Years of research has confirmed that customers spend more money via credit card transactions than they do paying by cash or check. It is, after all, easier to swipe a card than having to run to a nearby ATM to obtain bills. It would then stand to reason that merchants, from small business owners to international corporations, would favor credit card purchases every time.
However, there’s a hitch: Merchants must pay fees on every credit card transaction—fees that can add up, especially for small businesses. Here’s a rundown of credit card transaction fees, plus tips for keeping these fees from ballooning.
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What are credit card processing fees?
Credit card processing fees are transaction fees that businesses pay to credit card companies, payment processors, and the financial institution backing a credit purchase. Merchants pay these credit card fees every time someone uses a credit card to buy something from them.
According to analysts, merchants spend an average of 1.3% to 3.5% of a total purchase amount on credit card processing fees. These payment processing fees may include interchange and assessment fees, chargeback fees, payment card industry (PCI) compliance fees, and monthly fees to a payment processor.
Credit card processing fees come in three forms:
- Credit card processing fees. This most common is a percentage-based fee that a business pays from the total amount of a sale.
- Per transaction fees. This is a flat fee assessed to the merchant on every purchase.
- Monthly fees. This flat fee covers a month of service from a merchant services provider like Shopify. You don’t need a merchant services account to process credit card payments, but many small business owners like them because they come bundled with other features, like online store hosting and ecommerce management tools.
Credit card fees will lower the net profit you make from each sale. Despite this, few merchants hesitate to accept credit card payments because it eases the friction when a shopper wants to buy something. Shoppers expect to be able to pay by card, and they reliably buy more when they use a credit card than they do paying cash.
A credit card issuer also can charge fees to buyers, usually in the form of annual account fees, along with interest on late payments. However, these purchasers do not pay fees on every transaction; only merchants do that.
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3 types of credit card processing fees
When merchants pay credit card processing fees, those fees are split among the various financial service providers that make credit card payments possible. The fees break down into three main categories:
1. Interchange fee
An interchange fee is one paid to the bank that formally extends credit to the cardholder. These are traditional banks like Bank of America, Chase, and Citibank, as well as credit unions, whose names are printed on Visa and Mastercard cards. These financial institutions take the largest cut of your credit card processing fees.
Notably, Discover and American Express operate their own payment networks, which means they collect interchange fees at somewhat higher rates than what banks charge. That means merchants that accept Discover and American Express ultimately pay higher total fees to those companies. This is why some sellers choose to not accept those cards, and only accept Visa and Mastercard.
2. Payment processor fee
This fee goes to the credit card processor, which is a payment processing company that facilitates your credit card transactions. Popular credit card processors include Stripe, PayPal, and Shopify Payments. These companies, which may also provide point-of-sale equipment like credit card readers, take both a percentage-based cut and a flat fee, which could be either per-transaction fees, monthly fees, or both.
3. Assessment fee
Assessment fees go to credit card networks, which connect merchants and banks throughout the world. These networks, powered by a major credit card company like Visa, Mastercard, Discover, and American Express, transmit purchase amounts and purchase details like a merchant category code. Buyers may know these codes, which cover categories like gas stations and restaurants, from the special cash back perks that some credit cards offer for specific spending categories.
How to calculate your credit card processing fees
Your credit card processing fees will be the sum of the following inputs:
- Monthly fees from your payment processor. These are fees that businesses will pay to payment processors for the ability to accept credit card payment. Some payment processors charge a monthly minimum fee, while others charge monthly by the transaction. It’s noteworthy that some free processors may make up for it by charging higher processing fees on each transaction. For example, Shopify’s all-in-one service starts at $39 per month after a free trial. By contrast, PayPal does not charge a monthly fee, but it takes a commission from each sale.
- Transaction-based fees from the payment processor. Your transaction fees are typically a blend of a flat per-transaction fee and a commission on the total purchase price. For instance, PayPal charges merchants 3.49% of the purchase price, plus a flat 49¢ transaction fee. Shopify Payments fees range from 2.4% to 2.9% of a purchase, plus a flat 30¢ transaction fee. These transaction-based fees almost always include interchange fees, so you don’t have to calculate these as a separate line item.
- Assessment fees from credit card companies. These typically range from 0.13% to 0.15% of the purchase price, depending on the credit card company. For instance, if your customer made a $20 purchase on their credit card, you can expect to pay approximately 3¢ in credit card assessment fees.
Merchant service providers
The fees related to accepting credit cards can be overwhelming, especially for solo entrepreneurs. That’s why you may choose to partner with a merchant service provider that will calculate and remit almost all fees on your behalf.
A merchant service provider is essentially a credit card processing provider that acts as an intermediary between your business, your customer, and financial institutions. It does this, in part, by maintaining a merchant account through which funds pass on their way from your customer’s credit card to your bank account. You’ll pay merchant account fees, which are usually baked into your overall merchant service fees.
4 strategies to reduce your credit card processing fees
- Shop around among payment processing companies
- Minimize chargeback fees
- Negotiate fees with processors and banks
- Encourage the use of debit cards
Credit card processing rates have risen over time, with some payment processors charging more aggressive rates than others. Here are some ways to reduce these fees, and keep more of your total sales revenue.
1. Shop around among payment processing companies
Depending on how many transactions you process per month, you may spend less with a provider that charges a monthly fee but lower fees on each transaction. The opposite may also be true, where a monthly fee pushes your costs too high. Compare prices by weighing components like monthly fees, flat per-transaction fees, and percentage-based commissions. This will help you find the best option for your precise business needs.
2. Minimize chargeback fees
When customers dispute a charge from your business, their credit card company may issue them a refund and then dock you with a chargeback fee, which can often exceed $100. One way to avoid fraud-based chargebacks is to use an address verification system (AVS), which compares billing addresses submitted by card users to billing addresses on file at banks. You’ll have to pay AVS fees—usually a few cents per transaction—which can pay dividends in the long run. You can also ask customers to sign a credit card authorization form before making purchases. This is common among monthly subscription services, where a card is charged on an ongoing basis.
3. Negotiate fees with processors and banks
Many small business owners do not realize that they have the ability to negotiate for lower fees with their card processors and acquiring banks. Whether you do it yourself or hire a professional on your behalf, ask about getting a lower acquirer processing fee or a lower commission on each purchase. If a bank adds charges like a “convenience fee” that you don’t understand, ask for them to be waived.
Some processors may charge more for using an online payment gateway versus a physical point-of-sale terminal. These online payments are called “card not present” payments. Because they don’t involve the same security protections of a physical card, like an EMV chip, these card not present payments are more susceptible to fraud and customer chargebacks. Processors and banks may ask for higher fees to account for this risk. Ask if these fees are negotiable.
4. Encourage the use of debit cards
A debit card transaction almost always costs a merchant less than a credit card transaction—often less than 1% of the total purchase price. This is mainly due to the fact that banks charge higher interchange fees on credit purchases than debit purchases. Accepting debit cards still gives consumers the convenience of swiping a card while making a purchase.
Credit card processing fees FAQ
What compliance regulations should businesses be aware of regarding credit card processing fees?
Businesses must comply with the Payment Card Industry Data Security Standard (PCI DSS), a global information security standard administered by the Payment Card Industry Security Standards Council, that protects cardholder data.
Are there different fee structures for credit card processing?
Yes, different credit card processors use different fee structures. For instance, Shopify charges a monthly fee (which covers an all-inclusive ecommerce service). Its credit card commissions then range from 2.4% to 2.9% of a purchase, along with a 30¢-per-transaction fee.
How do payment processing methods (online, mobile, in-person) affect credit card processing fees?
Your credit card processor may charge different fees for online, mobile, and in-person purchases. Typically, these companies charge the lowest rates on in-person purchases made using the brands’ point-of-sale systems.
What are some potential risks of using a payment processor with high fees?
If you operate on a very thin profit margin, you may not have the flexibility to pay high fees assessed by a payment processor. The slim profit margin you enjoy from a cash, check, or debit transaction may be wiped out by the fees tacked onto credit card purchases.
Is it OK to charge a credit card processing fee?
Yes, it’s ethical to charge your customers a credit card processing fee as long as you’re upfront about the practice.