The Complete Guide to Merchant Account & Credit Card Processing Fees

We’ll show you how credit card merchant fees work, which ones are mandatory, and which ones you can negotiate away or skip by finding a great payment processor.

Frank Kehl
Expert Analyst & Reviewer
296 comments
Updated on: Mar 3, 2022

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Regardless of the size of your business or how long you’ve been running it, every merchant who accepts credit and debit cards need to understand credit card processing fees. These fees can be a significant expense for your business, and merchants frequently pay too much for them because they don’t understand how they work.

In this article, we’ll explain what credit card processing fees are, how they’re assessed, and what you should expect to pay for them. Having a sense of what the “industry average” is for certain fees can save you from paying too much for credit card processing. If you’re in a hurry, you can also check out our visual guide to credit card processing fees and rates.

Table of Contents

What Are Merchant Fees?
What Are The Average Credit Card Processing Fees For A Small Business?
Common Merchant Account Fees For Small Business
How Much Should You Pay In Credit Card Merchant Account Fees?
How To Lower Or Offset Your Credit Card Processing Fees
The Final Word On Merchant Account & Credit Card Processing Fees
Credit Card Processing Fees FAQs

What Are Merchant Fees?

Merchant fees, or credit card merchant fees, are the costs a business pays whenever a customer makes a transaction using credit or debit cards. The majority of merchant fees go to the customer’s issuing bank, with small portions going to other parties, including the merchant’s credit card processor.

How Do Credit Card Merchant Fees Work?

You’ll have to pay a merchant fee (also confusingly 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.

Merchant fees have always been rather expensive (from the merchant’s point of view), but they’ve risen significantly in recent years and are poised to go even higher in 2022. While there are many reasons for this increase, the primary factor is the dramatic increase in eCommerce sales during the COVID-19 pandemic, which drove an equally steep rise in online credit card fraud. In theory, higher processing fees help protect issuing banks from losses due to fraudulent transactions.

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 credit card processing fees of the four major credit card networks.

The table below shows estimates of the big-four card networks’ (i.e., Visa, Mastercard, Discover, American Express) average costs, taken from three different sources:

	Visa	Mastercard	American Express	Discover
Fool.com	1.15% + $0.05 to 2.40% + $0.10	1.15% + $0.05 to 2.50% + $0.10	1.43% + $0.10 to 3.30% + $0.10	1.35% + $0.05 to 2.40% + $0.10
Square	1.43%-2.4%	1.55%-2.6%	2.5%-3.5%	1.56%-2.3%
Payment Depot	1.29%-2.54%	1.29%-2.64%	1.58%-3.30%	1.53%-2.53%

As you can see, the sources we’ve cited have come up with different numbers, and the ranges they’ve provided are broad enough that relying on a single “average” rate is not going to be very helpful in estimating anticipated costs.

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.”

What Determines Your Interchange Fees?

As you can see from the table above, even the “average” credit card processing fees are all over the map. That’s because credit card brands break down transactions into literally hundreds of separate categories based on the risk factors that apply to that particular type of transaction. Here’s a brief overview of the major factors that affect interchange fees:

Credit VS Debit Cards: Debit card transactions are inherently less risky because the funds are transferred directly out of the customers’ bank account. Credit cards, on the other hand, require the issuing bank to essentially loan the funds to the customer, with repayment typically taking 30 days or longer. Naturally, interchange fees will be much higher if the customer uses a credit card for a purchase.
Card-Present VS Card-Not-Present: Retail transactions where the merchant can verify the customer’s identity and inspect the credit card present a relatively low risk of fraud. Online transactions, on the other hand, provide limited cardholder data and don’t allow as many options for identity verification. For this reason, card-not-present transactions incur higher interchange fees due to the higher chance of fraud.
Credit Card Type: Rewards cards that offer cash back or frequent flier points will cost more in interchange fees to offset these perks. These types of cards are particularly problematic under a tiered pricing plan. They usually result in the transaction being downgraded to the unqualified tier, which imposes the highest processing fees.
Transaction Size: As you might have guessed, larger transactions are riskier than smaller ones, so the issuing banks charge a higher fee to process them. Credit card brands use a variety of additional factors to determine whether a transaction is “large” or “small,” so there isn’t a simple one-size-fits-all rule to determine where a given transaction will fall.
Merchant Category Code: The major credit card brands use a wide variety of merchant category codes (MCCs) to classify businesses by the type of goods and services they offer. Your business may or may not fall under more than one MCC, depending on your product lineup.

Wholesale Merchant Fees VS Markup Processing Fees

Your credit card processing fees are composed of two distinct elements: wholesale fees and markup fees. Wholesale fees encompass all the fees and charges that must be paid to the issuing bank and the credit card association. While your processor will collect the wholesale fees for each transaction, it merely passes them onto these other entities. Markup fees, on the other hand, are the fees that your processor keeps for itself in exchange for processing the transaction and maintaining your merchant account. Here’s a summary of the main differences between wholesale and markup fees:

Wholesale fees are passed onto the issuing bank and credit card association, while markup fees are retained by your processor.
Wholesale fees are the same for every processor, while markup fees will be different for every merchant services provider.
Markup fees can often be negotiated with your processor, while wholesale fees are fixed and cannot be reduced through negotiation.

While wholesale fees are the same for everyone, there’s still a lot of variability from one transaction to the next. All the factors we’ve identified above (card type, transaction size, Merchant Category Code, etc.) will impact how much you’ll pay in wholesale fees for any transaction.

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

	Pricing Model	Wholesale Rate
INT + 0.25% + $0.10:	Interchange-Plus (AKA Cost-Plus)	Not included
INT + $0.10 (+ $99/Month Membership):	Membership (AKA Subscription)	Not included
Qualified: 1.79% + $0.10 (Mid-Qualified: 2.19% + $0.15) (Non-Qualified: 2.99% + $0.20)	Tiered	Included
2.90% + $0.30 Online: 2.75% In-Person:	Flat-Rate	Included

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

Common Merchant Account 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):

Credit Card Transaction 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 Merchant 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.
Miscellaneous & Incidental Credit Card Processing 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.

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.

	Typical Price Range (Per Transaction)	Wholesale Or Markup	Description
Interchange Fees	1.3%-3.5%	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

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 merchant account fees will show up on your monthly statements.

	Typical Price Range (Per Transaction)	Wholesale Or Markup	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 an account; includes 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 others
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
Terminal 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	$25-$100/month	Markup	Many point of sale (POS) systems require a monthly software fee in addition to the cost of the hardware itself; not all POS systems require a subscription
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-$120/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

How Much Should You Pay In Credit Card Merchant Account Fees?

A common misconception among new business owners is that the best merchant account provider for their business will simply be the one offering the lowest credit card processing rates. While getting the lowest rates is very important, it’s not always the deciding factor. To minimize your overall processing costs, you’ll want to evaluate your effective rate, which is simply the ratio of all processing costs to your overall sales volume, expressed as a percentage.

With this benchmark in mind, here are the things to look for in a fair merchant account pricing quote:

Month-to-month billing with no long-term contract
No early termination fee (ETF) for closing your account early
Low recurring fees that are clearly disclosed before you sign up
Flat-rate, interchange-plus, or membership pricing, depending on your sales volume
No equipment leasing fees

For a regular, low-risk business, your effective rate should be about 3-4% and no higher. High-risk merchants, unfortunately, can expect to pay much more in rates and fees — often nearly two times more than a comparable low-risk business. If you’re already accepting credit cards, you can quickly determine your actual effective rate by analyzing your most recent credit card processing statements.

One final point: Having reliable access to high-quality customer support is critically important when working with a merchant services provider. Providers that try to win your business by offering the cheapest rates often cut corners in this area, leading to frustration and headaches on your part when a problem inevitably arises. It’s usually worth paying a little extra to sign up with a provider that has a solid reputation for offering top-notch customer support.

How To Lower Or Offset Your Credit Card Processing Fees

If the thought of sending 3-4% of your gross credit card sales off to your merchant services provider doesn’t sit well with you, you’re not alone. Interchange rates have risen dramatically in recent years and are poised to go even higher in 2022. Providers have no choice but to pass these price increases onto their account holders, but most aren’t above raising their own markup in the process.

The ever-increasing cost of accepting credit and debit cards has led many businesses to look for ways to offset their credit card processing fees (or eliminate them) as much as possible. Besides signing up with the cheapest credit card processor you can find, here are several alternative methods that business owners are using to lower their credit card processing fees:

Surcharging & Cash Discounting

For some merchants, the best way to save money on credit card processing is to shift the burden of those costs onto their customers who choose to pay by credit card. With interchange rates steadily rising and legal restrictions against surcharging being overturned, the processing industry is experiencing a wave of programs designed to make consumers pay for processing instead of merchants.

There are actually two ways to do this. One way is through credit card surcharging, which adds the cost of processing onto the customer’s bill at checkout if a credit card is used. The other option is cash discounting, where prices are set to include processing costs, and consumers who use an alternate payment method receive a discount at checkout.

While these two methods might sound great to a business paying hundreds of dollars in credit card fees every month, they aren’t always effective. You’ll have to comply with a host of confusing legal requirements and credit card brand policies, and surcharging, in particular, is likely to lead to lower sales overall if your customers take their business to a competitor that doesn’t surcharge.

Surcharging and cash discounting can be very effective in some industries; however, we recommend you proceed with caution and do some extensive research before implementing one of these programs.

Switching To Other Payment Methods

It’s always a good idea to give your customers as many different ways to pay you as possible. Alternate payment methods offer flexibility and lower processing costs. Methods to consider include the following:

ACH Processing: With an ACH payment, funds for the transaction are transferred directly out of the customer’s bank account. ACH payments are fast, convenient, and cost very little to accept. However, the underwriting process to get approved for ACH processing is more involved than it is for credit cards.
Online Invoicing & Payment Links: Freelancers and other independent contractors can also use online invoice payments to simplify the process of getting paid for their work. Invoices can be sent via email or text message and include payment links where the customer can submit an online payment. Online invoicing eliminates slow, inefficient paper-based processes and helps you get paid faster.
QR Code Payments: Another convenient and contactless payment option is the use of QR code payments. With QR codes, the customer can scan the code with their smartphone and then submit an online payment, eliminating the need for processing hardware. QR codes can be used in eCommerce or a retail setting by printing them out and displaying them in your store.

Other Methods To Lower Costs

While the above suggestions are all potentially useful in lowering your credit card processing costs, there are other things that you can do to achieve this goal without special programs or using alternative payment methods. Here are a few suggestions:

Ensure that you’re using credit card tokenization for all card payments. Tokenization replaces the customer’s card number with a “token” number that your payment processing network can decode. Tokenized payments are much more secure and incur a lower interchange fee to process. Most modern payment gateways and credit card terminals support tokenization.
If you accept a lot of B2B payments, make sure that you’re set up to accept Level 2 and Level 3 processing data. This additional data increases the security of the transaction, and you’ll pay a lower interchange rate if you include it. Unfortunately, many merchant service providers charge an additional monthly fee for Level 2 and Level 3 processing, somewhat offsetting these savings.
For retail merchants, avoid manually keying in a transaction unless you simply can’t get the customer’s card to go through by swiping or dipping. Most processors charge a significant premium to process a manually-keyed transaction.
If you use a payment gateway, it’s usually less expensive to use one provided by your processor than to add a third-party gateway to your processing setup.

The Final Word On Merchant Account & Credit Card Processing Fees

Every credit card processor has its own schedule of fees and processing charges, although they usually vary quite a bit from one customer to another. While many fees are unavoidable, others can be reduced or eliminated through negotiation. Because costs vary so widely from one merchant to another, “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. Be sure to compare quotes against what you’re currently paying to confirm your estimated savings before switching to this type of 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 will be worth it to choose a slightly more expensive provider that offers superior 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, analyze your recent processing statements using the guidelines we’ve described above. An excellent tool for comparing multiple quotes is our cost analysis workbook. It walks you through a complete apples-to-apples credit card merchant fees 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.

Credit Card Processing Fees FAQs

Can you negotiate credit card processing fees?

You can negotiate certain credit card processing fees, but not others. Interchange fees and assessments are non-negotiable, while other fees, such as the fees that constitute the payment processor’s markup, are often negotiable. As a general rule, the larger your business, the less you’ll pay in per-transaction markup to your processor.

What is the cheapest way to process credit cards?

Things you can do to minimize what you pay for credit card processing include choosing a processor that offers interchange-plus or flat-rate pricing (depending on the size of your business), avoiding tiered pricing, avoiding long-term contracts, reducing extraneous nickel-and-dime fees, and choosing an integrated payments system. Also, keep keyed-in transactions to a minimum and select a processor with fees that fit your business’s size and type.

Can you charge a fee to use a credit card?

Yes and no. Shifting processing fees onto your customers is called surcharging. There are strict rules governing surcharges, and these rules differ by state. Read our article on surcharging, where we weigh the pros and cons of this strategy. A convenience fee is another way to recoup your costs under certain conditions — we recommend reading that article, too.

How can I reduce my credit card merchant fees?

One of the biggest keys is to find the processor that offers an appropriate pricing scheme for your business. For instance, the simple flat-rate pricing provided by Square and PayPal works well for smaller merchants but may be quite expensive for higher-volume merchants.

If you’re shopping for a new merchant account provider, remember to negotiate down the markup fees as best you can.

What is a good effective rate for credit card processing?

To calculate your effective rate, divide all the fees you pay in a given month by your total sales volume. This is the most important percentage you need to know since every processor’s rates and fees work differently.

Speaking generally, a good effective rate for credit card processing is around 3-4%, though again, the particulars of your business may mean that your ideal effective rate is different. And while a low effective rate is good, consider the overall value of the services the provider offers as well.

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Frank Kehl

Expert Analyst & Reviewer at Merchant Maverick

Frank Kehl has been researching and analyzing merchant services, payment gateways, and international money transfer services since 2015. He has a Bachelor of Science degree from Penn State and a Juris Doctorate from the Ventura College of Law.

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No early termination fee	✓	✓	✓	✓
Pricing model	Interchange-plus*	Interchange-plus*	Interchange-plus*	Flat rate
Rate matching / Negotiable	✓	✓	✓	No
Next Steps	Visit Site	Visit Site	Visit Site	Visit Site