How Much Should You Pay for Credit Card Processing?
Retailers, restaurant owners, and other merchants have been relying on traditional merchant accounts for ages to process credit and debit card transactions. But with the introduction of Square in 2009 and PayPal Here in 2012, pay-as-you-go processing has emerged as the egalitarian solution to card processing. E-commerce has thrived, and vendors of all types — from artists to food trucks — can accept credit cards in addition to cash and check. But how much should you pay for credit card processing?
With so many options available, and more cropping up all the time, how do you know what you should pay in credit card processing fees? Are the numbers the processing companies quote you accurate, and are they fair?
Unfortunately, there’s no one number we can say is a fair processing rate. Credit card processing isn’t complicated, but many factors affect the fees a merchant pays.
Right now you’re thinking it would be less of a headache just to set up processing with the first company that’ll have you, right? Maybe your bank is offering a deal for being a long-time customer, or a friend of a friend uses Square and loves it.
Sure, you can go that route — but you could wind up paying hundreds, if not thousands, of dollars in extra fees that you don’t need to pay. We’re here to help you navigate credit card processing and help you get the best rate possible for your business. So stick around!
Table of Contents
Understanding Types of Credit Card Processing
When you start looking into credit card processing, you’ll find that your options typically fall into one of three categories: tiered pricing, interchange-plus pricing, and flat-rate processing. We’ve already covered the differences, and all the terminology you need to know, in numerous articles (check out The Complete Guide to Credit Card Processing Rates and Fees and our corresponding infographic), but we’ll just touch on each option again briefly.
Every card transaction is assigned a code to categorize it. There are thousands of codes, and some signal less risky transactions than others. (A cup of coffee at your local coffee shop is way less of a problem than a large purchase of furniture from an online store, for example. Learn more about high-risk payment processing here.) Merchant service providers started lumping similar categories into “tiers” as a way of simplifying statements and rate processing. Typically there are three tiers: qualified, mid-qualified, and non-qualified. Qualified transactions are the lowest risk and therefore the lowest cost to process; the rates go up with mid- and non-qualified transactions.
The biggest problem is transparency. It’s common for merchants to experience downgrades — transactions processed as mid- or non-qualified. Merchant service providers don’t always clarify what makes a purchase qualified or non-qualified, and every company categorizes differently. You might be quoted the same rate with two processors, but end up paying more with one because fewer of your transactions are qualified for that low rate.
Interchange-plus is a way to correct the issues with tiered pricing models. High-volume businesses have long been able to use this pricing model, but it’s only recently been expanded to merchants of all sizes. For each transaction you pay the interchange rate (assigned by the credit card associations) plus the processor’s markup. This is often a small percentage and a per-transaction fee.
It’s worth noting that some cards and transactions come with higher interchange rates, so your processing rate will still vary slightly, but not as much as you’ll see with tiered pricing. The processor’s markup percentage is typically anywhere between 0.20% and 0.75%, and your transaction fees can be anything from $0.15 to $0.30.
The latest pricing model to break onto the scene is flat-rate processing. This is what you see with pay-as-you-go processors like PayPal and Square. No matter the type of card, you pay the same rate over and over (with the occasional exceptions for card-not-present transactions or international cards, which also have set rates). This is nice because you know when you complete the transaction what you’ll pay to your processor, guaranteed. There’s no messing around with qualified transactions at all.
Some merchant account providers (namely Payment Depot and Fattmerchant) have pioneered another type of flat-rate processing: subscriptions. Rather than pay a percentage markup over interchange, you typically pay a flat monthly fee plus a per-transaction fee. There’s no percentages to mess around with, just the interchange fees and transaction fees.
Finding Your Effective Rate and Effective Markup
If you’re already accepting credit card payments, before you can go looking for alternatives, you need to know your effective rate and effective markup. And even if you aren’t processing payments, knowing how to calculate these numbers is the only way to make accurate comparisons between providers.
Your effective rate isn’t the theoretical rate you’re paying — it’s the total percentage of your sales that go toward fees. And it’s easy to calculate: just divide your total monthly fees (gateway fees, statement fees, monthly fees, equipment leases, and everything else) by the total sum of your monthly sales.
Let’s say you do $20,000 in sales in one month. You pay $1,050 in total fees, leaving you a net gross of $18,950. The formula for calculating your effective rate looks like this:
- ( [total fees] / [total sales] ) x 100
- (1,050 / 20,000) = 0.0525
- 0.0525 x 100 = 5.25%
Check out this handy guide for more information.
Your effective markup is a tool specifically for comparing processors that offer interchange-plus or subscription plans. It is calculated much like the effective rate — but it omits the interchange fees.
Let’s assume your monthly sales total is $35,000. With one processor, you pay $1,580 in markup fees (including statement fees and additional monthly services). The formula for calculating your effective markup looks like this:
- ( [markup fees] / [total sales] ) x 100
- ( 1,580 / 35,000 ) x 100
- (0.0451) x 100
This is the best way to make apples-to-apples comparisons for how much the credit card processors are charging you. However, it won’t work for comparing tiered or pay-as-you-go processors because they don’t separate their markup from the interchange.
Factors That Can Affect Rate
Now that you know your effective rate and your effective markup, let’s take a look at why they might be higher than you’d like.
Type of Transaction:
One of the major determinants in credit card processing rates is “card-not-present” vs. “card-present” transactions. Card-not-present transactions encompass everything where the merchant doesn’t swipe a card through a terminal. Every online transaction is essentially a card-not-present transaction — and so is every payment where you key in a card number through PayPal Here or Square. There’s a greater risk of fraud, at least from the perspective of the processor, and so you pay more for using their services in this way.
The other determining factor is volume. In retail, you save money when you buy in bulk. Likewise, you save money on processing fees when you have higher monthly sales. Volume discounts vary from one processor to the next. PayPal will give you a discount starting at $3,000 per month. Others won’t look at you until you clear $80,000 a month.
Extra services won’t necessarily affect your processing rates, but they will drive up your effective markup. This includes PCI compliance fees, gateway fees, statement fees, monthly leases, and so on. Don’t pay for services you don’t need! If you’re not using a feature your provider offers but you’re still paying for it, it might be time to shop elsewhere.
That said, you should also consider whether you are paying a third-party service for something a merchant account could include. This might be web hosting, a shopping cart, or a gateway — if you can get them cheaper through your provider than through commercial alternatives, the higher effective rate could be worth it! Just make sure you factor these costs into your estimates when making a comparisons.
For example, let’s say you process $35,000 monthly. Your effective rate with one processor (Option A) is 3.5% and you pay $225 for a shopping cart.
Another processor (Option B) offers an effective rate of 4% but includes a hosted shopping cart that is on-par with your current option.
The formulas for calculating the different look like this:
- (Effective Rate x Monthly Sales) + Fees for Third-Party Services
- (0.035 x 35,000) + $225
- 1225 + $225
- (Effective Rate x Monthly Sales)
- (0.04 x 35,000)
In this case, even though you pay a higher effective rate, the inclusion of the shopping cart ultimately saves you money — $600 a year, in fact.
The type of card you process also affects your processing rate. For example, American Express’ interchange rates are higher than those for Visa and Mastercard. Interchange rates for PIN debit cards are quite low, but signature debit, which is processed through the credit card networks, comes with higher fees. Rewards cards — such as credit cards that give users cash back — and international cards also come with higher interchange rates.
Business cards will also drive up your processing costs, so if you are primarily a B2B organization, expect to pay more for credit card processing than a consumer-facing retail store.
Depending on the pricing model your processor uses, the size of your ticket could also affect how much you pay in fees.
Generally, bigger tickets come with a higher risk (which processors don’t like), but they can save you money if you have a lower percentage rate and a higher per-transaction fees. Say your processor charges a $0.20 per-transaction fee.
You do $15,000 in monthly sales and your average ticket size is $15. That’s an average 1,000 transactions.
- 1,000 x $0.20 = $200
You do $15,000 in monthly sales and your average ticket size is $150. That’s an average 100 transactions.
- 100 x $0.20 = $20
A lower average ticket amount means that you could be paying $180 additionally per month. That’s $2,160 per year in additional fees.
Comparing Processor Rates
Once you understand the factors that will affect your credit card processing rates, how do you go about accurately comparing offers from different processors?
For one, always do the math. Take a few scenarios — a good month, a bad month, and an average month, and run the numbers to see what you’d pay with each processor. Remember that not all your transactions will be qualified, either. Look at your existing monthly statements and see where you currently fall. That’s not perfect model because every processor is different, but it’s a good starting point.
Even better would be to compare only interchange-plus quotes, because with interchange-plus you can compare only the markup. Unlike with tiered pricing, the markup is a constant. The interchange variable is completely removed from the equation, making the comparisons more accurate.
Running these numbers can help you decide whether a monthly fee, higher rate, or per-transaction fee might be more costly than you expected.
As we’ve already said, some merchant service providers will include extra services, either for free or at additional cost. Decide which ones you need and don’t pay for the ones you don’t use! If you currently pay another provider for the services, compare costs, features, and reliability to decide where the better value lies.
And always, always research any processor you’re considering. Read customer reviews and look at what the experts are saying. A string of reports claiming a processor is overcharging, complaints about never receiving statements, unauthorized withdrawals, and a lack of responses to those allegations are all warning signs.
All that seems pretty obvious, right? Good!
Here are some other common issues that you might have to wrangle with:
PCI compliance is all about protecting your customers’ information. It’s a set of security standards for card processing. Some merchant account providers will assess a PCI compliance fee — that means you’re meeting the industry standards for data security. Others charge a non-compliance fee, meaning you’re not meeting those standards and you acknowledge as such. If you’re lucky, your processor won’t have any PCI fees. Learn more about PCI compliance here.
Early termination fees are ugly. Merchants don’t like them, and neither do we (especially when they sneak into contracts without merchants realizing it!). That said, sometimes you can negotiate lower rates or get an interchange-plus plan in exchange for agreeing to an ETF.
If you’ve got a good processor and deal directly with the company, this isn’t an issue. If your processor turns out to be less than reputable, or you go through an independent sales rep who really just wants to close the deal and get the commission, you’re in trouble.
Some processors charge you a minimum fee if you don’t meet a certain volume of processing, and others won’t offer you volume pricing at all. Also worth noting is that some processors don’t distinguish between card-present and card-not-present transactions. That’s either a problem (if you primarily process card-present transactions, you’re probably paying more than you need to) or a relief (if you handle mostly card-not-present transactions, you’re probably getting a better rate).
What Should You Do Now?
There’s no one fair number when it comes to credit card processing rates. Some businesses are riskier than others, and processors will most certainly pass that cost onto you rather than absorbing it themselves. The more money you bring in, the more processors are willing to lower your rates, because they make up the difference in sheer volume.
Understand the interplay between the different pricing models and factors such as ticket size and the type of card. If you have a small ticket size, per-transaction fees will cost you much more than they do a business with a larger ticket size. The type of cards your customers use can lead to you ultimately paying more, too.
Wherever you can, we suggest you ask for interchange-plus pricing. Even if merchant accounts don’t advertise these plans, they often have them. It’s the most transparent payment model.
Read your contract all the way through before you sign and don’t be afraid to ask for what you want. And then, continue reading your statements every month and checking your effective rate. If something seems off or your rates suddenly spike, ask questions and demand answers. If you’re not satisfied, start looking for a better deal.