Credit cards are the most popular payment method for point-of-sale transactions (39%) and for online shopping (44%). After credit cards, debit cards are the second most popular payment method for in-store (34%) and online (32%) purchases.
So, accepting card payments is a must for every business. However, it comes at a cost.
Credit Card Processing Fee Breakdown
Merchants are required to pay a fee for every purchase customers make using a credit card. There are typically three parts to credit card processing fees:
1. Interchange Fees
Interchange fees are transaction fees merchants must pay to the customer’s card-issuing bank to cover handling costs and risks associated with approving the transaction.
While the card associations (Visa, MasterCard, Discover, American Express) set the default interchange fees, they are paid out to the bank that actually issues the credit card (Chase, Bank of America, Wells Fargo, etc.).
For example, if your customer uses a Chase Visa credit card, you will be charged interchange rates set by Visa, that are then paid out to Chase for handling the transaction. Interchange fees make up 70% – 90% of the total transaction fee.
2. Assessment fees
Assessment fees are set, charged, and collected by credit card associations (Visa, MasterCard, Discover, American Express). They are added into individual transactions along with the interchange fees.
Assessment fees are also known as Card Brand Fees, Card Association Fees, or Network Access and Brand Usage Fees (NABU). Unlike interchange fees, which go to the banks, these fees stay with the credit card associations.
3. Merchant Services Markups
Merchant services markups are the fees merchant account providers and payment processors collect from businesses in order to process card payments.
Merchant service markups are the most variable part of credit card processing fees. Processing services, such as Square or PayPal, that businesses use to accept credit cards also charge a fee for their services. However, unlike interchange and assessment fees, which are fairly standardized, payment processors use a whole mix of different fee structures, which can make it hard to compare options and find an affordable solution.
In general, merchant service providers fall under one of four fee structures:
Flat-rate fees: Merchants pay a set amount for every transaction they process, regardless of card type. This fee structure is transparent, easy to budget for, and offers a lot of transparency. It’s usually a good option for new and small businesses.
Interchange-plus: In this model, merchant service providers pass along the direct interchange and assessment fees along with a percent and/or flat-fee markup. Companies that charge a flat-fee markup instead of a percentage are usually a better option. This model can be more affordable for growing businesses.
Membership model: Similar to interchange-plus, in this pricing model, businesses pay a flat monthly fee, direct interchange and assessment fees, and typically a small flat fee (such as 5 – 10 cents) for each transaction. This model is also typically best for growing and established businesses.
Tiered pricing: Also known as bundled pricing, this model separates transactions into three tiers: qualified, mid-qualified, and non-qualified. Qualified payments are typically debit cards and non-reward credit cards that customers swipe or insert at the point of purchase. These are low-cost and low-risk payments, so in a tiered model, the merchant service provider would add on the lowest markup. Non-qualified payments are riskier or higher cost, like card-not-present (keyed-in) transactions and corporate or high-reward credit cards. Merchant account providers would apply higher fees to these types of transactions in a tiered model, sometimes as high as 4%.
Why Businesses Should Avoid Tiered Pricing Models
The fees merchants pay in a tiered pricing model can vary wildly depending on the type of card your customer uses. This can result in paying higher fees than you would under a different model. For this reason, we recommend businesses stay away from tiered pricing models and instead choose a flat-rate, interchange-plus, or membership model merchant service account.
The Federal Trade Commission cautions small business owners, “Scammers know that small businesses are looking for ways to reduce costs. Some deceptively promise lower rates for processing credit card transactions.” Merchant service providers offering tiered pricing models will typically advertise “Rates as low as X%.” The advertised rate will be the qualified tier, which may not be the price you actually pay on most transactions.
See our recommended merchant service providers for a selection of processors that offer flat-rate, interchange-plus, and membership model pricing.
What Are Average Credit Card Processing Fees?
The average credit card processing fee for in-person transactions is around 2%. For online and card-not-present payments, the average fee is closer to 3%. Larger businesses are able to negotiate or qualify for volume discounts, so their rates are typically lower. Small businesses, on the other hand, could pay rates that are slightly higher.
For example, Square Payments, which millions of small businesses use in the US, charges 2.6% + 10 cents for swiped, chip, and contactless payments and 2.9% + 30 cents for online and invoice payments.
How Do Debit Card Transaction Fees Compare?
The short answer is, it depends on your merchant account. If you are using a processor like Square that charges a flat rate for every transaction, the fees for debit card payments will be identical to those of credit card payments.
However, if you’re using a merchant account that offers interchange-plus pricing (where they pass along the direct transaction cost with a small markup), the fees you pay for each transaction will depend on the type of transaction and the customers’ card. In this case, the fees you pay for debit card transactions will be lower because debit cards have lower interchange fees than credit cards.
Debit card interchange fees are lower than credit card interchange fees because there is less risk associated with them. Funds are coming directly out of the customer’s bank account, instead of credit that they will need to repay.
Why Are American Express Fees Higher?
If you have interchange-plus pricing, in addition to debit card rates being lower, you may also notice that American Express rates are higher. To explain this, let’s first zoom out: American Express cards aren’t actually credit cards. They are charge cards. This means, in most cases, customers are paying their balance in full each month and American Express is not collecting interest from customers in the same way traditional credit card issuers do.
Additionally, other credit card associations (Visa, MasterCard, etc.) will allow other banks (Wells Fargo, Chase, etc.) to issue credit cards using their brand name. American Express does not do this and instead operates on what’s called a closed-loop or closed network.
Closed network: Where a bank functions as the credit card association and the issuing bank.
This closed network gives American Express a lot more freedom to set interchange rates. Essentially, American Express charges rates that are as high as the market will allow. In this scenario, having a flat-rate merchant account that charges the same fee regardless of card type works in your favor.
Other Factors Than Impact Credit Card Processing Fees
- Type of transaction: Card-present (swipe, chip, and NFC) payment types are lowest-risk and have lower interchange rates. Online and card-not-present transactions have higher interchange risks because there is more risk involved.
- Type of business: Every business has a Merchant Category Code (MCC) based on the business type. Credit card associations set different interchange rates for different codes. For example, retail, supermarket, fuel, and travel businesses all have different rates.
- High-risk businesses: If your business qualifies as high-risk, either because of the products or services you sell, a history of high chargebacks, or personal credit, you may need to open a dedicated high-risk merchant account. This will likely increase your transaction fees.
- B2B businesses: Large-volume business to business companies, such as suppliers, and businesses processing a lot of business to government transactions, can qualify and set up Level 2 and Level 3 processing, which qualifies for lower interchanges rates. These discounts are not available to businesses that use physical terminals or traditional ecommerce.
Credit card processing fees or transaction fees are a significant expense for any small business. Because every processor operates slightly differently, it can be hard to tell what kind of rate you are getting. Knowing all the key players and where the different fees come from makes it easier to ensure you are choosing a fair provider.