Merchant Services Fees Explained: Everything You Need To Know About Credit Card Merchant Fees
Merchant account fees are more than just the cost you pay per credit card swipe. They also include the costs to maintain your account, hardware, and software — and sometimes even hidden fees.
Merchant account fees are an inevitable — and deeply unpopular — element of establishing a merchant account that will allow your business to accept credit and debit cards. Merchant services fees can eat into your profits and make it even more expensive to process credit/debit card transactions.
Worst yet, fees often aren’t disclosed during the sales process and instead appear out of nowhere as an unexpected surprise on your monthly processing statement. In this article, we’ll explain what merchant services fees are, which fees are commonly charged, and how much you should expect to pay for them.
We’ll also give you some tips on how to avoid being surprised by a “hidden” fee, and offer some suggestions to help you lower your merchant account fees.
Table of Contents
What Are Merchant Fees?
Merchant services fees are simply fees paid to maintain the merchant account you need to be able to accept credit and debit cards. Many of these fees recur on a monthly or annual basis, whether you process any transactions or not. Other fees are only assessed if a specified event (such as a chargeback) occurs.
What Makes Merchant Services Fees So Complicated?
The main factor complicating merchant fees is that each fee serves a specific purpose that makes it distinct from other fees, resulting in a bewildering variety of charges that can show up on your processing statement.
Another complicating factor is that some merchant account fees are levied by your processor, while others are charged by the major credit card associations (e.g., Visa, Mastercard, Discover, and American Express). With these fees, your processor merely collects the fee and passes it on to the appropriate entity. Needless to say, these types of fees are non-negotiable when setting up your account.
Finally, there is no standardization among merchant services providers with regard to fees. While most providers tend to stay within industry averages, each provider is free to set its own fee schedule using whatever criteria it deems appropriate.
Common Merchant Account Fees For Small Business
Regardless of which provider you sign up with, your merchant account will come with three types of merchant services fees, including the following:
- Transaction Processing Fees: These are charged by the banks, the card associations, and your processor for processing your transactions and disbursing the remaining funds to your account.
- Scheduled (or Recurring) Account Fees: These are fees charged by your merchant services provider for maintaining your account. They are typically charged on a monthly or annual basis.
- Incidental Fees: These fees are only assessed if a defined triggering event occurs (chargebacks are the most common). They are usually a one-time additional charge, although PCI non-compliance fees will be charged every month until your account is brought back into compliance.
Merchant Processing Fees
These fees are assessed every time you run a transaction. Your processing fee, for instance, is a transaction fee. Transaction fees usually comprise the biggest cost of accepting payment cards. Credit card transaction fees come in two forms: 1) percentages (e.g., 2.19%, 0.25%), or 2) fixed per-item fees (e.g., $0.20, $0.0195). Often, both forms are charged on a given transaction.
|Typical Price Range (Per Transaction)||Wholesale Or Markup||Description|
|Interchange Fees||1.5%-3.1%||Wholesale||Fees the issuing banks charge for each transaction; they usually represent the largest single expense merchants pay per sale and per month|
|Assessment Fees||0.12%-0.15%||Wholesale||Fees the credit card associations collect for each transaction|
|Markup Fees||0.10%-0.40% + $0.05-$0.49||Markup||Fees charged by your merchant services provider to cover costs and ensure a profit|
Note that this article focuses primarily on merchant services fees. Please see our complete guide to credit card processing rates and fees for an in-depth look at credit card processing fees.
Scheduled Merchant Account Fees
Scheduled merchant account fees are the recurring fees you pay to maintain your account. While most of these fees are charged on a monthly basis, you may also encounter annual or quarterly fees as well. While many of our top-rated providers disclose a complete fee schedule on their websites, many others do not. In this case, your fees should be specified in your contract documents. Note that providers don’t always charge the same amount for a given fee for every merchant, and some of these fees can be reduced or eliminated through persistent negotiation during the account setup process.
Below is a compilation of the most common scheduled fees used by the payments industry today. Note that markup fees are paid directly to your provider, while wholesale fees are passed through to the applicable entity charging the fee.
|Typical Price Range||Wholesale Or Markup Fee||Description|
|Fixed Acquirer Network Fee (FANF)||Varies, published by Visa||Wholesale||Card association fee charged by Visa; varies by business type and monthly volume|
|Merchant Location Fee||$15/year or $1.25/month||Wholesale||Card association fee charged by Mastercard; waived for some businesses|
|PIN Debit Network Fee||$50-$62/year||Wholesale||Additional charge for use of the PIN Debit networks, if your business accepts debit cards|
|Monthly Account Fee||$0-$199/month||Markup||Monthly fee charged to maintain a merchant account; may include the cost of providing customer support|
|Annual Fee||$0-$300/year||Markup||An annual fee to cover service and equipment upgrades (often a “junk” fee)|
|Statement Fee||$7-$10/month||Markup||Covers printing and mailing costs for credit card statements; can sometimes be avoided by using e-statements|
|Online Reporting Fee||$5-$15/month||Markup||Alternative fee for e-statements; most providers will not charge this fee and those that do usually lump it together with other fees|
|Monthly Minimum Fee||$5-$25/month||Markup||Additional fee charged if processing fees fail to reach a minimum amount for the month; note that you only pay the difference between your actual processing costs and the required minimum|
|Equipment Leasing Fee||$5-$60/month||Markup||Fees charged to merchants who lease their credit card terminals; leasing is never a good idea and can be avoided by buying your equipment outright|
|POS Software Fee||$10-$100/month||Markup||Many point-of-sale (POS) systems require a monthly software subscription fee in addition to the cost of the hardware itself|
|Payment Gateway Fee||$5-$25/month + $0.05/transaction||Markup||A monthly subscription fee for use of a payment gateway, typically charged if you choose to use a third-party gateway instead of your provider’s proprietary product; may also require an additional per-transaction processing charge|
|PCI Compliance Fee||$60-$130/year||Markup||Fees paid to your provider for security scans and other services to ensure compliance with Payment Card Industry Data Security Standards|
|IRS 1099-K Reporting Fee||$25/year||Markup||Fee charged by your provider for reporting transaction information to the IRS|
Incidental Merchant Fees
Incidental fees are only paid when a pre-defined incident occurs with your account, triggering the fee. Most of these fees are only charged once per incident. However, PCI non-compliance fees are usually charged for every month that your account is deemed to be out of compliance. The most common incidental fees include the following:
- Refund Fees: If you issue a refund to a customer who paid with a credit or debit card, you may be charged a refund fee by your processor. Most processors will return the amount of the purchase, but some will keep any transaction processing fees that were charged. Policies vary widely among providers, so you’ll want to make sure you understand your provider’s policy before signing up.
- Chargeback Fees: More accurately described as a chargeback investigation fee, you’ll pay this fee to your provider whenever a customer files a chargeback against you with their card-issuing bank. Chargeback fees usually cost $15-$25 per chargeback, although some providers will refund this fee if you prevail in the chargeback investigation.
- Batch Fees: Many (but by no means all) providers charge a small fee whenever you upload a batch of transactions for processing. Retail businesses traditionally submitted all credit/debit card sales for the day in a single batch at the end of the day, but this approach doesn’t always work for eCommerce businesses that accept orders 24/7. Although batch fees typically only cost around $0.10 each, they can add up quickly if you aren’t careful. Many providers today have eliminated batch fees altogether.
- Address Verification (AVS) Fees: Card-not-present transactions usually require the use of the Address Verification Service (AVS) to verify that the customer’s billing address matches the one provided by the customer at checkout. AVS fees — if your provider charges them — typically cost around $0.10 each. However, the use of AVS is a powerful tool in preventing online credit card fraud, and AVS fees are generally worth the additional expense.
- PCI Non-Compliance Fees: This type of fee is essentially a penalty for not maintaining PCI compliance standards for your business. Unfortunately, most providers merely add this fee to your monthly processing statement without doing anything to help you get back in compliance. We recommend reading every monthly statement very carefully and contacting your provider for assistance immediately if you see that you’ve been charged this fee. Non-compliance fees typically run about $30/month until your account is brought back into compliance.
Do Merchant Accounts Have Hidden Fees?
It’s commonly accepted among business owners that merchant accounts include hidden fees.
By “hidden,” they mean fees that either they weren’t aware of or weren’t disclosed by the sales agent who set up their account. It’s true that sales representatives trying to sign up a new merchant will frequently gloss over — or completely fail to mention — every fee that you might possibly have to pay. At the same time, merchants share an equal part of the blame if they fail to read their contract documents or merchant agreement thoroughly before signing up.
Your merchant agreement should disclose the name and amount of every fee you will or might be responsible for over the life of your account. (Be aware, however, that some providers cover themselves by including a clause in their contracts that allows them to impose new fees or raise existing ones, with or without prior notice to you.)
While you should be able to locate information about every fee that comes with your account, the following fees generate the most complaints about “hidden” fees from merchants:
- Application or Account Setup Fees: While the practice is no longer common, some providers will still charge you a one-time fee to process your application for a merchant account, and possibly a second fee to set the account up once it’s been approved. We recommend that you steer clear of any provider that still charges these fees, as they’re likely to add even more fees to your account once you’ve signed up. The exception is for high-risk merchants, where the additional underwriting required to approve an account sometimes justifies paying a setup fee.
- Annual Fees: In addition to a monthly account maintenance fee, some providers will also charge you a hefty annual fee, claiming that this expense is necessary to cover the cost of software and hardware upgrades. In most cases, however, it’s simply a “junk” fee that’s tacked onto your bill while providing little or no actual value in return. Annual fees can run into hundreds of dollars, a significant expense for a small business.
- Early Termination Fees: Perhaps the most reviled “hidden” fee in the processing industry is the early termination fee (ETF). This fee, which typically runs between $200 and $600, only applies if you’re on a long-term contract and try to close your account before the current term expires. Unfortunately, complaints about ETFs usually come from merchants who mistakenly relied on their sales agents to disclose all fees before signing up and failed to read their contract documents. While most of the top-notch providers in the industry today no longer require long-term contracts or ETFs, there are still plenty of traditional providers out there that will include these features as standard items in their contracts.
What Can You Do About Hidden Merchant Account Fees?
As we’ve emphasized above, your single best defense against hidden fees is to read your contract documents thoroughly before you sign up with any provider. By doing this, you’ll avoid being surprised by an unexpected fee later on. Other steps you can take to lessen the impact of merchant account fees on your bottom line include the following:
- Sign up with a payment service provider (PSP): Very small or newly-established businesses often don’t need the features of a full-service merchant account. Payment service providers (PSPs) like Square offer month-to-month billing with no long-term contracts and no monthly fees for basic services. Fees for optional services are clearly disclosed on the Square website. While you’ll pay more on a per-transaction basis with Square’s flat-rate pricing, your overall cost will be much less due to the savings on account fees.
- Sign up with a transparent merchant account provider: For larger businesses, using a PSP like Square or PayPal won’t be a great option due to account stability issues, higher transaction processing costs, and a lack of specialized features. If your business needs a full-service merchant account, you can still find providers that fully disclose their fee schedules on their websites. Companies like Helcim and Dharma Merchant Services offer some of the most thorough pricing disclosures we’ve found anywhere. With transparent providers like these, you’ll be able to come up with a more accurate estimate of your anticipated costs before you even contact their sales departments.
- Negotiate for lower fees: If you end up with a more traditional merchant account provider that doesn’t offer a fixed, fully-disclosed fee schedule, you can still negotiate some of the fees that come with your account. Note that wholesale fees that are passed through to other entities are not negotiable, but any markup fees charged directly by your provider are fair game. For example, most providers are surprisingly willing to waive your early termination fee if you have a long-term contract. Monthly minimums and rolling reserves (if you have one) can also be reduced through negotiation.
The Bottom Line On Merchant Services Fees
While merchant account fees are definitely irritating (and expensive!), they’re often an inevitable cost of doing business. Even if you sign up with a payment service provider like Square that doesn’t charge monthly fees, you’ll still be paying the costs associated with maintaining your account in the form of higher transaction processing rates.
Unfortunately, the overall impact of merchant fees falls most heavily on small business owners with a relatively low monthly processing volume. If your current merchant account provider is hitting you with a bewildering variety of unexpected fees every month, you’ll want to consider switching providers. In looking for a better deal, be aware of the industry averages we’ve listed in the table above, and follow the strategies we’ve recommended for lowering the overall impact of merchant services fees on your business. You’ll also want to learn how to calculate your effective rate for credit card processing, which is the simplest and most accurate way of comparing overall costs between different providers.
New business owners may also wish to consult the following articles for more information on choosing the best processing hardware and software for your business: