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How to Avoid Overpaying for Credit Card Processing

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One of the first things that I do when I analyze a merchant account statement is calculate the “effective rate.”

The effective rate of a credit card processing statement is the total processing fees divided by total sales volume. It’s usually expressed in the form of a percentage, and in my opinion is one of the quickest ways to find out if you’re paying too much for your merchant account.

The best way to explain the effective rate would be to show you an example.

Effective Rate Example

For this example, we’ll use the following statement:


Let’s assume that the above statement is for a business that sells backpacks, and sells them exclusively online — a straight eCommerce business. I’ve highlighted the total sales volume in green, and the total fees in red.

So, what is the effective rate for this statement? If you guessed 5.99 or 6% (rounded) you would be right.

Let’s do the math again:

$5907.03 / $98511.45 = .0599 or 5.99%.

Now, what does that 6% tell us?

Well, we know for sure that about 6% of this merchant’s processing volume goes to fees, but is that 6% good or bad? Is it too high, or is it just right?

To determine that, we need to figure out how much the merchant should be paying. We need to know if 6% is industry standard, or if it’s much higher. So, how do we determine that?

Have You Heard of Interchange Rates?

If not, here’s a quick overview. Interchange rates are the primary “wholesale price” of transactions. Every credit or debit card transaction has a specific wholesale cost, usually in the form of a percentage and small per-transaction fee. Moreover, every transaction is different depending on the environment it is processed in (e.g., eCommerce vs. retail), and the type of card that is used (e.g., basic, rewards, business, etc.). So, every transaction has a different wholesale price — or rather, interchange rate.

Visa and MasterCard set these interchange rates as a standard for the entire payment processing industry. For every transaction you run, the entity that resells credit card processing services to you must pay the designated interchange amount to the bank that issued the credit or debit card to the consumer. Anything that is charged above that base cost is the reseller’s cut (markup). Visa or MasterCard also take their own wholesale cuts in the form of card association dues and assessments, but the portion is much smaller.

Let’s look at some sample interchange rates this merchant might see. For this example, we’re going to look at Visa’s rates, since MasterCard and Visa’s rates are very similar.

Like MasterCard, Visa publishes tables of interchange rates twice a year in PDF form. If you open the PDF and begin looking at the debit interchange rates on page 3, you’ll see a section for “Card Not Present Transactions.” Since our sample statement is from a strict eCommerce business, those are the kinds of rates we want to pay attention to. Here’s a snapshot of the interchange table:

Depending on the size of the card-issuing bank, there are two possible rates for each type of debit card transaction listed down the left in bold. You can see the rate for “CPS/eCommerce Basic, Debit” in the last row, which should be a very common debit interchange rate this particular merchant is charged.

For transactions on consumer credit cards, scroll to page 8 of the PDF to find some basic eCommerce interchange rates. Here’s another snapshot:

Notice anything when looking at these tables of rates?

I see numbers like 1.80% and 1.65%, and even 2.40% — but nothing even remotely close to 6%. (And, in case you’re wondering, even American Express wholesale rates are typically under 2.5% for these types of transactions.).

What’s the deal? This merchant’s effective rate is double or triple the common interchange rates for the business. That’s a red flag if I’ve ever seen one.

So, what’s next?

Why You Might Be Paying More For Credit Card Processing

At this point, we need to start looking at why. Why is this merchant’s effective rate so high?

Here are a few things I would look for right away:

  • Is the merchant considered high risk?  In our case, the merchant sells backpacks, and that’s not considered high risk. If it was something like an adult store or debt settlement company, then I wouldn’t be so surprised by that 6% effective rate. High risk merchants should expect to pay higher rates to process their transactions, regardless of what the interchange rates are.
  • Are there any hidden or junk fees?  Remember, the effective rate takes into account total fees, not just interchange rates and rate markups. There could be some hidden fees, or even some less-nefarious incidental fees that particular month that are contributing to the 6%. Check out our complete guide to rates and fees and our guide to analyzing your processing statement in full to learn more about all the potential fees involved in card processing.
  • Is the average transaction size quite small? Businesses with very small average tickets are often hit hard by the flat, per-transaction piece of an interchange rate or processing rate. For example, you could see in the debit interchange table snapshot that the raw amount of the transaction fee of a small bank debit card is $0.21. This wholesale charge alone is over 4% of every $5 transaction of this type, even before any processor’s markup comes into play. Or, consider the flat rate (including interchange) of 2.9% + $0.30  that some ecommerce payment facilitators charge. If this merchant sells super-discounted backpacks and the average transaction size is $15 each, that’s already almost a 5% effective rate before any other fees are counted. The point is, transaction size can have a huge impact on your effective rate.
  • Are there lots of international transactions? Remember when I said that the card brands like Visa and MasterCard also charge some wholesale transaction fees, but that these are typically much less than interchange? The exception is for international charges, particularly if currency conversion is involved. If this merchant’s processor passes cross-border assessments through on the statement, this could easily be adding as much as 1.65% to international volume on top of all other normal fees and rates.
  • Are most of the merchant’s transactions being downgraded?  We’ve covered downgrades in a few articles, but this basically means that transactions are getting bumped into higher rate tiers for any number of reasons (most of which are completely out of the merchant’s control). If the merchant is on a tiered pricing plan, we’d check to see if the majority of transactions are ending up in higher-priced mid- or non-qualified rate tiers. If a more transparent cost-plus model (like interchange-plus or subscription) is in place, we could examine the statement in more detail to see if the merchant could change anything about its processing procedures to prevent excessive downgrades of wholesale fees.
  • Is the processor’s markup too high? This one’s pretty self-explanatory, but it’s also worth pointing out that the only way you can accurately see the difference between standardized, wholesale costs (like interchange) vs. the processor’s variable markup is with a cost-plus/pass-through pricing plan like interchange-plus. It’s no coincidence that all our top-rated providers offer cost-plus pricing.

The Bottom Line

And, there you have it! Calculate your effective rate and then cross-check that with interchange rates (while also taking a good look through your statement for unexpected charges). If your effective rate is much higher than the “wholesale price,” then start looking into it. If not, then maybe it’s time to switch providers.

Rose Holman

Rose Holman

Rose Holman is a writer, blogger, and educator from Portland, OR with an MA in Teaching from Western Oregon University. She enjoys educating SMB owners about the complicated (and notoriously sketchy) world of payment processing. Since starting at Merchant Maverick in 2016, she has also added eCommerce software to her areas of expertise.
Rose Holman
Rose Holman

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Responses are not provided or commissioned by the vendor or bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the vendor or bank advertiser. It is not the vendor or bank advertiser's responsibility to ensure all posts and/or questions are answered.

    Lowell Parker

    We’ve been fighting with merchant service providers for years to give us contracts based on average net effective rate during the term of the contract, but they refuse. This should be an industry standard. Instead, merchant service providers prefer being able to manipulate their fees from one month to the next to squeeze profits out of the merchant.

    Our other gripe relates to chargebacks. When a cardholder claims a charge is not theirs due to fraudulent use of the card, the merchant (who has done nothing wrong) takes the hit by having that revenue removed from his account, despite having provided a product or service that cost money. What about the thieves who steal the cards? Sure, they are hard to find, but who asked credit card companies and their issuing banks to create products that are so easily misused, and who took them off the hook when the actual criminal can’t be found? Charging the merchant is blaming one of the victims. We’ve always wondered if this is written into law, or whether it just works this way because banks own the politicians in Washington?


      You also need to take into account if processing fees are returned when the merchant issues a refund. Flate Rate processors normally do refund the fees.


        Be sure not to include any Amex volume since Amex bills merchants directly, that would only distort the numbers.

          Merchant Maverick Admin

          Great point Curtis. I’ll add that to the article.

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