The Complete Guide to Credit Card Processing Rates & Fees
Credit card processing fees are extensive, complicated, and somewhat overwhelming. Nevertheless, you have to pay them if you want to process credit cards through your business. Rather than paying these charges blindly, you might as well make an effort to understand them. That way, you can dispute any costs you think are unfair or get a better understanding of what your true overhead is. Hopefully, this guide will help you do just that.
If you’re pressed for time and trust our judgment here at Merchant Maverick, then I suggest you take a look at our top-rated credit card processors. They all offer very fair and competitive rates and don’t charge any bogus fees. If you prefer to learn about this stuff yourself, then read on!
Table of Contents
Before you can begin to understand processing fees, you need to know about the parties involved with them. Consider these the financial “middlemen” between a customer and merchant. They include:
- Credit Card Associations: These are obviously the companies that create the credit cards, like Visa, MasterCard, and American Express. These are the guys that set the rules.
- Credit Card Issuing Banks: These are the financial institutions that issue the credit cards, like Chase, Citi, and Wells Fargo. Some card associations take on the role of a bank as well, developing and issuing their own cards. Examples include Discover and American Express.
- Credit Card Processors: Also known as Acquiring Banks aka Acquirers, these institutions act as messengers between merchants and credit card associations. They pass batch information and authorization requests along so that merchants can complete transactions in their businesses. A merchant may encounter several acquirers for one transaction – one that creates monthly statements, one that handles technical support, and one that issues money to a bank account.
- Merchant Account Providers: These are companies that manage credit card processing (e.g. sales, support, etc…), usually through the help of an acquirer. They could be financial institutions, independent sales organizations, or double-duty acquirers, depending on the situation.
- Payment Gateways: These are special portals that route transactions to an acquirer, usually in the case of an online shopping cart.
Where Do They Fit Into a Transaction?
In any given transaction, the above-mentioned parties play a role. Here’s a graphic to help you visualize the flow of a typical credit card transaction. (Note: Credit Card Processors and Merchant Account Providers usually fill the same role within a transaction, so that’s why you only see “Credit Card Processor” listed below.)
Types of Fees
Now that we’ve covered all the parties involved, let’s discuss the different types of fees in any given credit card transaction.
These fees are assessed every time you run a transaction. They represent the biggest cost of operating a merchant account.
In addition to transactional fees, you may be charged some flat fees as well. They vary by name, value, and applicability, but at least some of them will show up on your monthly statements.
Flat fees are always charged, but incidental fees only appear per incidence. When a chargeback occurs, for instance, you are charged a chargeback fee. Some months you will (hopefully!) not have any chargebacks, and, therefore, the fee will not be charged. However, there’s more than just one incidental fee so keep reading to find out what they are.
Wholesale vs. Markup
All of the above fees (transactional, flat, incidental) fall into one of two categories: (1) wholesale fees, and (2) markups. Just remember, markups are negotiable, while wholesale fees are not.
I’m using the term “wholesale” to help you picture the meaning behind this type of fee, but it can go by other names as well, like, “base fee” or “pre-markup” etc… Your wholesale fees are exactly like they sound – the wholesale cost of your sales transactions. These fees are determined by the credit card issuing bank and the credit card associations (Visa, MasterCard, etc.). They are consistent regardless of which provider you choose. In other words, don’t try to shop around for lower wholesale fees or rates from various credit card processors. It’s just not going to happen.
Your markup fees are how your credit card processor is planning to make a profit from your business. With the right processor, these fees will be modest. With the wrong processor – you’re in trouble. What’s worse is that some processors make it as difficult as possible to know how much markup you’re paying by using bewildering terms and pricing models that would baffle even the most experienced business owner. Markup fees are different from processor to processor and are what you should be comparing when preparing to open a new merchant account.
Breakdown of All Credit Card Processing Fees
Remember the different types of fees we discussed above? This is where we break each of them down.
- Interchange Reimbursement Fees and Assessments: These are the fees the card-issuing banks and the credit card associations charge for each transaction, and they represent the largest expense merchants (should) pay per sale and per month. Interchange fees typically consist of a percentage of each transaction accompanied by a flat per transaction fee (2.10% + .10). Assessments are typically based on a percentage of the total transaction volume for the month. Examples of these non-negotiable interchange and assessment merchant account fees include: Merit 1/ecommerce/CNP fees, NABU/APF/data usage fees, Dues and assessments. Each card association publishes their interchange and assessment fees online (e.g. Visa, MasterCard, Discover, American Express). Remember, these are the wholesale rates. Now, let’s say you’re on an interchange-plus pricing structure. Your processor will quote you something like (.25% + .10). THAT is their markup. That is the amount that they will add to the wholesale rates. But, if you’re on a tiered pricing plan, you’ll get a quote with the Qualified, Mid-Qualified, and Non-Qualified rates that we talked about earlier. Those quotes have the margin baked right into the quote, thus making it more difficult to tell what the processors margin is.
- Terminal Fees: These are charged to merchants who have physical stores, where they directly swipe a customer’s card. If you run a business online, you will not have to worry about this. Some providers try to lock merchants into terminal leases, but as we’ve mentioned before, don’t lease a terminal. Most of our favorite providers will encourage you to buy your machine outright for a low one-time fee. This can save literally thousands of dollars in the long-run. For an example of this, check out Helcim.
- Payment Gateway Fees: These are similar to terminal fees, but they are applied to ecommerce businesses instead. Some processors have in-house payment gateways that are free of charge (CDGcommerce). You can learn more about payment gateway’s here.
- PCI Fees: These are fees paid to the Payment Card Industry, either for noncompliance or compliance. In the case of noncompliance, you have to pay because your business is not upholding PCI standards, which could cost you even more money in the long run. In the case of compliance, you have to pay the merchant account provider to make sure you remain in line with the regulations at all times. Unfortunately, some providers charge for this service without actually providing it, so you need to make sure you are being cared for at all times.
- Annual Fees: These are fees charged every year to cover the basic use of a provider’s services. In my opinion, this is a bogus fee. Most of the better merchant account providers will not charge it.
- Early Termination Fees: This is pretty self-explanatory. It is a fee that is charged if you cancel your contract early. Another fee you definitely want to avoid.
- Monthly Fees: These are fees that are charged each month, usually for the purpose of covering call center costs. Ironically, most of the phone calls that come in are the result of mistakes made by the merchant account providers, making them the cause of their own fees. If you’re looking for the lowest monthly fee possible (a good idea if you have a low volume) take a look at Payline Data. They have a plan for just $5 per month.
- Monthly Minimum Fees: These are fees charged to merchants who do not reach a certain transaction total for the month or year. The minimums will vary by provider, but most of them are around $50,000 a year. This is another fee that is not charged by some of the better providers like Dharma Merchant Services.
- Statement Fees: These are fees charged to cover printing and mailing costs for credit card statements. Some merchants bypass these costs by using electronic bill statements, but others pay as much as $15 a month for miscellaneous processing costs.
- IRS Report Fees: These are fees that merchant account providers charge in exchange for reporting transaction information to the IRS (1099-K). Most of these charges range from $2 to $5, depending on the provider.
- Online Reporting: These are alternatives to statement fees, charged to merchants who choose to view their statements online. Most providers will not charge this kind of fee, and those that do often lump it together with others.
- Network Fees: The card networks charge certain non-negotiable fees that are passed through to the merchant, such as the FANF.
- Address Verification Service (AVS): If you have an e-commerce or telephone order business, beware of the AVS fee. It will be charged on every single transaction. For retail businesses that occasionally key-in card information, you don’t need to worry about it as much.
- Voice Authorization Fee (VAF): Rarely you may be required to call a toll-free number in order to verify certain information before a transaction is authorized. This doesn’t occur often, so don’t worry about it too much.
- Retrieval Request Fee: Every time a customer initiates a dispute on a charge from your business, it sets into motion the chargeback protocol. This retrieval request is the first step. The fee covers any expense related to the retrieval request.
- Chargeback Fee: After the retrieval request, the actual chargeback may occur depending on the circumstances. If it does, expect another fee on top of losing the money from the sale.
- Batch Fee: Every time you submit a batch of transactions, a batch fee (or batch header) is charged. It only happens once or twice a day, so don’t worry too much about an extra dime or two.
- NSF Fee: If you don’t have enough funds in your bank account to cover your merchant account expenses, you will be assessed a NSF (non-sufficient funds) fee.
When it comes to selling merchant accounts, there are four popular ways of pricing: interchange-plus, tiered pricing, subscription/membership, and blended.
The first is referred to as an interchange plus pricing model. This is the most transparent pricing model with the most understandable terms and fees. Interchange-plus itemizes wholesale fees and markups and clearly lists them on your monthly statement. It may make your statement a bit more difficult to read, but it’s worth it since you’ll know exactly what the difference between your wholesale fees and markups are.
If you aren’t lucky enough to be on interchange plus pricing, chances are you’re tied up in a tiered or ‘bundled’ pricing model. In fact, the vast majority of business owners are on a tiered plan, which may make it more difficult to review and understand some statement charges.
Tiered pricing plans categorize credit card transactions into three categories – qualified, mid-qualified and non-qualified Generally, qualified rates are the lowest, and the transaction rates increase for mid-qualified and are highest for non-qualified transactions. Qualified transactions must meet all of the processor’s criteria for processing, such as a swipe in-person with a batch settlement the same day. Failure to meet one or more standards may result in a ‘downgrade’ to mid-qualified or non-qualified tiers.
Although tiered pricing plans aren’t necessarily a bad thing, some dubious merchant account processors will take advantage of this more complicated price plan to charge merchants excessive fees. You may end up paying a lot more than you want to with little way of determining exactly what you are paying for. This is because processors often fail to disclose which tiers the merchant’s transactions are falling into, making it near impossible to determine the markup rates.
This is a fairly new pricing system, but it’s catching on. It is similar to interchange-plus in that the actual cost of the transaction is charged separately from the mark up. But the difference is that you do not pay any percentage markup, just a small transaction fee. For merchants with large transactions especially, this kind of pricing can save a lot of money without decreasing transparency. Check out Fattmerchant (see our review) for a great example of this kind of pricing.
This is like tiered pricing, but without the tiers. Instead all transaction cost the exact same percentage and transaction fee, regardless of the wholesale cost. All costs are blended together to create one consistent rate and fee. This tends to make the transaction cost very high, especially for debit transactions. But since processors using blended rates (like Stripe and PayPal) usually do not charge a monthly fee, this pricing model often makes sense for low-volume businesses.
Every credit card and merchant account provider has a different set of costs associated with its services. Some of them are unavoidable, but others can be negotiated. Remember to choose interchange-plus, and keep in mind that most of the flat fees can be negotiated. If you process a lot of transactions, don’t be afraid to bargain with your processor. With that in mind, there are several processors out there that are very transparent with their fees and are more than happy to place you on interchange-plus credit card processing fees. The majority of our highest rated processors do just that.
Questions about credit card processing? Reach out to us on Twitter with the hashtag #askmerchantmav