This article is part of a larger series on Payments.
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 US businesses use, charges 2.6% + 10 cents for swiped, chip, and contactless payments and 2.9% + 30 cents for online and invoice payments. Manually keyed-in credit card transaction fees typically cost 3.5% + 15 cents per transaction.
Credit card processing fees are a necessary cost of doing business. Credit cards are the most popular payment method for point-of-sale transactions (39%) and online shopping (44%). After credit cards, debit cards are the second most popular payment method for in-store (34%) and online (32%) purchases. WorldPay Global predicts credit, debit, and digital wallets will be the primary payment method online—84.5% by 2024.
There are ways to get essentially free credit card processing. However, it involves passing the cost of processing on to customers, and many of those solutions may not be sustainable or legal.
Credit Card Processing Fee Breakdown
The best way to get a handle on what you are paying (and whether it’s too much) is by calculating your effective rate.
Effective rate: Total processing fees, usually expressed as a percentage of your total sales.
Effective rates can vary from as low as 1.7% for large businesses handling high volumes of low-risk, in-person sales to as high as 5% for small online businesses handling high-risk transactions. For most small businesses, expect an effective rate of around 3% when you are starting out, and once you are processing more than $20,000 monthly, your rate should decrease to closer to 2%. However, high-risk businesses will always pay higher rates.
There are a lot of factors that impact your effective rate, which we detail below. And, 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.). These typically range from 1.29% to 3.5% per transaction.
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. These typically range from 0.11% – 0.15% per transaction.
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 services 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:
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.
Who should use it? New and small businesses.
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.
Who should use it? Growing businesses.
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 $0.05–$0.10) for each transaction.
Who should use it? Growing and established businesses.
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.
- Mid-qualified payments are usually a rewards card that’s swiped, or a debit or non-reward credit card used online, and one typical caveat is the billing address must be verified at checkout (for ecommerce purchases).
- 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.
Other Factors That 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 rates 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: As we mentioned earlier, 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 credit card 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. Some of the most popular payment processors are also the best B2B payment solutions.
Average Credit Card Processing Fees for Flat-Rate and Interchange-Plus Pricing Models
Let’s assume you’ve made a bunch of sales of a $100 item at your brick-and-mortar shop and online. Here’s how much you might pay in fees, based on typical processing fees (and in different payment methods).
|$100 sale||Typical flat pricing model||Interchange-plus pricing model*|
2.6% + 10 cents = $2.70
1.65% + 10 cents = $1.75
Swiped American Express
2.6% + 10 cents = $2.70
3.20% + 10 cents = $3.30
2.6% + 10 cents = $2.70
1.5% + 10 cents = $1.60
2.6% + 10 cents = $2.70
2.1% + 10 cents = $2.20
3.5% + 15 cents = $3.65
1.95% + 10 cents = $2.05
Online CC payment
2.9% + 30 cents = $3.20
1.8% + 10 cents = $1.90
*We used an average percentage based on typical rates for merchant accounts offering interchange-plus pricing for each type of card.
Interchange-Plus vs Flat-Rate
At first glance at that chart of averages, it seems that choosing a merchant account that offers interchange-plus pricing for your credit card processing is far less expensive than Square, for example, which offers flat-rate fees. You’re not wrong. However, there are many rules, exceptions, and other fees that go into the total amount you pay with interchange-plus pricing.
What you pay as a merchant varies greatly depending on the type of transaction, your customer’s card type, and your type of business. Square’s flat fee may be a better choice for small businesses because the fees are transparent and more stable. Plus, many merchant accounts that offer interchange-plus pricing have strict application processes, and often monthly fees or minimums that would disqualify or not be practical for small businesses.
It will take some shopping around to find the cheapest credit card processing for your business.
Accepting Debit Cards to Cut Costs
Transaction fees typically cost less on debit card payments simply because the interchange rate is lower for debit cards due to their lower risk. With a debit card, funds come directly out of a customer’s bank account, instead of credit that they need to repay.
If you use Square or another flat-fee solution for credit card processing, you’ll pay the same amount in transaction fees whether it’s a debit card or a credit card.
American Express Fee Processing Is Often 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 doesn’t 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.
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.
You May Also Like …
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- Still trying to decide which online credit card processor is right for you? See who the winner is in the Stripe vs PayPal showdown.