The Complete Guide To Merchant Account & Credit Card Transaction Fees

Whether you’re a new business owner who’s thinking about taking credit card payments for the first time or an experienced merchant seeking to lower your current rates, a deeper understanding of the payments processing industry can help protect you from unscrupulous salespeople and, ultimately, save you money on your credit card processing costs.

The payments processing industry is notoriously complex and confusing, but you don’t need to develop expert-level knowledge to understand how it works and what your costs should be. We say “should” because there are many players in the industry that are trying to make as much profit as they can from their products and services. These providers will gladly charge you above-market prices if you let them.

In this article, we’ll give you some average credit card merchant rates that you should keep in mind as you look for a suitable credit card processor. We’ll also explain why these average rates are only rough ballpark figures and why you’ll need to determine which type of pricing plan will work best for your particular business.

Between this article and the many other, more in-depth articles we’ve linked to, you should come away with a functional understanding of how processing works and what all those fees on your monthly processing statement are for. If you’re in a hurry, you can also check out our visual guide to credit card processing fees and rates.

What Are Credit Card Merchant Fees?

Credit card merchant fees are simply the fees you have to pay to get the proceeds from a credit card transaction. While your merchant account provider determines the total fee, multiple entities will receive a portion of the funds you pay for each transaction.

You’ll have to pay a merchant fee (sometimes also referred to as the “discount rate”) on every credit or debit card transaction that you accept. Typically, this fee is a combination of three factors: interchange fees, assessment (or service) fees, and the payment processor’s markup. While your payment processor is the party that sets the merchant fees, the card issuer and the card network each play a starring role in determining the fees that are ultimately taken from the transactions you process.

What Are The Average Credit Card Processing Fees For A Small Business?

We all know that having an average number in mind is very useful when comparing merchant fees. However, there is no single definitive set of universally accepted statistics showing the average costs of the four major credit card networks. That’s why we’ve created a table showing estimates of the big-four card networks’ (i.e., Visa, Mastercard, Discover, American Express) average costs from three different sources: Payment Depot, Fool.com, and Square.

Additionally, Payment Depot has estimated that when taken together, the average costs for credit card processing are:

• 1.5% to 2.9% for swiped/dipped cards
• 3.5% for keyed-in transactions

Please keep in mind that these numbers are very rough estimates of average credit card processing fees. Your actual fees will depend on many factors, including the type of transaction you process most often (in-person vs. online), your specific type of business (low-risk vs. high-risk), and your average transaction size. Once you understand how these factors can affect your rates, you’ll be much better positioned to judge the appropriateness of a quote than you will by merely comparing your quote to a simple “average.”

How Interchange Affects All Of Your Credit Card Processing Fees

Let’s take a closer look at credit card transaction fees and discuss which ones you can do something about and which ones you cannot change.

Wholesale Merchant Fees VS Markup Processing Fees

The terms wholesale and markup get thrown around a lot in the processing industry. It can be difficult to identify which credit card fees for merchants fall into which category. At its core, however, the distinction isn’t too difficult to grasp. The two primary considerations are 1) which of the parties we’ve discussed ultimately collects the fee, and 2) how fixed the cost is across the industry. Here’s all you really need to know:

Wholesale Fees VS Markup Fees

As the merchant, you’re the “lucky” one who ultimately must cover all these costs. Meanwhile, your credit card processor is right in the center of the fee-collecting and directing process. It chooses how to pay the necessary wholesale costs for running your account — while also adding markups to cover its costs, paying other third-party service providers associated with your account, and turning a profit.

With the right processor, markup fees should be modest. With the wrong processor, you can really get hosed. What’s worse is that some processors make it as difficult as possible to know how much markup you’re paying by using obscure terms and pricing models that would stump even the most experienced business owner. For now, just remember that markup fees differ from processor to processor; these are what you should be comparing when preparing to open a new merchant account. Meanwhile, don’t try to shop around for lower wholesale fees or rates from various credit card processors. These rates remain consistent throughout the industry and are not negotiable.

There is something else you should know about wholesale costs: They vary from industry to industry and from card association to card association. They also tend to differ by how the card is used — whether it’s an in-person purchase or an online purchase. The reason for the difference has to do with risk.

Some industries, such as the gambling industry, are simply more prone to instances of impulsive purchases/chargebacks/fraud than, say, fast-food restaurants. It’s also easier to use a stolen card for an online purchase (a.k.a. a card-not-present or keyed-in transaction) than dipping a card in person (a.k.a. a card-present transaction). Everyone along the transaction chain wants to be paid more for taking a higher risk, so your costs will change depending on your industry and how your customers typically pay. If you compare your pet store’s rates (low-risk) with your friend’s CBD shop rates (high-risk) — even if you use the same processor charging the same markup — you’ll discover that your buddy is paying a higher rate.

(Your processing cost also varies by type of card — credit, debit, rewards, corporate — but that has more to do with maintaining profit margins by passing costs down to you than with risk.)

Take a look at this table showing some sample pricing models and see whether or not you can easily pull out the wholesale fees and markups from the quoted rates:

Sample Quoted Payment Processing Rates

This brings us to the concept of interchange fees. Earlier, we touched on and defined the term, but let’s further elaborate on this fee.

What Does Interchange Have To Do With Merchant Account Fees?

Most discussions about the costs of credit card processing hinge on one particular category: interchange. This is primarily due to the fact that this wholesale fee makes up the majority of the cost of processing cards. Card association fees, also known as assessments — the other main wholesale cost — make up a non-trivial chunk as well, but it’s considerably smaller than the interchange portion.

The interchange fee is strictly a wholesale fee. It uses the formula financial risk charge + fixed business costs. As the formula relates to risk, the interchange fee can be different depending on your industry. Lower-risk industries get a lower interchange fee, while higher-risk industries get a higher interchange fee.

To further complicate matters, the card associations set the interchange fee, and each card association can assign a different risk value, even to the same industry. In other words, the interchange rate for, say, a shoe shop might be different if a customer uses a Visa card instead of a Mastercard card. This happens if Visa and Mastercard have simply decided differently on how much risk they wish to take on for the footwear industry.

As we discuss interchange fees below, remember that this number can differ depending on your industry and the card your customer decides to use to make the purchase. This industry-dependent risk assessment is called a merchant category code or MCC. Businesses using merchant accounts are assigned an MCC from the list of pre-existing codes provided by the card associations to broadly identify the type of product or service a business offers.

Despite the card association’s involvement, the interchange fee is ultimately collected by the card-issuing bank. The table below summarizes just a few examples, but there are hundreds of interchange classifications across the card brands. Visit the Visa and Mastercard websites for the complete lists, but note Discover and American Express do not publish their interchange fees. Interchange fees are reviewed and adjusted on an as-needed basis twice a year by the card associations (April and October). Yes, your interchange rates can change over time. Due to the economic fallout from the ongoing COVID-19 pandemic, both Visa and Mastercard have delayed proposed changes to their interchange fees until sometime in 2022.

Common Interchange Rate Examples

Due to the central role interchange fees play in the processing industry, card processors’ pricing models are primarily based on how interchange fees are handled. Before going any further, take a moment to compare those big bank debit interchange rates in the table above to the rate of 2.9% + $0.30 or even the 2.75% charged by some flat-rate processors. One begins to see the pitfalls of a pricing model that lumps multiple (or all) card and transaction types together and then slaps on one blanket rate to cover them all. There are pros and cons to each pricing model for different business types. Just be aware of the wide variety of base costs behind the different card and transaction types.

Now, let’s scrutinize the four main pricing models in detail.

How Pricing Models Affect Credit Card Processing Rates

All merchant account providers use one (or more) of four popular methods of pricing: interchange-plus, membership, tiered, and flat-rate pricing. If you already have an account but don’t know your pricing model, you can identify which one you have by examining your statements for key indicators. The main distinction to be aware of in pricing models is what happens to interchange fees. Are they itemized and charged completely separately from the processor’s markup (“pass-through” or “cost-plus” pricing), or are they blended in with the rate markup (blended pricing)? Take a look:

Pricing Model Overview

For most merchants, we recommend signing up for one of the pass-through models. Otherwise, you won’t be able to see the true difference between wholesale rates and processor markups. Bearing the above in mind, let’s look at the various pricing models currently being used by credit card processors.

Interchange-Plus Pricing

Interchange-plus pricing 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. This may make your statement a bit more difficult to read overall, but it’s worth it since you’ll know the precise difference between your wholesale fees and rate markups. Interchange-plus rate markups usually consist of a percentage markup and a per-transaction fee markup (also called an authorization fee).

Membership Pricing

Membership pricing is a newer pricing system, but it’s been gaining acceptance lately. Like interchange-plus pricing, interchange fees are passed through at cost, and the only markup you pay is a fixed per-transaction (authorization) fee.  You’ll also pay a flat monthly subscription fee that covers all your recurring account fees and a certain amount in markup to compensate for the percentage-based fee that you aren’t being charged on each transaction. Although the monthly subscription fee can be quite expensive, high-volume merchants can save a lot of money under this kind of pricing without decreasing transparency. Check out Payment Depot for a great example of this variety of pricing.

Tiered Pricing

Even with the increased popularity of the above “cost-plus” models, most business owners are on a tiered (or bundled) pricing plan. Tiered statements may appear simpler at first, but in reality, this model makes it difficult to understand your rates and fees thoroughly. Tiered pricing plans categorize credit card transactions into one of three categories: qualified, mid-qualified, or non-qualified.

Qualified rates are the lowest of these three types. 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 an in-person swipe/dip 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. Tiered pricing makes it easy to charge excessive markups without being obvious about it. Unless you’re intimately familiar with the interchange fee schedules, it’s nearly impossible to determine how much you’re paying in markup and how much is simply covering the interchange fees.

Flat-Rate Pricing

Favored by payment service providers (PSPs) such as Square and PayPal, this kind of pricing sets a single rate for all transactions, regardless of the size of your business or your monthly processing volume. Of course, it’s not completely “flat,” as you’ll pay different rates for retail, eCommerce, and keyed-in transactions. However, you’ll always know in advance which rate will apply, unlike the unpleasant surprises that tiered pricing often brings. Per-transaction costs will be pretty high, but since most providers using flat-rate pricing don’t charge any monthly fees, this pricing model often makes sense for low-volume businesses.

One thing you’ll notice when comparing PSPs is that many of them feature similar flat-rate pricing schemes. For instance, Stripe, PayPal, Square, and Shopify (at its most basic subscription tier, anyway) all charge 2.9% + $0.30 per online transaction. These processors’ rates vary slightly for in-person transactions, but the differences are generally small. For the full scoop on the pricing policies of the leading third-party processors, check out our articles on the following:

• Square pricing
• PayPal pricing
• Stripe pricing
• Shopify pricing

So what’s the best pricing model for your business? Unfortunately, there are no hard and fast answers, mainly due to the tremendous number of variables involved. We can tell you that small or seasonal businesses will usually find a flat-rate pricing plan to be the most affordable. Medium-sized (or larger) businesses are best served by an interchange-plus plan, with very large businesses potentially saving even more money with a membership plan. Finally, despite being the most common type of pricing in actual use by merchants, there are no circumstances under which tiered pricing will be the most affordable option.

Common Merchant Fees For Small Business

In addition to credit card transaction fees, merchant accounts usually also come with a number of fees to cover services included as part of your account. There are three types of fees (or charges):

• Transaction fees
• Scheduled fees
• Incidental fees

We’ll elaborate on each below. For now, know that any entity can charge each fee in the transaction flow. The bulk of your fees are likely to be transaction fees, which can be charged by the banks, the card associations, and your processor.

Below, we’ve compiled a list of the most common fees in the processing ecosystem, along with their typical price ranges, for your general reference. Your pricing model and your specific processor determine which of the individual fees come through to you on your account. As we delve into the details, keep in mind the big picture concepts regarding wholesale and markup costs:

• A markup is anything beyond the established wholesale fees from either the card-issuing banks or the card associations.
• Wholesale fees from the card-issuing banks come in only one form: interchange fees — all of which are transactional. Card association fees (assessments), on the other hand, can be transactional, scheduled, or incidental.
• Many markup fees are negotiable, while wholesale fees are not.
• A wholesale fee can be passed through to you by your processor “at cost,” marked up by your processor, or absorbed into the overall cost of running your account by other means. The same goes for costs associated with other add-on service providers — passing the fee straight through, marking it up, or absorbing the cost into another blanket fee are all possibilities.
• Don’t exclusively focus on your processing rates or any one particular fee. You must consider the entire markup amount by looking at all the rates and fees on your account to ascertain your true cost.

Credit Card Transaction 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.

Wholesale Transaction Fees

• Interchange Fees: These are the fees the card-issuing banks charge for each transaction. They represent the largest expense merchants (should) pay per sale and per month.
• Assessment Fees: These are the fees the card associations collect for each transaction. These fees make up a smaller portion of your total card processing costs than interchange fees. Assessments are based on a percentage of the total transaction volume for the month. Depending on the card association, the main assessments currently range between 0.12%-0.15%, while an additional assessment percentage is charged on international transaction volume. Meanwhile, one or more small, flat per-transaction fees are also charged across your whole processing volume. These have different names depending on the association — APF (Visa), NABU (Mastercard), and Data Usage Fees (Discover) are the primary ones. We suggest using our full list of card brand fees for reference.

Markup Transaction Fees

Every processor adds some form of markup to the wholesale interchange rates of processing transactions. The markup may either be blended with interchange or kept separate.

With interchange-plus, for example, your processor will quote you something like 0.25% + $0.10. That is their markup over interchange — the amount they will add to the wholesale interchange rates. Alternatively, if you’re on a tiered pricing plan, you’ll get a quote with qualified, mid-qualified, and non-qualified rates. Those quotes have the markup baked right into the rate, thus obscuring the processor’s true margin.

See our How Pricing Models Affect Credit Card Processing Rates section above for more details.

Scheduled Merchant Account Fees

In addition to credit card transaction fees, you may be charged some predictable, flat fees. They vary by name, value, and applicability, but at least some of them will show up on your monthly statements.

Wholesale Scheduled Fees

• Fixed Acquirer Network Fee: Otherwise known as the FANF, this is a card association fee from Visa. While the exact amount varies based on your business type and monthly volume, it’s still a predictable, flat fee. Your processor chooses how to pass this along to you, but it’s typically assessed once per quarter.
• Merchant Location Fee: Mastercard charges an annual $15 per merchant location fee if you’re using a traditional processor. This is the wholesale amount, but how and when your processor charges you will vary. You’ll often see this fee as a $1.25 per month fee. The fee is waived for merchant locations with less than $200 in Mastercard gross monthly volume, charitable organizations (MCC 8398), or religious organizations (MCC 8661).
• PIN Debit Network Fee: PIN debit, which is not universally accepted by businesses, operates on separate (but associated) networks to Visa and Mastercard (e.g., Maestro, Accel). Some of the main networks currently charge an annual network access fee of $12-$14/year to the processor for each merchant using the network. Depending on exactly how many networks are at play, this typically totals between $50-$62/year. If you accept PIN debit, this fee may be passed through to you.

Markup Scheduled Fees

• Monthly Account Fee: These are service fees charged monthly, usually to cover call center costs. Ironically, most of the phone calls that come in are the result of the merchant account providers’ mistakes, making them the cause of their own fees. If you’re looking for the lowest monthly fee possible (we recommend this if you have a low volume), take a look at Payline Data. Also, if you’re on a membership pricing plan, your monthly fee will be significantly higher. This helps cover the markup over interchange that you’d otherwise be paying with an interchange-plus or blended plan.
• Annual Fee: This fee is charged once per year, presumably to cover service and equipment upgrades. This is generally a “junk” fee unless you are paying it instead of, not in addition to, a monthly fee.
• Statement Fee: These fees are charged to cover printing and mailing costs for credit card statements. Some merchants bypass these costs by using e-statements, but others charge as much as $15/month for miscellaneous processing costs.
• Online Reporting Fee: These are alternatives to statement fees and are charged to merchants who choose to view their statements online. Most providers will not charge this kind of fee, and those that do usually lump it together with others.
• Monthly Minimum Fee: These are fees charged to merchants who fail to reach a certain transaction total for the month or year. Monthly minimums are typically about $25 per month but might be lower. Note that you only pay the difference between your actual processing costs and the required minimum and only if your actual costs are less than the minimum. The better merchant account providers, such as Dharma Merchant Services, do not impose this fee.
• Terminal Fee: These are charged to merchants with physical stores where cards are directly swiped/dipped. If you run a business online, you won’t have to worry about this. Some providers try to lock merchants into terminal leases, but please don’t lease a terminal. Most of our favorite providers will encourage you to buy your card reader outright for a low one-time fee. This can save you thousands of dollars in the long term. See Fattmerchant for an example.
• POS Software Fee: If you purchase or subscribe to point of sale (POS) software through your processor, this fee covers that. In some instances, basic POS software is included with retail merchant accounts at no additional charge beyond the main monthly service fee.
• Payment Gateway Fee: 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). Otherwise, gateways typically come with a monthly fee — and occasionally a per-transaction fee as well.
• PCI Compliance Fees: These are fees paid to your processor for compliance with standards set by the Payment Card Industry Data Security Standard. In the case of compliance, you pay the merchant account provider (monthly or annually) to make sure you remain in line with the regulations. Unfortunately, some merchant services providers charge for this service without actually providing it, so you need to make sure you are being cared for at all times. PCI non-compliance fees, on the other hand, are incidental fees imposed when you don’t follow your processor’s requirements to maintain PCI compliance.
• IRS 1099-K Reporting Fee: Merchant account providers charge these fees in exchange for reporting transaction information to the IRS.

Incidental Credit Card Processing Fees

Incidental fees are only charged when a defined triggering event occurs. Chargeback fees are the most common (and often most expensive) example of an incidental fee.

Wholesale Incidental Fees

• Processing Integrity Fees: Whereas the main fees from the card associations are assessed on your every transaction, some fees are only charged as a penalty when you haven’t met the requirements for authorizing and/or settling transactions properly. These card brand fees typically include “integrity” or “misuse” as part of the fee’s name. They resemble transaction fees, as they are just a few cents per instance (Amex’s is a percentage) and tend to be grouped together on a statement with the rest of the more regular credit card transaction fees. It’s common to incur a handful of these charges each month, but watch out if they become excessive.

Markup Incidental Fees

• Application/Setup Fee: Most good providers don’t charge a setup or application fee, except for certain high-risk account providers. Look for a provider that doesn’t charge this fee or negotiate its removal.
• Early Termination Fee (ETF): This fee is charged if you cancel your contract early, and it’s one you want to avoid. Take special care to ensure there’s no liquidated damages clause.
• Account Closure Fee: Different and much lower than an ETF, this is charged regardless of when your account is closed.
• Address Verification Service (AVS): If you have an eCommerce or telephone order business, beware of the AVS fee. It will be charged on every single transaction. Retail businesses that occasionally key in card information don’t need to worry about it as much. However, AVS is an important fraud-fighting tool, so keep that in mind.
• Voice Authorization Fee (VAF): Rarely, you may be required to call a toll-free number to verify certain information before a transaction is authorized. This is relatively uncommon, so don’t be too concerned about it.
• Retrieval Request Fee: Each 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, circumstances depending. 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, and it should only be an extra dime or two.
• NSF Fee: If you lack the funds in your bank account to cover your merchant account fees, you will be assessed an NSF (non-sufficient funds) fee.
• PCI Non-Compliance Fee: This fee will start kicking in monthly if you don’t meet PCI standards. It’s possible to be required to pay a PCI compliance fee and a non-compliance fee at the same time.

Credit Card Processing Fees FAQ

The Final Word On Merchant Account & Processing Fees

Each credit card processor has a different set of costs associated with its services. Many are unavoidable, but others can be negotiated. Per-transaction and account maintenance costs vary widely from one merchant to another, and “average” figures don’t tell you much about what your costs will be. With that in mind, here are some recommendations to help you get the best service at the most affordable price:

• If you’re running a very small or seasonal business, look for a highly-rated provider with flat-rate pricing, no monthly fees, and no long-term contracts
• If you have a medium-sized business with a stable month-to-month processing volume, interchange-plus pricing will usually be your most cost-effective option
• Large, established businesses can save even more money overall with a membership pricing plan
• Regardless of the size of your business, avoid providers that will lock you into a long-term contract with an early termination fee (ETF)
• Avoid leasing your processing equipment under all circumstances
• Read your proposed contract thoroughly before you sign up to gain a complete understanding of your fee structure
• In many cases, it’s worth it to choose a slightly more expensive provider that has a great reputation for solid customer service and support

We hope this article has given you a place to start to find the best payment card processor for your business. Remember that there’s no overall “best” or “cheapest” payment processor, only the best/cheapest processor for your particular business. Making that final determination takes some sales data from your business and doing some math, but we promise that the time you spend analyzing the numbers will more than pay for itself.

If you’re already in business but think you could find a better deal, check out our complete guide to analyzing your processing statement to discern if you’re paying too much for your specific situation. Then, check out our cost analysis workbook. It walks you through a complete apples-to-apples comparison between providers using your specific numbers. While you’ll have to do some math to make a valid comparison, you could end up saving a significant amount of money on your credit card processing costs.