the credit card networks that set the cost. These fees are not negotiable, but they can vary according to the risk of a given transaction. The credit card network, credit card type (accepting rewards credit cards tends to cost more), transaction type (either in-person vs. card-not-present), transaction amount, and more can influence the final cost for the merchant.
In general, credit card networks update the cost of interchange fees each year in April and October. You can take a look at some of the current interchange fees via the links below:
2. Assessment fees
Assessment fees go to the credit card network. They represent a small portion of the total transaction amount.
Like interchange fees, assessment fees are non-negotiable and fixed. Yet they can differ based on the type of transaction. According to Wells Fargo Merchant Services, here are the current assessment fees for the four major credit card networks (as of April 2021):
|Credit Card Network
|Debit Card and Prepaid Card
|Mastercard (transactions < $1,000)
|Mastercard (transactions >= $1,000)
|American Express* (OptBlue transactions)
*Note: Merchants that process more than $1 million per year with American Express cannot participate in the OptBlue program. Instead, they need to set up a direct processing agreement with the network.
3. Payment processor markup fees
Payment processor markup fees go to — you guessed it — the payment processor. These fees round out the final piece of the transaction fee puzzle. However, you may have to pay your payment processor additional fees outside of those that are transaction-based.
Processor markup fees are not fixed. As a result, you can negotiate to try to get a better deal. In general, businesses that process higher sales volumes are in a better position to secure lower rates.
There’s wiggle room where merchant service provider markup fees are concerned. So, businesses can shop around to make sure they secure the best price available.
In addition to transaction fees, your payment processor may charge recurring fees, one-time fees, and incidental fees. These fees aren’t transaction-based. Still, you’ll need to factor them into your business expenses if you want to accept credit card payments.
You might not even realize you’re paying some of the fees below unless you review your monthly merchant services statement. It’s also worth noting that some fees may be negotiable, and could represent opportunities to save money.
1. Recurring fees
- Merchant Account Fees: Your payment processor might charge you monthly or annual account fees to maintain your account.
- Payment Gateway Provider Fee: If you process payments online, you’ll need a payment gateway. This online tool may feature a recurring monthly fee.
- Point-of-Sale Terminal Fees: Brick-and-mortar businesses usually need a point-of-sale (POS) terminal to accept credit and debit cards. Your merchant services provider may charge you a fee to rent or lease this equipment.
- Virtual Terminal: If you accept orders over the phone, the merchant provider may charge you a fee for the capability to key in those payments.
- Monthly Minimum Processing Fee: Some merchant providers charge a fee if you don’t process enough credit or debit card transactions each month. The minimum requirement is usually based on overall payment volume, not the number of transactions.
- Statement Fee: Online or paper statements may come with an additional statement fee each month.
- IRS Reporting Fee: Payment processors have to send a 1099-K to the IRS each year to report your transactions. Some companies charge businesses a fee for fulfilling this requirement.
- Payment Card Industry (PCI) Fee: Businesses that accept credit cards must be PCI compliant. Some merchant service providers offer PCI compliance support and may charge for the service.
2. One-time fees
- Set-Up Fees: You may have to pay a one-time initial fee when you set up your merchant account.
- Cancellation Fee: When you set up a merchant account, you may have to commit to using the service for a specific period of time. If you wish to close your account early, a cancellation fee could apply.
- Point-of-Sale Terminal Fee: If you opt to purchase your POS terminal outright, there could be a one-time fee for the hardware.
3. Incidental fees
- Dispute Fees: Customers can dispute credit card charges they disagree with via their issuer. Your payment processor may charge you to process the dispute.
- Chargeback Fee: If you lose a payment dispute, a chargeback or refund to the customer takes place. Many payment processors assess fees for each chargeback. Additionally, too many chargebacks could result in the suspension or closure of your merchant account.
- Non-Sufficient Funds (NSF) Fee: A payment processor may attempt to charge fees or withdraw funds for a chargeback directly from your bank account. If you don’t have sufficient funds to cover the transaction, you might incur a NSF fee.
- Batch Fees: Most merchant accounts let you cash out the transactions you process once per business day. Some processors charge additional fees for this service.
Credit Card Processing Options
Your company’s final credit card processing fees come down to two important decisions — the payment provider and pricing model you choose.
Merchant account provider
Merchant account providers are traditional, full-service credit card processors. They tend to feature more complex fee structures and require your business to pass underwriting for approval. On the plus side, you might secure lower processing costs for your business.
There are several pricing models you might encounter with merchant account providers. Two popular structures are:
- Interchange-Plus Pricing Plans: Your business pays the interchange fee plus markup fees for each transaction. For example, it might cost you the interchange rate + 0.2% + $0.15 for every keyed-in credit card transaction on a standard (non-rewards) credit card. However, costs can vary depending on the transaction type, credit card type, credit card network, etc. While there’s potential to save money here, processing costs can also be difficult to predict in advance.
- Tiered Pricing Plans: Instead of having many options when it comes to processing fees, a tiered pricing plan charges you one of three flat rates for every transaction. You’ll pay a separate cost for high risk, medium risk, and low risk transactions. Premium rewards credit cards and card-not-present transactions fall into the high risk tier and, therefore, feature the highest costs. Tiered pricing can be easier to predict and understand, but it might not help you secure the lowest fees — especially for online merchants.
Payment service provider
Payment service providers (PSPs) offer simple credit card processing solutions that can be a good fit for small businesses. Your business probably won’t undergo a detailed underwriting process with a PSP. As a result, it’s easier and faster to start accepting credit and debit card payments.
PSPs often charge flat fees per transaction with no hidden costs. So, your transaction cost may be higher, but you don’t have to worry about added fees or paying for equipment. Yet even with flat-rate pricing, fees can differ based on the transaction type.
Flat-fee processing might be right for small businesses that prefer simple, predictable expenses. However, if your company has a high average sales amount or processes a large volume of transactions per month, flat-rate processing through a PSP may cost you more.
How To Choose the Right Payment Processor for Your Business
Credit card processing fees can represent a big expense for your business each month. Nonetheless, they’re a necessary investment if you want the ability to accept credit card and debit card payments from your customers.
Your best bet is to take the time to research and compare multiple payment processing options. As you shop around, be sure to list out the fees each provider charges, and ask about any additional hidden costs. And remember to factor in other important details, like underwriting and contract requirements, into your final decision.