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.
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.”
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:
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.
Hello,
I was wondering if you could provide any feedback on the following rate I am being quoted compared to our current rates. Are there any other gotchas which may show up? Will the interchange rates be similar between both companies?
Thanks in advance!
Current Rates
Interchange – Lists Varies
Discount Rate – .49%
Transaction Fee – $.05
Quoted Rates for New Service
Interchange – Lists Varies
Discount Rate – .35%
Transaction Fee – $.05
This comment refers to an earlier version of this post and may be outdated.
Hi Greg!
My apologies for the delay! We’ve been prioritizing the PPP/EIDL questions, and unfortunately, there have been a LOT.
Now, to respond to your questions! Assuming both companies you’re dealing with are honest, then the interchange numbers should be exactly the same. Interchange is what the credit card companies charge the processors, so the charges for Visa cards should be the same for all processors, the charges for Mastercard should be the same for all processors, etc. We sometimes hear that unscrupulous processors might try to bury a charge, which is why we say “assuming both companies are being honest,” and that’s why we pay attention to company reputation and honesty in our reviews.
As to other gotchas, sometimes incidental fees can be unexpected and processors can hide additional charges there. Other times, if you have a lot of customers who are outside the country, international/cross-border charges can add up. Finally, reward/travel/similar cards have higher interchange rates, so, these charges can be a little surprising too.
This comment refers to an earlier version of this post and may be outdated.
My processing company recently informed me of a situation that I was not only unaware of but have a hard time grasping. To make things simply, let’s say my fee to charge a customer card is 2%. When I charge a customer $1000, in essence, I receive $980.00 into my bank account. If I void that charge prior to our daily batch, they are saying that I will get debited the $20, even though I voided the charge and received no funding. Could this be true?
This comment refers to an earlier version of this post and may be outdated.
Hi Jeff,
It is true. However, that’s not always the case. Some processors do refund the original transaction fees to the merchant. It really just depends on who your processor is.
This comment refers to an earlier version of this post and may be outdated.
Hi – do Visa and Mastercard publish their Fee Guides? (Scheme fees, processing fees, etc).
If so, how can I get a hold of them?
Thank you
Nikos
This comment refers to an earlier version of this post and may be outdated.
Hi Nikos!
We’ve linked to both of their rules and fees here in this section of the article. Hope that helps!
This comment refers to an earlier version of this post and may be outdated.
Could you provide any insight into the credit card transaction fees incurred by processors when using Apple Pay? I have been researching and have found a slew of different answers from several different sources, but nothing clear cut. Apple Pay claims that they do not charge any additional fees, but what do the issuers and processors charge?
This comment refers to an earlier version of this post and may be outdated.
Hi Rachel! We’ve got an article on Apple Pay that should answer all of your questions. Check it out and let us know if you need any additional clarification. Thanks!
This comment refers to an earlier version of this post and may be outdated.
Not sure I understand the math in your chart. For example, the Payline fees are $10 a month plus 0.2% +$0.10.
200 x $100 would be 200 x $0.10 = $20
$100 x 0.2% = $0.20 x 200 = $40
Monthly Fee = $10
Total = $70
The other figures also do not match up with what I am coming up with. Can you elaborate on where your numbers come from?
This comment refers to an earlier version of this post and may be outdated.
Hi Don! We actually just updated this post- have another look and let us know if you still have questions. Thanks!
This comment refers to an earlier version of this post and may be outdated.