How do credit card transaction fees work? Our guide breaks down the types of fees, common pricing models, and everything else you need to know.
Just as most businesses need to accept credit cards, it’s equally important for most business owners to have a solid working knowledge of how credit card processing fees are calculated. These fees can be a burdensome expense for your business, and most merchants pay too much for them because they don’t understand how they work.
This article explains what credit card processing fees are, how they’re assessed, and what you should expect to pay for them.
Having a sense of what the “industry average” is for certain fees can save you from paying too much for credit card processing. This will be helpful as you research the best credit card processing companies for your business.
If you’re in a hurry, you can also check out our visual guide to credit card processing costs.
What Are Credit Card Processing Fees?
Credit card processing fees are the fees a business pays to process the transaction whenever a customer pays using a credit or debit card. Most credit card processing fees go to the customer’s issuing bank, with small portions going to the credit card association and the merchant’s credit card processor.
What Are The Average Credit Card Processing Fees For Small Businesses?
How much are credit card fees for merchants? The typical credit card processing fees (specifically, the interchange fees paid to the card-issuing bank) for the four most popular credit card brands (i.e., Visa, Mastercard, American Express, and Discover) range from 1.46% + $0.05 to 2.96% + $0.10 per transaction. Remember that these are rough averages. Most users will fall somewhere in between the two numbers, but in some cases, your rates can be higher or lower.
Your overall credit card processing fees will also include assessment fees, which are small fees paid to the card associations themselves. While these fees are quite low, they add up quickly, especially if you have a high monthly processing volume.
Finally, your fees will include a processor markup, which is paid to your credit card processor. Processor markups are extremely variable and may be difficult to break out from the rest of your processing fees, depending on why type of processing rate plan you’re using.
The table below shows the latest average interchange fees charged by the four biggest card networks in the United States (i.e., Visa, Mastercard, Discover, and American Express), taken from three different sources. The table also breaks out assessment fees separately.
|
Visa |
Mastercard |
American Express |
Discover |
| Forbes |
- 1.15% + $0.05 to 2.40% + $0.10
- 0.14% average assessment fee
|
- 1.15% + $0.05 to 2.50% + $0.10
- 0.1375% (under $1,000); 0.01% ($1,000+) average assessment fee
|
- 1.43% + $0.10 to 3.30% + $0.10
- 0.15% average assessment fee
|
- 1.35% + $0.05 to 2.40% + $0.10
- 0.13% average assessment fee
|
| Business News Daily |
- 1.29% + $0.05 to 2.54% + $0.10
- 0.14% average assessment fee
|
- 1.29% + $0.05 to 2.64% + $0.10
- 0.1375% (under $1,000); 0.01% ($1,000+) average assessment fee
|
- 1.58% + $0.10 to 3.45% + $0.10
- 0.15% average assessment fee
|
- 1.48% + $0.05 to 2.53% + $0.10
- 0.13% average assessment fee
|
| Fool.com |
- 1.15% + $0.05 to 3.15% + $0.10
- 0.14% average assessment fee
|
- 1.25% + $0.05 to 3.15% + $0.10
- 0.1375% (under $1,000); 0.01% ($1,000+) average assessment fee
|
- 1.35% + $0.10 to 3.0% + $0.10
- 0.165% average assessment fee
|
- 1.45% + $0.05 to 3.05% + $0.10
- 0.14% average assessment fee
|
Note that processor markup is not included in this table, as it is too variable to establish reliable average figures. Since your processor will always take at least a small markup on each transaction, your total credit card processing costs will be higher than the figures shown here.
When reviewing the “average credit card processing fees” provided by experts, it’s important to note that the numbers can vary significantly, even for the same card brand. The takeaway from the table should be that even experts struggle to provide exact numbers for credit card payment processing.
Types Of Credit Card Processing Fees
Your overall cost to process a credit or debit card transaction consists of three separate elements, although you often won’t be able to break them out individually by looking at your processing statement.
These three elements are (1) interchange fees, (2) assessment fees, and (3) processor markup.
Here’s a brief explanation of each of these elements and how much each one will usually cost you:
Interchange Fees
The table above shows that even the “average” credit card processing fees are highly variable. That’s because credit card brands break down transactions into hundreds of separate categories based on the risk factors that apply to that particular type of transaction.
Here’s a brief overview of the major factors that affect interchange fees:
- Credit VS Debit Cards: Debit card transactions are inherently less risky because the funds are transferred directly from customers’ bank accounts. On the other hand, credit cards require the issuing bank to loan the funds to the customer, with repayment typically taking 30 days or longer.
- Card-Present VS Card-Not-Present: Retail transactions where the merchant can verify the customer’s identity and inspect the credit card present a relatively low risk of fraud. Online transactions, on the other hand, provide limited cardholder data and don’t allow as many options for identity verification. For this reason, card-not-present transactions incur higher interchange fees due to the greater chance of fraud. (Note that this risk can be mitigated by using security features such as tokenization.)
- Credit Card Type: Rewards cards that offer cash back or frequent flier points will cost more in interchange fees to offset these perks. These types of cards are particularly problematic under a tiered pricing plan. They usually result in the transaction being downgraded to the unqualified tier, which imposes the highest processing fees.
- Transaction Size: Larger transactions are riskier than smaller ones, so the issuing banks charge a higher fee to process them. Credit card brands use a variety of additional factors to determine whether a transaction is “large” or “small,” so there isn’t a simple one-size-fits-all rule to determine where a given transaction will fall.
- Merchant Category Code: The major credit card brands use merchant category codes (MCCs) to classify businesses by the type of goods and services they offer. Depending on your product lineup your business may fall under more than one MCC, depending on your product lineup.
Assessments
While they usually constitute the smallest portion of your credit card processing costs, network assessment fees nonetheless make credit card acceptance just a little more expensive than it would be otherwise.
These are essentially licensing fees and are paid to the credit card brands themselves. Assessment fees usually range from 0.13% to 0.15% per transaction, depending on the card brand. These fees are typically lumped in with interchange fees as a single cost, as your processor passes through them to the issuing bank and credit card association.
For more detailed information on assessment fees and other charges imposed by credit card networks, check out our complete guide to card brand fees.
Markup
Your credit card processing fees are composed of two distinct elements: wholesale fees and markup fees. Wholesale fees encompass all the fees and charges that must be paid to the issuing bank and the credit card association (as discussed above). Markup fees are the fees your processor keeps for itself in exchange for processing the transaction and maintaining your merchant account.
Here’s a summary of the main differences between wholesale and markup fees:
- Wholesale fees are passed onto the issuing bank and credit card association, while markup fees are retained by your processor.
- Wholesale fees are the same for every processor, while markup fees differ for every merchant services provider.
- Markup fees can often be negotiated with your processor, while wholesale fees are fixed and cannot be reduced through negotiation.
Although wholesale fees are the same for everyone, there’s still a lot of variability from one transaction to the next. All the factors identified above (card type, transaction size, Merchant Category Code, etc.) will impact how much you’ll pay in wholesale fees for any transaction.
Take a look at this table showing some sample pricing models and see whether or not you can easily pull out the wholesale fees and markups from the quoted rates:
Sample Quoted Payment Processing Rates
| Sample Rate |
Pricing Model |
Wholesale Rate |
| INT + 0.25% + $0.10 |
Interchange-Plus (AKA Cost-Plus) |
Not included |
| INT + $0.10 (+ $99/Month Membership) |
Membership (AKA Subscription) |
Not included |
Qualified: 1.79% + $0.10
(Mid-Qualified: 2.19% + $0.15)
(Non-Qualified: 2.99% + $0.20) |
Tiered |
Included |
2.90% + $0.30 Online
2.75% In-Person |
Flat-Rate |
Included |
Credit Card Processing Rate Pricing Models
Credit card processors have come up with a variety of ways to charge you for processing your transactions in a way that covers their costs while ensuring a profit. Almost all pricing plans today fall into one of four models: interchange-plus, subscription, flat-rate, or tiered pricing.
Below, we’ll explain how these plans work and which ones offer the lowest costs for your business.
Interchange-Plus Pricing
With interchange-plus pricing, your merchant services provider simply adds a fixed markup to every transaction, so you’ll pay the interchange and assessment fees, plus that markup. This markup is the same for every type of transaction, with the cost of processing each transaction varying based on the applicable interchange fee.
In addition to fully disclosing how much of your processing fees your provider keeps for itself, interchange-plus pricing tends to be less expensive overall than flat-rate or tiered-rate plans. However, additional merchant account fees add to your overall costs, making this type of pricing most suitable for established businesses processing at least $5,000/month.
Subscription Pricing
A variation of interchange-plus pricing, subscription pricing (also called membership pricing), eliminates the percentage-based portion of your processor’s markup and most merchant account fees in exchange for a single monthly subscription fee. With this type of pricing, you’ll pay just the interchange fees and a small, fixed per-transaction authorization fee (typically $0.05-$0.30/transaction).
However, the monthly subscription fee can be quite expensive — typically around $100/month or more. For this reason, we only recommend subscription pricing for large, established businesses with a high, stable monthly processing volume.
Flat-Rate Pricing
Flat-rate pricing addresses the confusion merchants often experience in trying to sort out their processing costs. With this type of pricing, you’ll pay the same rate for every transaction. (Well, sort of. Almost all providers offering flat-rate pricing use at least two rates: one for in-person transactions and another for card-not-present transactions.)
While predictable, these rates tend to be fairly high, as they have to be able to cover the interchange fees and ensure a profit for even the most expensive transaction categories. At the same time, providers offering flat-rate pricing typically don’t charge any monthly or annual account fees, lowering your overall costs. We recommend flat-rate pricing to startups and small businesses with a low or sporadic monthly processing volume.
Tiered Pricing
A variation of flat-rate pricing, tiered pricing separates your transactions into three tiers (qualified, mid-qualified, and non-qualified) based on various factors that usually aren’t disclosed very well. Each tier has a fixed rate, but it’s nearly impossible for a merchant to tell in advance which tier a transaction will fall into. Factors such as rewards cards and even submitting the transaction for processing after the date payment was accepted can drop a transaction into the non-qualified tier, where processing rates might be as much as two to three times higher than for qualified transactions.
Tiered pricing is, unfortunately, quite popular with many traditional merchant account providers, as it obscures markup costs and usually ensures a healthy profit. For merchants, your processing costs will almost always be higher with tiered pricing, and there are no counterbalancing advantages to this type of pricing. Stay away.
Credit Card Processing Fees Comparison
Credit card processors base their processing rate plans on one of two approaches: pass-through or blended. Here’s how they work:
Pass-Through Approach
The pass-through approach is used in interchange-plus and membership pricing plans. With this approach, the interchange and the markup are separated, so you know exactly how much your processor takes from each transaction. This approach is generally best suited to established businesses with a stable month-to-month processing volume.
Pros
- Better transparency regarding processor’s markup
- Generally less expensive for mid-sized and larger businesses
Cons
- Variable per-transaction costs due to variations in interchange rates
- Can be more complex to estimate processing costs in advance
Blended Approach
The blended approach is used in flat-rate and tiered pricing plans. With this approach, the interchange and the processor’s markup are combined into a single charge, so it can be more difficult to determine how much of your processing fee is going to the issuing bank and how much to your processor. The blended approach can save small or newly-established businesses money — if the processor doesn’t charge additional recurring account fees.
Pros
- Processing costs are more predictable
- Simple rate structure is easier for merchants to understand
Cons
- Lack of transparency regarding processor markup
- Generally more expensive on a per-transaction basis (particularly tiered pricing)
Identifying The Best Approach For Your Business
To get the best deal possible and minimize your overall costs, it’s important to analyze the rate quotes you receive from processors by calculating how much they’ll cost you based on your current monthly processing volume and average ticket size. Be sure to factor in all monthly and annual account fees as well. With a complete rate quote, you should be able to come up with a fairly accurate comparison between competing offers. However, don’t forget to consider intangible factors, such as the quality of a provider’s customer service and software/hardware compatibility as well.
How Much Should You Pay In Credit Card Transaction Fees As A Small Business?
While every business owner will want to minimize their credit card transaction fees, it’s a mistake to assume that the best merchant account provider for your business will simply be the one offering the lowest credit card processing rates.
Low rates are only one of several factors to consider. You’ll want to estimate your effective rate, which is simply the ratio of all processing costs (including account fees) to your overall sales volume, expressed as a percentage. Especially for smaller businesses, a provider charging higher processing rates — but no recurring account fees — will often be more affordable overall.
With this benchmark in mind, here are the other important factors to look for in selecting a merchant services provider:
- Month-to-month billing with no long-term contract
- No early termination fee (ETF) for closing your account
- Low recurring fees that are clearly disclosed before you sign up
- Flat-rate, interchange-plus, or membership pricing, depending on your sales volume
- No equipment leasing fees
For a regular, low-risk business, your effective rate should be about 3-4% — and no higher. High-risk merchants, unfortunately, can expect to pay much more in rates and fees — often nearly two times more than a comparable low-risk business. If you’re already accepting credit cards, you can quickly determine your actual effective rate by analyzing your most recent credit card processing statements.
One final point: Having reliable access to high-quality customer support is critically important when working with a merchant services provider. Providers that try to win your business by offering the cheapest rates often cut corners in this area, leading to frustration and headaches on your part when a problem inevitably arises. It’s usually worth paying a little extra to sign up with a provider with a solid reputation for offering top-notch customer support.
How To Lower Or Offset Your Credit Card Processing Fees
If the thought of sending 3-4% of your gross credit card sales off to your merchant services provider doesn’t sit well with you, you’re not alone. Interchange rates have risen dramatically in recent years. Providers have no choice but to pass these price increases onto their account holders, but most aren’t above raising their own markup in the process.
The ever-increasing cost of accepting credit and debit cards has led many businesses to look for ways to lower or offset their credit card processing fees as much as possible. Besides signing up with the cheapest credit card processor you can find, here are several alternative methods that business owners are using to lower their credit card processing fees:
Surcharging & Cash Discounting
For some merchants, the best way to save money on credit card processing is to shift the burden of those costs onto customers who choose to pay by credit card. With interchange rates steadily rising and legal restrictions against surcharging being overturned, the processing industry is experiencing a wave of programs designed to make consumers pay for processing instead of merchants.
There are two ways to do this. One way is through credit card surcharging, which adds the cost of processing onto the customer’s bill at checkout if a credit card is used. The other option is cash discounting, where prices are set to include processing costs, and consumers who use an alternate payment method receive a discount at checkout.
While these two methods might sound great to a business paying hundreds of dollars in credit card fees every month, they aren’t always effective. You’ll have to comply with various confusing legal requirements and credit card brand policies. Surcharging, in particular, is likely to lead to lower sales overall if your customers take their business to a competitor that doesn’t surcharge.
Surcharging and cash discounting can be very effective in some industries; however, we recommend you proceed with caution and do extensive research before implementing one of these programs.
Impose A Minimum Charge For Credit Card Use
For businesses that process a lot of small-ticket sales, imposing a minimum charge for using a credit card can save you from paying disproportionately high processing fees. Although you’ll need to ensure compliance with all applicable laws and card association policies, it’s generally legal to set a minimum purchase amount as high as $10.00.
As an extreme example of how much credit card processing fees can cost you, consider a $1.00 purchase made through PayPal. Because PayPal charges a whopping $0.49 per transaction authorization fee, you would end up paying over 50% of the value of the transaction in processing fees.
Setting a minimum purchase amount for credit card use makes sense even if your current processing rates are much lower than what PayPal charges. Be aware, however, that you cannot require a minimum purchase amount when a debit card is used. You should also consider the possibility of lost sales from customers who aren’t carrying any cash on them.
Offering Alternative Payment Methods
It’s always a good idea to give your customers as many different ways to pay you as possible. Alternate payment methods offer flexibility and lower processing costs. Alternative methods to consider include the following:
- ACH Processing: With an ACH payment, funds for the transaction are transferred directly out of the customer’s bank account. ACH payments are convenient and cost very little to accept. However, the underwriting process to get approved for ACH processing is more involved than it is for credit cards.
- Online Invoicing & Payment Links: Freelancers and other independent contractors can also use online invoice payments to simplify the process of getting paid for their work. Invoices can be sent via email or text message and include payment links where the customer can submit an online payment. Online invoicing eliminates slow, inefficient paper-based processes and helps you get paid faster.
- QR Code Payments: QR code payments are another convenient and contactless option. With QR codes, the customer can scan the code with their smartphone and then submit an online payment, eliminating the need for processing hardware. QR codes can be used in eCommerce or a retail setting by printing them out and displaying them in your store.
Other Techniques To Lower Costs
While these suggestions are all useful in lowering your credit card processing costs, there are other things that you can do to achieve this goal without special programs or using alternative payment methods. Here are a few suggestions:
- Ensure that you’re using credit card tokenization for all card payments. Tokenization replaces the customer’s card number with a “token” number that your payment processing network can decode. Tokenized payments are much more secure and incur a lower interchange fee to process. Most modern payment gateways support tokenization.
- If you accept a lot of B2B payments, ensure you’re set up to accept Level 2 and Level 3 processing data. This additional data increases the security of the transaction, and you’ll pay a lower interchange rate if you include it. Unfortunately, many merchant service providers charge an additional monthly fee for Level 2 and Level 3 processing, somewhat offsetting these savings.
- For retail merchants, avoid manually keying in a transaction unless you can’t get the customer’s card to go through by swiping or dipping. Most processors charge a significant premium to process a manually-keyed transaction.
- If you use a payment gateway, it’s usually less expensive to use one provided by your processor than to add a third-party gateway to your processing setup.
The Final Word On Credit Card Processing Rates
Every credit card processor has its own schedule of fees and processing charges, although they might vary quite a bit from one customer to another. While many fees are unavoidable, others can be reduced or eliminated through negotiation. Because costs vary so widely among merchants, “average” figures don’t tell you much about what your costs will be.
With that in mind, here are some recommendations to help you get the best service for a reasonable price:
- If you’re running a very small or seasonal business, look for a highly-rated provider with flat-rate pricing, no monthly fees, and no long-term contracts.
- If you have a medium-sized business with a stable month-to-month processing volume, interchange-plus pricing will usually be your most cost-effective option.
- Large, established businesses can save even more money with a subscription pricing plan. Be sure to compare quotes against what you’re currently paying to confirm your estimated savings before switching to this type of plan.
- Regardless of the size of your business, avoid providers that will lock you into a long-term contract with an early termination fee (ETF).
- Avoid leasing your processing equipment under all circumstances.
- Read your proposed contract thoroughly before you sign up to gain a complete understanding of your fee structure.
- Choosing a slightly more expensive provider that offers superior customer service and support will be a worthwhile tradeoff.
We hope this article has given you a place to start to find the best payment card processor for your business.
Remember that there’s no overall “best” or “cheapest” payment processor, only the best/cheapest processor for your particular business. Making that final determination takes using sales data from your business and doing some math, but the time you spend analyzing the numbers will more than pay for itself in savings on credit card processing fees. Good luck!
FAQs: Credit Card Processing Fees
How much do credit card companies charge merchants in 2023?
Credit card processing costs, including per-transaction processing fees and account maintenance fees, typically amount to 3-4% of a merchant’s total monthly processing volume. However, merchants in high-risk industries can pay up to two times this amount due to the additional risk these transactions entail.
Who pays the credit card processing fee?
Merchants have traditionally been liable for paying credit card processing fees, which are paid to the card-issuing bank, credit card association, and the merchant’s credit card processor. Today, many businesses are shifting these costs onto customers who choose to pay by credit card, either through a credit card surcharge, cash discounting, or a convenience fee.
What is the typical fee for credit card processing?
Generally, a good effective rate for credit card processing (i.e., the ratio of your total monthly fees divided by your processing volume) is around 3-4%. However, the particulars of your business may mean that your ideal effective rate is different. While a low effective rate is good, you should also consider the overall value of the services the provider offers.
How can small businesses avoid credit card fees?
Credit card processing fees are unavoidable if the merchant accepts credit and debit card payments. However, these costs can be passed onto customers through surcharging, convenience fees, or cash discount programs. Merchants can also lower their overall processing costs by offering alternative payment methods, including:
- ACH transfers
- eCheck processing
- QR code payments
- Online invoicing
- Peer-to-peer (P2P) payment methods (e.g., Venmo, Zelle, etc.)
Can I charge customers a credit card processing fee?
It depends. While credit card surcharging is now legal in most of the United States, the rules governing the practice differ in each state. We recommend carefully weighing the pros and cons of this strategy before implementing a surcharging program. A convenience fee is another way to recoup your costs under certain conditions.
Why are businesses charging credit card fees?
Businesses have always had to pay credit card processing fees whenever a customer used a credit or debit card. Today, the rising cost of credit card processing fees and the loosening of legal restrictions on the practice have encouraged many businesses to pass these costs onto their card-using customers; often by imposing a credit card surcharge. Surcharging is a legal method of recouping credit card processing fees in almost all states within the US.
