According to the Wall Street Journal, credit card payments make up 62.3% of dollars spent by consumers, dwarfing cash, which makes up only 15% of total consumer spending. Being able to accept credit cards is a requirement for most businesses, but each credit card transaction will cost you a percentage of sales.
In this article, we’ll discuss the different types of fees you’ll pay for a credit card transaction, the average range you can expect to pay, and tips on how to reduce that amount so that you can keep more money in your business.
If you’ve been following the news about credit card fees, 2021 was supposed to be the year when Visa and Mastercard had planned an increase. The good news is that the increase has been delayed. The bad news is that high fees are inevitably coming, and they’re forecasted to affect online retailers, with rates rising somewhere between 0.05% to .10%.
To put the above figure into context, it’s necessary to understand how merchant processing fees are determined and which companies take a cut of each of your transactions. The simple act of swiping a credit card includes three different parties.
1. A bank: This is the company that issues a credit card to a consumer. The names you’re probably familiar with are banks like Bank of America, Chase, Capital One, and Wells Fargo.
Credit unions can also issue credit cards, as can department stores, like Nordstrom, that partner with a bank. Consumers can even get credit cards from major companies like Visa, which give rewards in Bitcoin.
2. A credit card network: There are four major credit card networks – Mastercard, Visa, American Express, and Discover. Note that in addition to functioning as a credit card network, both Discover and American Express also issue their own cards, making them similar to a bank.
3. A payment processor: Payment processors do the heavy lifting when executing credit card transactions. If you want to accept credit and debit cards from your customers online, over the phone, or at a point of sale (POS), you’ll have to partner with a payment processor to conduct those transactions.
The role of payment processors is transmitting transaction data between a business and the bank. Payment processors may also provide the credit card machines and other applicable equipment required to accept credit cards.
Because you can negotiate the rate charged by payment processors, it’s worth shopping around to find a company that offers a good deal without skimping on customer service or technology.
The fees a merchant can expect to pay range from 1.3% to 3.5%, but this figure does not include the amount allocated to the payment processor.
This range is relatively broad, and it varies based on the credit card network. Traditionally, American Express charges the most, and Visa tends to have the lowest fees.
Other factors that influence the prices a merchant pays include the particular type of credit card that a customer uses, whether the customer is present at the time of the transaction, and the business’s merchant category code, MCC for short.
The total fees that a merchant will charge for a transaction include interchange fees, assessment fees, and processing fees. Payment processing fees are negotiable, and they’re the only part of credit card transaction fees. The other two fee categories are predetermined.
As we mentioned, three different fees make up how much you’ll pay for a particular transaction.
– Interchange fees: These fees are collected by the bank that issues the customer’s credit card. For example, Chase will get these fees as the bank extends the credit and takes on the risk, not Visa. As a whole, interchange fees make up the bulk of what a merchant will pay. The range is typically 70% to 90% of the total cost.
The following factors contribute to determining the interchange fee for a merchant:
o Network: Each of the major credit card networks charges a different rate for processing. The chart below shows averages, but several variables relating to the merchant’s business determine the exact rate.
o Merchant category: The merchant category, or MCC, is a classification code that identifies a business based on the types of products or services it sells. Different MCCs include clothing stores, government services, transportation, etc.
Your MCC classification is an indicator of how risky your business is. It can influence your average credit card fees and define rules, such as whether you’re allowed to charge your customers a convenience fee.
o Type of credit card: Credit cards often come with rewards for travel, cashback, etc. The issuers tend to offset the costs of those benefits by passing them along to the merchant in the form of higher interchange fees. Small business owners should research the best type of credit card for their business spending.
o Processing method: The interchange fee will vary based on how the customer pays. A credit card that is swiped or inserted may have a lower fee than if a phone or online computer system captured the payment information via the telephone or an online computer system.
The rate varies due to the risk of fraud, complaints, and chargebacks associated with each method.
| Credit Card Network | Average Cost (Low) | Average Cost (High) |
| Visa | 1.15% + $0.05 | 2.40% + $0.10 |
| Mastercard | 1.15% + $0.05 | 2.50% + $0.10 |
| Discover | 1.35% + $0.05 | 2.40% + $0.10 |
| American Express | 1.43% + $0.10 | 3.30% + $0.10 |
– Assessment fees: These fees are received by payment network, i.e., Visa. They currently range from .13% to .15% and cover the costs of running the networks.
– Payment processing fees: These fees are paid to the company that accepts the credit card payment and sends the transaction data to the payment network. Different payment processing companies charge different rates, and fees may include charges for transactions, monthly service, and equipment.
Each payment processor will likely have different fee structures that can affect your overall costs. There could be terminal lease fees, reductions for PCI compliance, various fees for statements, IRS reporting, subscriptions, payment gateways, and more.
Be sure to ask about chargeback fees, whether there are contract cancellation fees, and if there are tiered pricing structures.
When it comes to structuring your payment agreement with a credit card processor, there are four available pricing options:
1. Interchange-plus pricing: This fee structure is common and known for being relatively fair. It consists of the interchange fee plus a markup, hence the name. There may also be a monthly fee. It is a very transparent model because you can quickly see how much you pay for each transaction on record.
2. Flat rate: The simplest pricing model available, flat rate pricing charges you the same percentage for each of your transactions. Though there are no monthly fees, the transaction fee percentages tend to be higher.
This structure can be a good choice for small businesses, but it may not be the best option as you grow. Square and PayPal follow a flat-rate model.
3. Subscription: Also called membership-based pricing, this model is also similar to interchange-plus pricing. The main difference is that the monthly fees are higher, and the transaction fees are lower.
4. Tiered: With tiered pricing, each transaction gets classified into separate tiers. Depending on the specifics of a transaction, you could pay more or less in fees. This model can be risky if you handle many payments with credit cards that offer generous rewards.
Merchants who have made the switch to Accredited Interchange have boasted savings of thousands of dollars per year, and in some cases, have been able to reduce their processing fees by a whopping 50%. We’d love to see how much you can add to your bottom line by implementing our credit card payment processing solutions. Get in touch today to learn more.