Posted: by Allison
Ultimate 2020 Guide: Credit Card Processing Fees Explained
To run a business in today’s world, it’s inevitable that you will need to pay credit card processing fees for your merchant account to function. This is true for starting an online business from the ground up or simply expanding your brick and mortar store.
There is no standard model for a credit card processing company to follow when administering merchant account fees. The banks and credit card companies pass through their costs to the processor who adds their costs of handling plus mark-ups for credit risk and type of business risk.
Processors do not all use the same pricing model, either. The top four credit card providers release their credit card processing fees annually. For example, Visa has their interchange fees posted online for every merchant and customer to see. While a merchant cannot negotiate the interchange rates with the bank or the credit card company, they can negotiate some of the processor’s fees. In order to negotiate effectively with a processing company you will first need to understand how they assess merchant account fees.
How the Payment Processor Determines Credit Card Processing Fees
Each credit card processor assesses accounts differently based on the type of business and processing history. The average credit card processing fees a merchant pays will actually vary. There are many factors that go into determining the credit card processing fees for a merchant.
There’s much more involved in what determines the transaction fees that a merchant is charged aside from what you may think. Three different parties involve themselves in the process. Here’s who they are and what each of them is responsible for in processing credit cards:
- Credit Card Company – Often labeled the “issuer” because it is a financial institution (i.e. banks and credit unions) who issues the credit card. Examples include Citibank, Chase, Capital One, Wells Fargo, and Bank of America.
- Credit Card Network – These companies are partners of the credit card companies. The most widely known are Visa and Mastercard.
- Payment Processor – The company that carries out credit card transactions and ensures that it is processed securely.
Each of these parties determines the transaction fees that they will charge for their involvement in a credit card transaction.
Credit Card Processing Pricing Types that Determine Fees
The fees that your payment processor charges will be determined by what pricing model the provider charges. To secure a merchant account for your business you most likely went through a merchant services provider who connected you to your payment processor. Here are four common pricing models that payment processors use:
- Interchange-Plus pricing – Two parts make up this pricing model. The credit card networks set the “interchange”. The additional markup charged by your processor is the “plus.”
- Tiered pricing – Broken down generally by three tiers:
- Qualified – transactions charged with lower fees; Usually non-reward credit cards and debit cards.
- Mid-Qualified – middle of the road transactions with higher fees than qualified transactions.
- Non-Qualified – the most expensive types of transactions; generally these are credit cards with a higher-tier rewards program and corporate cards.
- Blended pricing – This is a flat rate that accounts for all types of transactions including credit cards, rewards cards, and debit cards.
- Bundled pricing – Usually this means a fixed rate + downgrade fees. The “most favorable” interchange rate is the lowest cost interchange rate that the merchant would pay determined by how they process the transaction, their industry, and how timely the transaction is submitted for clearing. Interchange Fee Plus – The Interchange Fee + Fixed Percentage
- Membership-Based pricing – If a processor has a membership-based model, you will pay either a monthly or annual membership fee plus the interchange rate charged by the network.
Merchant Account Fee Downgrade
One of the major factors that determine the fee amount you are charged is whether the credit card was swiped or keyed-in. Transactions processed through a swipe have less risk associated with them than those keyed-in. As a result, the fees are lower on a swiped transaction. This is called a ‘downgrade.’
A downgrade can occur when a transaction does not qualify because:
- The transaction was keyed in instead of swiped
- The transaction was not submitted for clearing within 1 or 2 days
- The type of card used for the purchase (i.e., Rewards card, premium credit cards)
The type of card that your customer uses is also a factor. More exclusive credit cards with robust rewards or business cards will have higher fees associated with them.
Additionally, if your business is considered to be “high risk” for any reason, your credit card transaction rates could increase. This can happen for a number of reasons but typically goes back to the processor who deems your business to be risky.
Non-Negotiable Merchant Account Card-Issuer Fees
These are the fees charged directly from Visa and MasterCard which are passed through to the merchant. The average costs will generally range between 1.5 percent and 2.9 percent of the purchase price when the card is swiped or inserted. And roughly 3.5 percent for all keyed-in transactions.
The four major networks have the following average costs:
- Visa – 1.43 percent to 2.4 percent
- Mastercard – 1.55 percent to 2.6 percent
- American Express – 2.5 percent to 3.5 percent
- Discover – 1.56 percent to 2.3 percent
Be aware that these percentages change annually, bi-annually, or even just as they see fit. For the most up-to-date costs reach out to your credit card processor or to the card-issuer itself.
Terminology to Get You Talking About Credit Card Processing Fees
Here is some common terminology that you should have a grasp of before moving forward:
- A flat fee is a static cost that does not change depending on the cost of the purchase. Commonly charged for recouping computer network costs that include the hardware, software, and network connection.
- A percentage is a variable cost that is dependent on the cost of the purchase. This is commonly added for the financing risk.
- A processing charge = flat fee + percentage.
At a high-level, the credit card processing fees can be broken down into common merchant account fees, administrative fees, and incidental fees. Each has its own unique place within the payment processing cycle.
Common Merchant Account Credit Card Processing Fees
Merchants will generally have to pay what’s known as an interchange fee (also known as “interchange rate”). These fees aren’t a set amount that can be predicted and are usually calculated based on the total charge amount.
The calculation is typically a percentage of the sale plus a fixed fee. For example, 1.80% + $0.10.
This makes it hard to determine ahead of time what the fees will be at the end of the month for merchants.
In addition to this, Visa and Mastercard adjust their rates biannually. Another variable factor is how the card is being transacted and where, as well as the type of credit card used. Visa has outlined its interchange reimbursement fees with well over 100 classifications. For example, a transaction that occurs for a hotel and car rental company that the credit card is present for will be charged 2.40 percent plus $0.10 on a Visa Signature Preferred/Visa Infinite credit card.
The payment processor will also generally charge a flat fee and commission that matches the structure of the interchange fee mentioned above.
The type of merchant, processing volume, and other factors will determine the rate and percentage for these charges. Here are the five factors that heavily influence processing fees:
- Type of card – Credit cards and debit cards have a different rate. But even within credit cards, these rates will be different. The most expensive type of credit card is generally a business credit card.
- Network – The major networks including Visa, Mastercard, Discover, and American Express all have different interchange rates. Within these networks, different levels may also exist. For example, Visa has Platinum and Signature-level products which have different interchange fees.
- Processing type – How the credit card enters the system also matters. Swiping on a POS terminal, entering the numbers manually, paying online, mobile or digital payments, and handling card-not-present transactions are all charged differently by networks.
- Merchant category code – MCC is what credit card companies assign consumer transactions. These four-digit numbers are usually partially determined by the type of business structure and its risk level. For example, a restaurant will be categorized differently than a supermarket business.
- Annual Business Sales – This calculates the total dollars and numbers of transactions that your business generates on a yearly basis.
The transaction fee is a flat, per-transaction fee that is charged on each transaction along with the processing fee. This fee can range from zero dollars and up, but is usually about $.10 for swiped accounts and $.25 for keyed accounts. The fee is charged on all approved or declined transactions, as well as batches and returns. It is a fee to access the processing network. Therefore it is charged every time the network is accessed.
Regularly Scheduled Administrative Fees
To maintain your merchant account, the processing company charges these flat fees.
- Annual Fee – Some processors charge a yearly fee just for providing access to the software and solutions to the merchant.
- Monthly Minimum Fee – This fee is the minimum amount that you must pay in processing fees each month. If you do not reach this amount, then you are charged the difference between actual and minimum. For example, if you have a particularly slow month and only accrue $10 in processing fees, but your minimum processing amount is $15, you will be charged $5 at the end of the month cycle to meet the monthly minimum. Tip: Additional Mid and Non-Qualified fees are not included in reaching the monthly minimum.
- Statement Fee – This fee is a monthly fee for the delivery of a paper statement to your business.
- Wireless Fee – If you process with a wireless credit card machine, this is your monthly cellular bill.
- Internet Access Fee – If you process transactions over the internet or through a website, this is an additional fee for all internet transactions. This fee is not charged in all payment processing accounts even is internet usage is provided.
- Supplies Fee – Some merchants are set up with monthly supplies. This fee is to cover the cost of providing those supplies.
- Batch / Batch Header Fee – This fee is charged each time a merchant batches out their EMV terminal, Mobile terminal, or software which is commonly at the end of every working day.
- PCI Non-Compliance Fee – Processors usually allow up to 90 days to become PCI Compliant before they start charging the non-compliance fee. Make sure you ask your merchant services company to take the PCI test to avoid the fee altogether.
Incidental Fees: Authorization, Chargebacks & Termination
Incidental Fees are not common on merchant accounts and only occur if one of the following things happen.
- Voice Authorization Fee – A voice authorization occurs when a merchant calls in to a Help Desk to authorize a transaction manually.
- Voice AVS Fee – Voice AVS means manually verifying the address of a cardholder against the card by calling the card in to the processors help desk.
- Electronic AVS Fee – Electronic AVS is the program in a credit card terminal that will prompt and verify the cardholder’s address against the information linked to the card. This process is done automatically through the terminal.
- Chargeback Fee – This fee is charged when a merchant receives a chargeback on their merchant account.
- Return Fee / Return ACH Fee – A return fee is charged when the processor tries to collect payment from you and your bank account has insufficient funds.
- Early Termination Fee – An early termination fee is charged if a merchant closes their account or breaks the contract before the agreed-upon date.
Credit Card Processing Fees To Look Out For
Some processors may try to charge more in fees than are necessary. If a charge in one of these categories occurs, call and ask your processor to break down the fee and explain why it was charged.
- Application Fee – Some companies charge you to apply with them. Unless you are a non-American or high risk business, if a company requires this, it would be in your best interest to find another credit card processing provider.
- Setup or Startup Fee – This is a fee just for getting set up with a provider. Most good providers have no setup fee.
- Sales Transaction Fee – A sales transaction fee could be added to each transaction that a merchant processes. For this reason they really add up and are often hard to identify. If you see that you are being charged this fee, it would be in your best interest to find another credit card processing provider.
- Retrieval Fee – A retrieval fee might be charged for requesting a copy of a transaction receipt. Typically, you shouldn’t be charged when a customer or the processor needs a copy of a transaction from you.
An understanding of credit card processing will help you find a processor that is a good fit for your business. Contracts can vary depending on which processor you choose; it is essential to go over the costs and terms and conditions before signing. If you are looking to change processors, ask them what their rates are, and then ask them to break down your statement.
Credit Card Processing Fees Specific To Your Business
The best way to figure out how much the processing fees will be for your business is to talk to a merchant services provider to find out how their pricing works. They should be able to help you understand what your business needs and what to expect. Once you’re set up with a merchant account, you’ll be ready to start accepting credit cards from your customers.