Credit card processing fees for small businesses typically range from 1.5% to 3.5% of each transaction. Several factors influence the exact cost, including the type of card, processing method (in-person or online), and your chosen payment processor. You might also pay monthly fees or charges for specific services.
If you don’t know your current rate, be sure to check since these can add up quickly for small business owners. You may be paying thousands a year just to collect payment!
What Are Credit Card Processing Fees?
Credit card processing fees are charges that merchants pay to process payments made with credit cards. These fees cover various costs associated with accepting credit card payments, such as transaction processing, fraud protection, and payment network usage.
Typically, the fees include a percentage of the transaction amount, known as the interchange fee, and a flat rate per transaction.
Other components may include assessment fees from card networks and additional charges from payment processors or merchant service providers.
Interchange Fees
Interchange fees are the largest component of credit card processing costs. These fees are paid by the merchant’s bank to the cardholder’s bank for each transaction. The fee typically consists of a percentage of the transaction amount plus a fixed fee.
Rates vary based on factors like the type of card used (e.g., credit or debit), the transaction method (e.g., in-person or online), and the merchant’s industry. Visa, Mastercard, and other card networks set these rates, and they are meant to cover the risks and costs associated with processing transactions, such as fraud protection and credit card rewards.
Assessment Fees
Assessment fees are charged by the card networks (Visa, Mastercard, American Express, etc.) to cover the cost of maintaining their payment networks. These fees are a smaller percentage of the total transaction volume, generally ranging from 0.13% to 0.15%.
Assessment fees are non-negotiable and apply to all transactions processed through a particular card network. Unlike interchange fees, assessment fees do not vary by the type of card or transaction but are consistent across all transactions processed through the network.
Payment Processor Fees
Payment processor fees are charged by the company that provides the credit card processing service to the merchant. These fees can vary significantly based on the provider and the specific services offered. Payment processors may charge a variety of fees, including a percentage of each transaction, a flat per-transaction fee, monthly service fees, and fees for additional services like chargeback management or PCI compliance support.
Payment processor fees compensate for the technology and support needed to facilitate credit card transactions, ensuring they are completed securely and efficiently.
What Do Major Credit Card Companies Charge?
Card network fees, including interchange and assessment fees, can vary based on factors such as the type of transaction or the nature of the business. Below is a sample table summarizing the average interchange and assessment fees for a few of the major credit card networks.
| Card Network | Interchange Fees | Assessment Fees |
|---|---|---|
| American Express | 2.3% – 3.5% | 0.165% |
| Discover | 1.55% – 2.5% | 0.14% |
| Mastercard | 1.5% – 2.6% | 0.1375% |
| Visa | 1.4% – 2.5% | 0.14% |
These rates reflect typical charges but can fluctuate based on specific circumstances.
How Do Credit Card Processing Fees Work?
Credit card processing fees are calculated based on different pricing models, which determine how much a business pays for each transaction.
Here’s a closer look at the four main pricing models: flat-rate (or blended) pricing, tiered pricing, interchange-plus pricing, and membership-based pricing.
Flat-Rate (or Blended) Pricing
Flat-rate pricing charges a single rate for all transactions, regardless of the card type or transaction method. This rate usually combines interchange fees, assessment fees, and payment processor fees into one simple percentage.
For example, a flat rate might be 2.75% per transaction, covering all costs associated with processing the payment. This model offers predictability and simplicity, making it popular among small businesses and new merchants.
However, it might result in higher overall fees for businesses that process a large number of low-risk or debit card transactions, as they would pay the same rate for all transactions, regardless of the actual cost to the processor.
Tiered Pricing
Tiered pricing divides transactions into different categories, or “tiers,” each with its own pricing level. Typically, there are three tiers: qualified, mid-qualified, and non-qualified.
- Qualified transactions are considered the lowest risk and cost the least, usually involving debit cards or standard credit cards used in person.
- Mid-qualified transactions might include rewards cards or online payments, which carry slightly higher fees.
- Non-qualified transactions involve higher-risk payments, such as those with corporate or international cards, and have the highest fees.
The payment processor determines how transactions are categorized, and fees can vary widely depending on the transaction type. Tiered pricing offers flexibility but can be confusing and sometimes leads to higher costs due to less transparent fee structures.
Interchange-Plus Pricing
Interchange-plus pricing, also known as cost-plus pricing, separates the interchange fee and assessment fee from the processor’s markup. This model charges the actual interchange fees set by the credit card networks plus a fixed percentage or flat fee added by the payment processor.
For example, a merchant might pay “interchange + 0.3% + $0.10” per transaction.
This structure provides transparency, allowing merchants to see exactly what they’re paying to the card networks versus the payment processor. Businesses with high transaction volumes often prefer interchange-plus pricing because it can result in lower costs and a clearer understanding of fees.
However, it requires a good understanding of interchange rates and might involve more complex statements.
Membership-Based Pricing
Membership-based pricing, sometimes called subscription pricing, charges merchants a monthly membership fee in exchange for processing transactions at a low, wholesale rate. This model often uses interchange-plus pricing, where merchants pay the direct interchange fees with no additional markup, only a small transaction fee.
The monthly fee covers the payment processor’s services and infrastructure. This approach can be highly cost-effective for businesses with high sales volumes, as it eliminates the traditional percentage markup on each transaction. However, the membership fee might be less advantageous for businesses with lower transaction volumes, as the flat monthly cost could outweigh the benefits of reduced per-transaction fees.
Each pricing model offers distinct advantages and drawbacks, depending on a merchant’s sales volume, transaction types, and need for pricing transparency.
How to Offset Your Credit Card Processing Fees
Offsetting credit card processing fees involves strategies that help businesses reduce or recoup the costs associated with accepting credit card payments.
Here are some effective ways to offset these fees:
- Implement a Surcharge or Convenience Fee: Some businesses add a small surcharge or convenience fee to credit card transactions to cover the processing costs. This approach is legal in many regions but subject to certain regulations and card network rules. Before implementing a surcharge, ensure compliance with local laws and card network policies.
- Offer Discounts for Cash Payments: Encourage customers to pay with cash by offering a discount for cash transactions. This can help reduce the number of credit card transactions, thereby lowering processing fees. Clearly communicate this option to customers to incentivize them to choose cash over card payments.
- Negotiate with Your Payment Processor: Many payment processors are open to negotiating their fees, especially if your business has a high volume of transactions or has been a long-term customer. Contact your payment processor to discuss potential discounts or better rates. Regularly reviewing your processing statements can help identify areas where you might negotiate lower fees.
- Choose the Right Pricing Model: Selecting the appropriate pricing model can significantly impact your overall processing costs. For example, businesses with high transaction volumes may benefit from interchange-plus or membership-based pricing, which typically offer more transparency and potentially lower fees than flat-rate or tiered pricing models. Analyzing your transaction history can help determine the best pricing model for your business.
- Optimize Transaction Methods: Encourage the use of lower-cost payment methods when possible. For example, debit card transactions typically incur lower interchange fees than credit card transactions. Additionally, transactions processed in person using a chip or contactless payment often have lower fees compared to manually entered or online payments, which are considered higher risk.
- Minimize Chargebacks and Fraud: Chargebacks and fraudulent transactions can increase processing fees and damage your relationship with payment processors. Implement robust fraud prevention measures, such as requiring CVV codes, using address verification systems (AVS), and monitoring for suspicious activity. Clear communication with customers and a straightforward return policy can also reduce the likelihood of chargebacks.
- Pass on the Cost to Customers: Some businesses build the cost of credit card processing fees into their pricing. By slightly increasing product or service prices, you can cover these fees without directly charging customers a separate fee. This method requires careful pricing strategy adjustments to remain competitive while recouping costs.
- Review and Update Your Merchant Account: Regularly review your merchant account settings and terms. Over time, you may find better rates or terms with different providers. Additionally, some processors offer lower fees for businesses that maintain PCI compliance, so ensure your business follows best practices for handling customer payment data.
- Leverage Rewards Programs: If your business uses a credit card for expenses, consider a card with a rewards program that offers cashback, travel points, or other benefits. While this won’t directly reduce processing fees, it can help offset the overall cost of accepting credit cards by providing additional value.
By employing these strategies, businesses can effectively manage and offset credit card processing fees, improving their bottom line and enhancing overall profitability.
Another great option is to use Finli as your digital payment system and allow ACH payments from customers. We offer 0 commission for ACH transactions and give you the option to pass credit card fees onto customers, which can save you thousands of dollars/year.
Check out our Venmo, PayPal, and Square calculators to see how much you could save by switching to Finli!
FAQ
Who Pays the 3% Credit Card Fee?
The merchant typically pays the 3% credit card fee when processing a customer’s payment. This fee covers the costs charged by the card network, issuing bank, and payment processor. Some businesses may pass this fee on to customers through surcharges or higher prices, but generally, it’s a cost absorbed by the merchant.
Is It Legal to Pass Credit Card Fees to Customers?
Yes, it is generally legal to pass credit card fees to customers, but rules vary by region and card network. Merchants must comply with state laws, provide clear disclosures, and follow card network guidelines when adding surcharges. Always check local regulations and card agreements before implementing such fees.
How to Calculate Interchange Plus?
To calculate interchange-plus fees, add the interchange fee set by the card network to the processor’s markup. For example, if the interchange fee is 1.8% + $0.10 and the processor’s markup is 0.3% + $0.15, the total fee would be 2.1% + $0.25 per transaction.
