Merchant Account Fees & Rates: A Complete Guidebook

Overpaying on merchant account fees is commonplace for many business owners. While payment processing fees seem small in isolation, they add up quickly, especially for large-volume businesses. Understanding merchant account fees and rates is the first step in ensuring your business receives good value from its next merchant agreement.

This guide explores merchant account fees, the most common pricing models, how to lower your processing costs, and other related topics. Continue reading for some helpful insight on how to save money on your credit card processing each month!

What Are Merchant Account Fees?

Merchant account fees are issued to cover the costs associated with having a merchant account. Merchant account fees refer to a range of different costs; including processing fees, scheduled fees, and even incidental fees. These fees can vary significantly depending on the payment type, card network, and merchant account provider. Similarly, merchant account providers assess fees using different pricing structures, so understanding your provider’s pricing model plays an integral role in predicting your payment costs.

As with any business expense, merchant account fees are unfavorable. However, with the average credit card payment totaling more than five times as much as the average cash payment, offering card payment options can do wonders for a business’s revenue—regardless of merchant fees.^[1]Experian. “Cash vs. Credit Cards: Which Do Americans Use Most?“. Accessed June 26, 2023.

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Most Common Merchant Account Pricing Models

In most instances, payment providers use one of three pricing models: interchange-plus, tiered, or flat-rate. Each pricing model has its own advantages and disadvantages, so it’s important to work with a provider using the model most suitable for your business. Let’s explore the details of each pricing model below:

Interchange-plus pricing offers a full breakdown of credit card processing costs. With interchange-plus pricing, the cost of processing varies depending on the issuing bank and card network being used, as each issuing bank and card network sets its own pricing. Next, the merchant account provider will add a markup (or “discount rate”) on top of the interchange and assessment fees to facilitate the payment. A benefit of this pricing model is that it shows merchants exactly how much they’re paying to merchant service providers, issuing banks, and card networks.

Tiered pricing divides different card types and card networks into unique tiers. For example, there could be three separate tiers, each with a different processing rate. This pricing model provides variation depending on the payment type and card network, but it doesn’t break down the cost like interchange pricing does. (Multiple card networks can be grouped into a single tier.) So, if your business uses tiered pricing, take a look at your payment trends to determine if you’ll save money by switching to an interchange pricing structure. In this instance, if your customers prefer a specific card network and the tiered pricing rate is higher than the interchange rate, it’s worth switching for you.

Flat-rate pricing charges merchants the same price for processing, regardless of the card network or issuing bank. But while this type of pricing is convenient and easy to understand, it can lead to higher fees. For example, a flat-rate pricing structure allows providers to hide the underlying markups on payments by charging a fixed rate. If you want full transparency on what you’re paying for, interchange-plus or tiered pricing is a more suitable option.

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Breaking Down Merchant Service Fees

Understanding the ins and outs of merchant service fees can help your business avoid unnecessary costs. Below, let’s explore the four primary types of fees:

Processing fees occur whenever a merchant processes a credit or debit card transaction. In most cases, credit card processing fees include three components: an interchange fee, an assessment fee, and a markup fee. Let’s talk about these components in more detail below:

• Interchange Fee: An interchange fee is a fee charged by the issuing bank of the credit or debit card being used. This fee typically makes up for most of the overall processing costs.
• Assessment Fee: An assessment fee is a fee charged by the cardholder’s card network, such as Visa, Mastercard, Discover, or American Express. (Some card networks are more expensive than others.)
• Markup Fee: A markup fee is charged by the merchant service provider for facilitating the payment.

However, depending on the pricing model your processor uses, you may not be privy to a full breakdown of this information. For example, if your provider uses flat-rate pricing, you will only see a single processing fee.

Scheduled fees are fees charged regardless of your payment volume. These “scheduled” fees are typically flat fees that are billed at pre-defined intervals. Here are some examples of scheduled fees charged by merchant service providers:

• Monthly or Annual Fees: Many merchant service providers charge monthly or annual fees, aside from processing fees. However, the larger your business’s payment volume, the less this scheduled fee will impact your per-transaction costs.
• Statement Fees: Some payment processors pass on the cost of preparing and printing statements to their merchants. If your merchant service provider charges excessive statement fees, it’s worth attempting to negotiate. And as most statement preparation is now automated and merchant statements are often communicated digitally, there’s really no need to pay hefty statement fees.
• Monthly Minimum Fees: A monthly minimum fee is a minimum processing fee charged regardless of your payment volume. If the monthly minimum fee is $25, you’ll need to process over $25 in fees for the month, or you will be charged. This ensures merchant service providers receive a monthly minimum for offering connectivity to the payment network.
• Payment Gateway Fees: Businesses using payment gateways to facilitate virtual transactions must also pay payment gateway fees. This fee accounts for the payment services provided by the gateway.
• Processing Commitment Fee: If you agree to process a pre-determined amount each month but fail to do so, your payment provider may charge a penalty fee.

Incidental fees refer to fees occurring when a specific incident occurs, such as a refund or chargeback. Let’s review the most common types of incidental fees:

• Setup Fees: Some providers charge a one-time setup fee when you first sign your merchant agreement.
• Chargeback Fees: If a customer files a chargeback against your business, your provider will likely pass this cost onto you. And remember, chargeback fees are in addition to any refund you provide to the cardholder due to the payment dispute.
• Refund Fees: Legitimate refunds can also cost your business money, as merchant service providers look to recoup any lost processing fees when they reverse a transaction for a customer.
• Batch Fees: Usually, the processing bank will send daily batches of transactions for a finalized settlement to merchants. Some merchant account providers charge batch fees for this; however, the cost is typically small.
• PCI Non-Compliance Fees: If your business doesn’t comply with PCI/DSS requirements, your payment provider may add a PCI non-compliance penalty fee. If you see this type of fee on your merchant statement, make sure to contact your payment provider to discuss how to fix any non-compliance issues.
• Address Verification Fees (AVS Fees): An AVS system verifies that a customer’s billing address matches the address on file with their credit card provider. This system helps prevent fraudulent online payments, and many payment processors charge AVS fees for facilitating the verification process.

The term “red flag fee” refers to any fees that are potentially outside of industry norms. Unfortunately, some payment processors prey on merchants without payment experience, charging extra fees. The following fees may indicate your payment processor is taking advantage of you:

• Incorrect Assessment Fees: Some processors attempt to markup card network assessment fees without notifying their merchants. It’s a good idea to familiarize yourself with the major card networks’ assessment fees so you can cross-reference them with what your processor is charging you.
• ERF/Integrity Fees: This type of fee occurs when you don’t correctly process payments. For example, swiping a customer’s chip card (instead of inserting it) may incur an extra cost because it’s less secure.
• Arbitrary Fee Increases: If your merchant discount rate is suddenly higher than usual without warning, ask your payment processor why the fee increased and verify that it doesn’t violate your merchant service agreement.

Other Hidden Merchant Fees to Keep in Mind

With so many fees to keep track of when signing up for a merchant account, you might wonder if there are any other hidden fees to be aware of. Unexpected hidden fees can be a significant issue for merchants who want to keep their processing costs low, so always read your merchant agreement carefully before signing any contracts.

It’s worth noting that even if you don’t see specific fees or charges in your agreement, your provider may include wording that allows it to assess future fees at its discretion. For this reason, pay close attention to reviews and do your research before selecting a provider.

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How to Reduce Merchant Service Fees

With retailers paying more than $126 billion in merchant fees in 2022, reducing them can considerably help business owners save money.^[2]Supermarket News. “Retailers paid $126.4B in credit card processing fees in 2022“. Accessed June 26, 2023. If merchant account costs currently impact your business’s profitability, it’s time to explore some strategies to unlock better rates. Consider these tips and tricks to reduce merchant service fees and secure the cheapest possible credit card processing:

First, never sign a merchant agreement without shopping around for the best rates. With so many merchant account providers currently available to U.S. business owners, overpaying for payment processing is unnecessary. Compare processing fees, chargeback fees, setup fees, and all other costs that are relevant to a merchant agreement. (You can use the breakdown of merchant service fees in this guide to compare each payment provider on your shortlist!)

It’s always beneficial to try to reduce the number of chargebacks filed against your business. If a customer successfully files a chargeback, you will likely need to refund the order value and pay a chargeback fee to your processor. Also, if your chargeback ratio exceeds acceptable levels, your provider may increase your processing rates to cover the risk involved with servicing your merchant account. Lowering your chargeback rate results in decreased processing rates, thereby guaranteeing cost-effective pricing alternatives for your business.

If chargebacks are a significant problem for you, it’s worthwhile to consider getting a high-risk merchant account. High-risk merchant accounts offer higher chargeback tolerances, dedicated support, and a range of other benefits suitable to businesses in riskier industries.

Increasing your revenue isn’t always easy. However, reducing your number of processing partners and using a single payment provider is a good place to start. This will help to increase the number of payments to a specific merchant account provider, improving your business’s negotiating position for enterprise pricing.

Several businesses make the mistake of assuming they’re using a merchant account for payment processing. However, payment aggregators or payment service providers (PSPs) are often mistaken for merchant accounts. Popular payment service providers (PSPs) such as Stripe, Square, and PayPal offer fast onboarding, easy payment processing, and straightforward flat-rate pricing. However, in the long term, they can become more expensive for you. These renowned providers often lack a personalized understanding of your business and fail to negotiate rates before granting approval, resulting in account closures and higher pricing.

By opting for traditional merchant account providers, businesses are assigned a unique merchant identification number (MID), which grants them privileged access to an exclusive merchant account. Your dedicated account manager will help you find services and solutions most suitable to your business’s budget and needs. This ensures transparent payment fees, enhanced payment control, and expedited payout times. When you partner with an experienced merchant service provider, you’ll secure reliable credit card processing options at favorable rates, or even at zero cost!

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