TABLE OF CONTENTS
While successfully running a business in 2022, it’s likely you’ll find paying credit card processing fees is an avoidable expense. This is true for eCommerce businesses and brick-and-mortar businesses alike.
These fees occur because there are many parties involved in an actual credit card transaction and each party takes a small percentage of the total. The payment processor, card network, issuing bank, acquiring bank, and payment gateway all play a role in each successful transaction. Ultimately, there are inherent costs involved in ensuring successful transactions go through in tokenized fashions without a hitch, these fees are passed on to the merchant according to the merchant account agreement. As a merchant, your fees include additional costs based on your type of business and credit risk.
In an attempt to minimize this expense, you may be asking yourself if you can pass these fees onto your customers. Can you negotiate a lower fee? Do certain companies charge higher fees than other companies? Below, you’ll find answers to all of these questions and much more.
Average Credit Card Processing Fees
Many new business owners quickly discover that credit card processing fees amount to much more than they’d previously thought. While the percentage fluctuates depending on a host of factors, the average credit card processing fee ranges from 1.5% to 3.5% per transaction.
How Payment Processors Determine Credit Card Processing Fees
There’s actually no standard model for credit card processing companies to follow when administering merchant account fees. However, there is a level of disclosure as well as common fee structures. The top four credit card networks release their interchange rate fee schedule annually. These fees are the ones they (Visa, MasterCard, Discover, and American Express) assess to run different types of credit cards (note that this is not the total fee to process a transaction, this is simply the portion that goes to the card brands).
Each credit card processor assesses accounts differently based on many different factors, but it all boils down to risk. Thus, the processing fees each merchant pays will vary. Some consistent factors that determine merchants’ credit card processing fees are:
- Merchant Category Code – A merchant category code (MCC) is a four-digit number used by credit card issuers to identify the type of business in which a merchant engages.
- Processing Method – How are merchants accepting card payments, in-person, taking orders over the phone, or transacting online. Each method carries a different level of both fraud and chargeback risk.
- Processing History – A merchant’s processing history includes factors like the length of time they’ve been processing transactions, volume of transactions, refund ratios and of course chargeback ratios.
- Merchant’s Personal Credit Score – Oftentimes, the personal credit score of the merchant is a factor in determining their business’ credit card processing fees. FICO credit scores measure a consumer’s creditworthiness on a scale ranging from 300 to 850. A score of 740 is above the average. Between 740 and 799 is considered Very Good.
- Forward Exposure – Forward exposure refers to monetary risk assumed by the processor and is usually looked at on a monthly basis. It’s the amount the processor stands to lose if the merchant does not fulfill their fiduciary duty.
- Chargeback Risk – A high chargeback ratio (the ratio of transactions that result in a dispute compared to normal transactions) may result in higher processing fees and even denial of processing services.
Three different parties participate in the process. They are:
- Credit Card Company: Often called the “issuer” because it’s the entity issuing 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. Essentially, they process payments made by credit cards to merchants. They’re responsible for the relationship between the credit card issuer and the merchant processor. The most widely known are Visa and MasterCard.
- Payment Processor – The company that securely executes a merchant’s credit card transactions.
Each of these parties determines the transaction fees that they will charge for their involvement in a credit card transaction.
How do fees differ for card-not-present (CNP) vs card-present transactions?
You’ll pay different credit card processing fees for the different types of transactions. In particular, card-not-present (CNP) and card-present transactions are subject to different fees.
A CNP transaction refers to any payment conducted without the merchant handling a physical card. This includes when a customer pays for goods online by way of a virtual terminal and over the phone by reading their card number, as well as when an unscannable card must be manually entered or keyed. Meanwhile, card-present transactions include swiping a card, inserting a card into an EMV terminal, and utilizing contactless options.
Because there’s less risk associated with card-present transactions, the interchange rate for such transactions is much lower than that for card-not-present transactions.
Common Merchant Account Credit Card Processing Fees
The first step towards minimizing your credit card processing fees is understanding the assortment of credit card processing fees, why you’re charged them, and how to best avoid them if possible.
One of the most commonly mentioned fees are interchange fees. Base interchange fees/rates are assessed by the credit card networks (Visa, MasterCard, American Express, and Discover) on every credit/debit card transaction. These interchange fees are passed through to the merchant with an additional surcharge added on by the processor. For example, an interchange fee might be 1.3%+ $0.10 and the processor may tack on an additional 0.20% making the cost to the merchant 1.50% + $0.10 for that particular transaction. This makes it difficult for merchants to determine what their fees will be ahead of time since there are hundreds of interchange rates.
Interchange fees also vary based on the type of card the customer uses to pay as well as the method of acceptance. Credit cards with desirable rewards programs may incur higher interchange fees, whereas debit cards usually incur the lowest fees.
Likewise, the method of card presentation impacts the interchange rate. Card-not-present transactions incur an average of 1.60%+ $0.10 to 2.60% + $0.15 in interchange fees, whereas card-present transactions incur an average of 0.10% + $0.10 to 2.35% + $0.10. The reason this varies is because much more fraud occurs in CNP transactions where the cardholder is not present. It is presumed that in an in-person sale the cardholder is present to offer a second form of identification so that the merchant can make sure the transaction is legitimate.
Additionally, Visa and Mastercard adjust their rates biannually. But the average Visa and MasterCard interchange rates are between one and two percent. Visa outlines its interchange reimbursement fees Visa. “Visa USA Interchange Reimbursement Fees“. Accessed January 11, 2022. 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% + $0.10 on a Visa Signature Preferred/Visa Infinite credit card.
In regards to credit card processing fees, no fee is greater than the processing fee because it’s incurred on every credit card transaction. If you pay attention to only one fee, it should be the processing fee.
For example, Stripe charges 2.95% + $0.25. The 2.95% is the processing fee. Additionally, the merchant service provider may also charge a flat fee and commission matching the structure of the interchange fee listed 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 impact processing fees:
- Type of card – Credit cards and debit cards have different rates. But even within credit cards, these rates differ. The most expensive type of credit card, in terms of processing fees, is generally a business credit card.
- Network – The major networks, including Visa, MasterCard, Discover, and American Express, have different interchange rates. Within these networks, different levels may also exist. For example, Visa’s Platinum- and Signature-level products offer different interchange fees.
- Processing type – How a credit card enters the system matters. Transactions swiped on a POS terminal, entered the numbers manually, paid online, and handled as card-not-present are charged different processing fees.
- 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 and its risk level. For example, a restaurant will be in a different category than a supermarket or other business.
- Annual Business Sales – The quantity, in units and currency, of transactions your business generations on a yearly basis.
The transaction fee is a flat, per-transaction fee charged on each transaction along with the processing fee. The transaction fee is usually about $0.10 for card-present transactions and $0.25 for CNP transactions. The fee is charged on all approved and declined transactions, as well as batches and returns. It’s a fee to access the processing network. Therefore it is charged every time the network is accessed.
Assessment fees are costs paid to credit card networks like Visa, MasterCard, and Discover. As with interchange rates, assessment fees aren’t determined by the payment processor, but rather the credit card network. These fees are intended to cover the operating costs of credit card networks.
Lower than the interchange rate, the assessment fee depends on factors such as the type of card used by the consumer, the merchant’s transaction volume, and other miscellaneous fees. (Miscellaneous fees are explained in more detail further below.)
Visa International Service Assessment (ISA) fee
The Visa International Service Assessment (ISA) fee is a charge assessed by Visa to help offset the risks associated with processing cards issued in another country. The ISA fee is assessed on a per-transaction basis and is paid by the business entity accepting the card. The ISA fee is generally passed on to cardholders through higher fees or prices.
Regularly Scheduled Merchant Account Fees
To maintain your merchant account, the processing company charges these regularly scheduled flat fees:
- Annual Fee – Some processors charge a yearly fee just for providing the merchant with access to the software.
- Monthly Minimum Fee – This fee is the minimum amount you must pay in processing fees each month. If you do not reach this amount, you are charged the difference. For example, if you have a particularly slow month, only accruing $10 in processing fees, but your minimum processing fee amount is $15, you’ll be charged $5 at the end of the month cycle to meet the monthly minimum. (Tip: Mid- and Non-Qualified fees are not included in reaching the monthly minimum.)
- Statement Fee – This is a fee for the delivery of a paper statement to your business.
- Wireless Fee – If you process wirelessly, this is your monthly cellular bill.
- Internet Access Fee – If you process transactions over the internet or through a website, this is a fee for all internet transactions. This fee is not charged in all payment processing accounts, even if 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 normally 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.
Misc Fees: Authorization, Chargebacks & Termination
On top of regularly scheduled fees, there are several uncommon fees that only apply if trigger by an incident. These incidental fees include, but are not limited to:
- Voice Authorization Fee – A voice authorization occurs when a merchant calls into a help desk to authorize a transaction manually.
- Voice AVS Fee – Voice AVS refers to the manual verification of a cardholder’s address by calling the card into the processor’s help desk.
- Electronic AVS Fee – Electronic AVS is the program in a credit card terminal that prompts and verifies the cardholder’s address against the information linked to the card. This process is done automatically through the terminal.
- Chargeback Fee – The chargeback fee is charged when a merchant receives a chargeback to their merchant account.
- Return Fee/Return ACH Fee – A return fee is charged when the processor tries to collect payment from a bank account with insufficient funds for said payment.
- Early Termination Fee – An early termination fee is charged if a merchant closes their account or breaks their contract before the agreed-upon date.
Credit Card Processing Fees: Other Costs to Consider
In addition to common and miscellaneous credit card processing fees, merchants may also be charged various other fees for processing services. Here are a few fees for which merchants should keep their eyes out:
Fixed Acquirer Network Fees (FANF)
In 2012, Visa began charging a Fixed Acquirer Network Fee (FANF), formally known as the Network Participation Fee (NPF). All merchants accepting Visa cards are charged this fee, but the fee itself varies. For merchants with a physical location, the fee varies on the number of physical locations the merchant has. Meanwhile, eCommerce merchants will pay a fee based on the gross processing volume. The FANF is a quarterly fee charged the following quarter. For example, the FANF for the first quarter of 2022 will be charged in the second quarter of 2022.
Kilobyte Access Fee (KB)
The Kilobyte Access Fee is a common assessment fee charged by your credit card processor when accepting credit cards. Both Visa’s and Mastercard’s fee is charged for every transaction submitted to the card network for settlement. So, if you’re processing a Visa or MasterCard transaction, except a Kilobyte Access Fee. While Visa charges $0.0047 and MasterCard $0.0035, your processor may pad this fee at a higher cost to you.
Network Access and Brand Usage Fee (NABU)
As of 2018, MasterCard’s Network Access and Brand Usage Fee (NABU) is $0.0195. Because revenue from this fee goes directly to MasterCard, processors pass this fee onto merchants. Like the Kilobyte Access Fee, processors may pad the NABU fee they charge merchants.
Acquirer Processing Fee (APF)
The Acquirer Processing Fee (APF), also known as the Visa Authorization Processing Fee, is $0.0195 for credit card transactions and $0.0155 for debit card transactions. In regards to debit card transactions, this fee only applies to transactions authorized with signatures, not with PIN entries.
Common Credit Card Processing Pricing Models
Payment processors charge merchants credit card processing fees through different pricing models. Below are five common pricing models payment processors use:
The appeal of the flat-rate model is its simplicity. In this model, you’re charged the same rate on every transaction. While the standardized rate makes it easier to predict how much you’ll pay in fees, that predictability comes at a cost. The total fees assessed at month-end in a flat-rate model can be much higher than in other models as you pay the same fee on lower-cost cards like debit. However, many merchants like this fee due to the ease of expense forecasting.
Membership and/or Subscription-Based Pricing
Under a payment processor’s membership- or subscription-based model, you’ll pay a monthly or annual membership fee plus the interchange rate charged by the network. Large, established businesses may see savings under this pricing model.
Tiered pricing models are generally broken down into three tiers (or buckets). Each transaction falls into one of the buckets:
1. Qualified Rate
Transactions with lower fees, like non-reward credit cards and debit cards, receive the qualified rate.
2. Mid-Qualified Rate
Middle-of-the-road transactions receive a slightly higher rate than that of the qualified rate. This rate is known as the mid-qualified rate.
3. Non-Qualified Rate
The most expensive transactions, like those in which a high-tier rewards program or corporate credit card is used, receive a non-qualified rate.
A bundled rate is one in which there’s a fixed rate and downgrade fees. This formula is impacted by how a transaction processes, the industry into which the business falls, and the timeliness in which the transition clears. Meanwhile, a blended rate is a flat rate for various transactions including credit cards, rewards cards, and debit cards.
The most common pricing model is interchange-plus pricing. Two parts make up this pricing model. The credit card networks set the “interchange,” while the additional markup charged by your processor is the “plus.” For medium-sized businesses with predictable monthly processing volumes, this may be the most cost-effective option.
How to Calculate Credit Card Processing Fees
In order to estimate how much you can expect to pay in credit card processing fees, you may want to know how to calculate these fees yourself. However, it’s important to note that you should only calculate the fees after a few months of business, as only one day or one week isn’t indicative of a full month of transactions.
Below outlines how to calculate your credit card processing fees.
Ask merchant service provider for recent statement
Reach out to the merchant service provider that helped set up your merchant account and request a monthly statement, usually issued as a PDF. Many merchant service providers will issue you a login through which you can download these statements yourself. Check your paperwork for said login to avoid calling your merchant service provider.
Determine the pricing model you are on
After obtaining your merchant statement, identify which pricing model you’re on. For help finding this information, we offer a guide on how to read a merchant statement.
Oftentimes, the discount rate will be clearly shown on every transaction. If you’re on flat-rate pricing, every transaction will be the same and easily discernible. Some merchant service statements are hard to read, especially if you’re on an interchange-plus pricing model, in which case every transaction is subject to a different fee or rate. If you are still not sure you can simply call your merchant service representative and ask them what your current rate is. (Hint: Don’t ask what rate you initially signed up with, ask what rate you are currently being assessed as you may have undergone a series of price increases).
Calculate effective rate
In situations in which rates aren’t easily obtained, the quickest way to find out how much you’re paying is to calculate what is called the effective rate. To find the effective rate, take the total amount of processing fees divided by the total sales volume on your credit card processing statement. For example, if you paid $3,100 in processing fees and your total sales volume was $100,000, your effective rate would be 3,100 divided by 100,000. This equals 0.031, which is a 3.10% effective rate.
How much should you expect to pay in processing fees?
This is a loaded question. What we mean by that is not all businesses are created equal—that is, in the eyes of payment processors.
If you’re a dry cleaner, which is a low-risk industry, accepting card-present swiped transactions, your average processing fee should be around 1.7% + $0.10. This doesn’t include any miscellaneous fees. However, if you’re in a card-not-present environment, like operating solely as an eCommerce store, your average transactions will incur processing fees closer to 2.95% + $0.25. If your business is high-risk, then you could be paying closer to 3.95% + $0.25 per transaction.
Fees of Common payment service providers:
- Stripe’s fees average at 2.95 percent + $0.25 per transaction
- Square’s fees for in-person transaction are 2.6 percent + $0.10 per transaction
- PayPal’s default rate is 2.99 percent + $0.49 per transaction
Can you deduct credit card fees from your taxes?
If you’re wondering whether or not credit card processing fees are tax-deductible, the short answer is yes. As a business owner, you can deduct most credit card fees. Taking advantage of the deductions offered by the IRS can help you earn back some of the money spent on fees.
The only guarantees in life are death, taxes, and credit card processing fees—that is, if you’re a business owner in 2022. As a cashless currency increasingly becomes the norm, accepting credit card payments is an even more vital task for businesses. And along with credit card processing, fees follow. But unlike death or taxes, credit card processing fees needn’t be scary or confusing. By absorbing the information in this guide, you should be able to assess your credit card processing fees from a more empowered perspective, as you now know what entity charges you, why it charges you, and how it appraises what it’ll charge you. Armed with this knowledge, you should be able to minimize the bite credit card processing fees take out of your revenue.
In 2022, credit card processing fees may be guaranteed, but excessive, expensive fees are absolutely avoidable.
- Visa. “Visa USA Interchange Reimbursement Fees“. Accessed January 11, 2022.