Credit Card Processing Fees: How Much Will They Cost & How Can You Lower Them?

“Average” credit card processing fees are highly variable because credit card brands break down transactions into hundreds of separate categories based on the risk factors that apply to that particular type of transaction.

These major factors affect the cost of interchange fees:

• Credit VS Debit Cards: Debit card transactions are inherently less risky because the funds are transferred directly from customers’ bank accounts. Credit cards, however, require the issuing bank to loan the funds to the customer, with repayment typically taking 30 days or longer.
• 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 greater chance of fraud. (Note that this risk can be mitigated by using security features such as tokenization.)
• 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, usually resulting in the transaction being downgraded to the most expensive unqualified tier.
• Transaction Size: 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 merchant category codes (MCCs) to classify businesses by the type of goods and services they offer. Depending on your product lineup, your business may fall under more than one MCC.

While they usually constitute the smallest portion of your credit card processing costs, network assessment fees nonetheless make credit card acceptance just a little more expensive than it would be otherwise.

These are essentially licensing fees and are paid to the credit card brands themselves. Assessment fees usually range from 0.13% to 0.15% per transaction, depending on the card brand. These fees are typically lumped in with interchange fees as a single cost, as your processor passes them through to the issuing bank and credit card association.

For more detailed information on assessment fees and other charges imposed by credit card networks, check out our complete guide to card brand fees.

Credit card processing fees include 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 (as discussed above). Markup fees are the fees 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 differ 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.

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

The pass-through approach is used in interchange-plus and membership pricing plans. With this approach, the interchange and the markup are separated, so you know exactly how much your processor takes from each transaction. This approach is generally best suited to established businesses with a stable month-to-month processing volume.

The blended approach is used in flat-rate and tiered pricing plans. With this approach, the interchange and the processor’s markup are combined into a single charge, so it can be more difficult to determine how much of your processing fee is going to the issuing bank and how much to your processor. The blended approach can save small or newly established businesses money — if the processor doesn’t charge additional recurring account fees.

With interchange-plus pricing, your merchant services provider simply adds a fixed markup to every transaction, so you’ll pay the interchange and assessment fees, plus that markup. This markup is the same for every type of transaction, with the cost of processing each transaction varying based on the applicable interchange fee.

In addition to fully disclosing how much of your processing fees your provider keeps for itself, interchange-plus pricing tends to be less expensive overall than flat-rate or tiered-rate plans. However, additional merchant account fees add to your overall costs, making this type of pricing most suitable for established businesses processing at least $5,000/month.

A variation of interchange-plus pricing, membership pricing (also called subscription pricing), eliminates the percentage-based portion of your processor’s markup and most merchant account fees in exchange for a single monthly subscription fee. With this type of pricing, you’ll pay just the interchange fees and a small, fixed per-transaction authorization fee (typically $0.05-$0.30/transaction).

However, the monthly subscription fee can be quite expensive — typically around $100/month or more. For this reason, we only recommend subscription pricing for large, established businesses with a high, stable monthly processing volume.

Flat-rate pricing addresses the confusion merchants often experience in trying to sort out their processing costs. With this type of pricing, you’ll pay the same rate for every transaction. (Well, sort of. Almost all providers offering flat-rate pricing use at least two rates: one for in-person transactions and another for card-not-present transactions.)

While predictable, these rates tend to be fairly high, as they have to be able to cover the interchange fees and ensure a profit for even the most expensive transaction categories. At the same time, providers offering flat-rate pricing typically don’t charge any monthly or annual account fees, lowering your overall costs. We recommend flat-rate pricing to startups and small businesses with a low or sporadic monthly processing volume.

A variation of flat-rate pricing, tiered pricing separates your transactions into three tiers (qualified, mid-qualified, and non-qualified) based on various factors that usually aren’t disclosed very well. Each tier has a fixed rate, but it’s nearly impossible for a merchant to tell in advance which tier a transaction will fall into. Factors such as rewards cards and even submitting the transaction for processing after the date payment was accepted can drop a transaction into the non-qualified tier, where processing rates might be as much as two to three times higher than for qualified transactions.

Tiered pricing is, unfortunately, quite popular with many traditional merchant account providers, as it obscures markup costs and usually ensures a healthy profit. For merchants, your processing costs will almost always be higher with tiered pricing, and there are no counterbalancing advantages to this type of pricing. Stay away.

For some merchants, the best way to save money on credit card processing is to shift the burden of those costs onto 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 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 various confusing legal requirements and credit card brand policies. 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 extensive research before implementing one of these programs.

For businesses that process a lot of small-ticket sales, imposing a minimum charge for using a credit card can save you from paying disproportionately high processing fees. Although you’ll need to ensure compliance with all applicable laws and card association policies, it’s generally legal to set a minimum purchase amount as high as $10.00.

As an extreme example of how much credit card processing fees can cost you, consider a $1.00 purchase made through PayPal. Because PayPal charges a whopping $0.49 per transaction authorization fee, you would end up paying over 50% of the value of the transaction in processing fees.

Setting a minimum purchase amount for credit card use makes sense even if your current processing rates are much lower than what PayPal charges. Be aware, however, that you cannot require a minimum purchase amount when a debit card is used. You should also consider the possibility of lost sales from customers who aren’t carrying any cash on them.

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. Alternative 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 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: QR code payments are another convenient and contactless option. 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.

While these suggestions are all 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 support tokenization.
• If you accept a lot of B2B payments, ensure 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 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.

Merchants have traditionally been liable for paying credit card processing fees, which are paid to the card-issuing bank, credit card association, and the merchant’s credit card processor. Today, many businesses are shifting these costs onto customers who choose to pay by credit card, either through a credit card surcharge, cash discounting, or a convenience fee.

Credit card processing fees are unavoidable if the merchant accepts credit and debit card payments. However, these costs can be passed onto customers through surcharging, convenience fees, or cash discount programs. Merchants can also lower their overall processing costs by offering alternative payment methods, including:

• ACH transfers
• eCheck processing
• QR code payments
• Online invoicing
• Peer-to-peer (P2P) payment methods (e.g., Venmo, Zelle, etc.)

It depends. While credit card surcharging is now legal in most of the United States, the rules governing the practice differ in each state. We recommend carefully weighing the pros and cons of this strategy before implementing a surcharging program. A convenience fee is another way to recoup your costs under certain conditions.