Credit card processing fees vary by issuer, processor, and network, impacting business costs. Reduce expenses by optimizing transactions, minimizing chargebacks, and selecting cost-effective payment solutions.
By Brad Nakase, Attorney
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For every credit or debit card transaction, a retailer must pay credit card processing fees. This charge is set by the merchant company and may include interchange fees, chargeback costs, assessment and service charges, and other expenses.
In general, the card issuer, the payment processor, and the card network are the three parties that process credit cards.
The financial institution or bank that issues cards to customers directly is known as the card issuer. A few examples of card issuers are Chase, Citi, Bank of America, and Capital One. The card issuers collaborate with debit and credit card networks like Visa & MasterCard. In order for a merchant to take a card, the card issuer takes a commission for every transaction. Usually, this commission is a proportion of the amount of the transaction plus a fixed fee.
The financial organization responsible for secure processing and completing a debit or credit card transaction is known as the payment processor. In order to make all of this possible, payment processors typically collaborate with other businesses or brands that deal directly with customers and retailers. For every debit or credit card purchase, they usually impose a set fee in addition to a proportion of the transaction value, much like card issuers do.
Overall, U.S. corporations pay between 2.87% and 4.35% per transaction on average. This is referred to as the merchant’s rate of discount.
The total amount that payment service companies charge businesses to process credit card transactions is known as the merchant discount rate. In order to guarantee a quick and correct transaction, it contains a number of fees, including assessment fees, interchange fees, and the fees charged by the payment service provider.
A number of factors, such as chargeback costs (which we discuss below), yearly account fees, and PCI compliance fees, affect how much you may end up paying. Therefore, before deciding how to handle credit card transactions at your company, it’s crucial to educate yourself.
1. Interchange Fees
A fee is deducted from the merchant account or acquiring bank and transferred to the customer account or issuing bank each time a consumer uses their credit card in the shop you operate. It is also called an interchange charge. (See below for the exception to this rule.)
Each network determines the interchange fees. In April and October, they undergo two annual changes. In 2023, interchange fees increased to an all-time high of $172.05 billion, averaging 2.24%, according to the Merchants Payment Coalition. Over 80% of fees were sourced from Visa and MasterCard (the interchange rates for both cards are available on their website).
In order to assist the card-issuing bank with managing expenses, fraud, and the risk of accepting the sale, interchange fees are used. It is therefore not unexpected that the factors influencing these rates are related to the level of risk assumed by the card issuer.
They consist of:
The MCC also affects the interchange fees that a bank or other organization charges. Interchange costs for “higher risk” business categories, such as financial services, hospitality, travel, and gambling are frequently higher. American Express functions as both the card issuer & the card network, and their fee schedule differs from the interchange costs that we have discussed.
2. Service or Assessment fees
It is required of payment processors to gather assessments and dues for credit card networks. The networks get these service fees in exchange for the right to execute transactions on the payment networks and for the utilization of their card name.
In contrast to interchange fees, assessment fees are determined by the total sales for the month rather than by the individual transactions. They are usually less expensive than interchange fees as well. However, the cost differs by network and is contingent on factors such as the volume of transactions, whether it was a debit or credit card, and whether international transactions were handled.
Assessment fees are reviewed by networks twice per year, much like interchange fees. You can find out if your assessment fee has changed by looking at your credit card statement every month.
3. The fee charged by the payment processor
You must pay the credit card processor a processing fee in order to utilize the product. This cost is usually assessed monthly, in hidden fees, and per transaction.
There are several methods to lower the fees associated with your credit card transactions. The following are some:
1. Try to take cards in person whenever you can
Compared to POS (in-person) transactions, online, keyed-in, invoicing, or mail-order transactions (sometimes referred to as CNP and card-not-present transactions) incur higher processing fees due to their increased vulnerability to fraud. Additionally, those transactions may be included in the “mid-qualified surcharges” category, which raises the interchange cost.
If taking cards in person is acceptable for your business, try to do so whenever you can.
2. Lower your chargeback risk
Banks view businesses that have a high volume of chargebacks—where a customer challenges a charge from the business and requests that the card issuer reverse it—as a higher risk & may increase processing fees. Therefore, taking action to lower the chargeback risk is crucial.
Among the most efficient methods to reduce chargebacks is by utilizing a credit card permission form, though there are other easy options as well. The customer’s signature on this document authorizes you to make chargebacks to the card repeatedly. Your chances of successfully resolving a chargeback dispute with the card provider are significantly increased (and also made simpler) when you have this paperwork in place. As a merchant or restaurant owner, there are steps you may take to reduce the likelihood of chargebacks.
3. Set a minimum amount to be spent for credit card transactions
A lot of companies (particularly those that deal with smaller transactions) decide to impose a minimum amount before they take credit cards in order to make up for processing fees. In the event that a minimum is established for card buys, the Dodd-Frank The Wall Street Reform & Consumer Protection Act (2010) permits companies to have a $10 credit card minimum as long as the policy is made explicit and easily accessible to customers. Additional rules and limitations on merchant limits might exist in some states.
However, only credit cards are affected by this. Setting a minimum amount to be spent on debit cards is prohibited.
4. Research other payment processors
Numerous criteria, including your sector, volume of sales, and company size, contribute to your decision when selecting a card payment processor.
If you handle fewer transactions each month, you may be able to save money by selecting a processor that charges a fee every month but lower rates for individual transactions. With a bigger volume of sales, the opposite can be true. Assess the various fee categories against one another and determine the possible interchange, assessment, and processing costs for each choice.
Think about how you want to conduct business in the future and don’t be scared to request better prices. Conditions may be negotiated if you have a track record of low chargebacks or strong sales volume.
5. Low processing fee cards
The fees associated with processing cards vary widely. Debit and credit card functionality and the card supplier (American Express, MasterCard, and Visa) both affect fees. Processing fees for credit cards are frequently higher than those for debit cards.
Because the money on a debit card having a PIN is instantly available and validated, there is less risk involved, which typically results in lower processing costs. Debit card payments are processed by several banks for a fixed cost, regardless of the total amount.
The practice of charging customers for credit card processing fees sometimes referred to as a surcharge, has gained popularity since 2020. However, in many states, such as Massachusetts, Connecticut, and Puerto Rico, it remains prohibited.
A variety of rules must be adhered to by states that permit surcharges, including:
Convenience fees are extra charges made to customers for the option to pay in a method that is deemed unusual for your company, whereas surcharges are when a corporation passes along credit card processing fees to a client. Some companies, for instance, can impose a convenience charge on payments made over phones. In the majority of states, convenience fees are permitted; however, they must be properly disclosed and are only applicable when the client has the choice to pay using the company’s preferred method.
1. What is the transaction cost that I will have to pay?
Consider using the Payments Fees Calculator for the platform you decide to use. You may calculate the costs you would pay based on the monthly transaction value, average transaction size, and the percentage of card present versus non-present transactions your company usually handles.
2. In terms of credit card processing fees, what may I save?
A competitive bespoke rate can be available to your company if you sell more than $250,000 annually and your typical ticket size is $15 or greater.
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