Small-business guide to credit card merchant fees

Everything business owners need to know about fees, options to process credit card payments


The number of fees businesses need to pay for accepting credit cards can be confusing – but we have you covered. Here’s everything you need to know about card merchant fees and options to reduce costs for accepting plastic.

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The costs for accepting credit card payments can be some of the most confusing and frustrating fees small-business owners face.

When a customer makes a purchase with a credit card, business owners pay a fee to three different parties:

  • The credit card network associated with the card a customer uses: Visa, Discover, Mastercard or American Express.
  • The bank that issued the card, be it Capital One, Wells Fargo, Chase, Bank of America or any other.
  • The merchant account provider, which is the company that provides the equipment and software used to scan and process credit card payments.

Credit card payments can be costly – and shopping around for the lowest processing fees, tricky.

Here’s everything small-business owners need to know about credit card processing fees.

See related:  Convenience fees: When is it OK to charge extra to use a credit card?

Start by understanding the fees

Ellen Cunningham, marketing manager with Middletown, Connecticut-based CardFellow, a site that provides advice and resources to businesses on credit card processing issues, said that most small-business owners struggle to understand just how much their merchant account fees will cost them each month.

That’s because the pricing plans that these companies offer can be confusing, Cunningham said.

“They offer pricing models that can be very complicated,” she said. “This is especially true if you’re a small business that doesn’t have an accounting staff to really look into these fees.”

Cunningham says that businesses can approach merchant fees in one of two ways: Some owners study all their options and research carefully. Others simply want the lowest monthly price.

“The second way is often preferable to business owners. It doesn’t involve as much of their time,” Cunningham said. “Unfortunately, that is where it is easiest to overpay. Usually, business owners won’t know if they are being overcharged.”

See related:  How much it really costs your business not to accept credit cards?

The basics of merchant fees

The rate that owners pay to close a credit card sale consists of two parts: base costs and markups.

  • Taken together, both costs are known as the merchant discount.
  • This is the most important fee for business owners to understand.
  • The merchant discount is the final rate that they pay to take credit card transactions.

Base costs

  • Business owners can’t negotiate them.
  • Base costs are made up of two different fees, interchange fees and assessment fees.
  • These remain the same no matter which credit card processing company business owners choose.

Interchange fee

  • It is paid to the banks that issue credit cards.
  • This fee is paid out every time business owners accept a card payment.
  • Visa, Mastercard, Discover and American Express each charge their own interchange fees

These vary depending on:

  • Whether customers swipe their cards in person, make purchases online or by phone.
  • Fees will vary, too, depending on the type of card consumers are using.

These variables are why the interchange fees published by the major credit card companies are so long and complex, and why it’s so difficult for business owners to estimate how much they’ll pay each month for credit card transactions.

Examples of interchange fees

  • Visa charges businesses 1.51 percent of the sale plus 10 cents for credit cards that are swiped in some stores.
  • But Visa might also charge 1.65 percent plus 10 cents if you use a Visa Signature or Visa Infinite card in supermarkets.
  • Mastercard might charge 1.90 percent for credit card transactions for gas but 1.58 percent and 10 cents for lodging and auto rental purchases.

Assessment fees

The credit card companies don’t earn any money from these interchange fees.

The four big card networks – Visa, Mastercard, Discover and American Express – make their money from assessment fees, which they charge on every transaction made by their cards.

  • Visa charges a 0.13 percent assessment fee for every charge made with its credit or debit cards.
  • Mastercard charges 0.13 percent for credit transactions of $1,000 or lower and 0.14 percent for those of $1,000 or higher.
  • Discover also charges 0.13 percent as an assessment fee on its credit cards.
  • American Express charges 0.15 percent.

Credit card networks’ full lists of rates and fees

Negotiating markup charges

The markup charges are the ones that business owners can negotiate with their credit card processing companies. These are the fees charged by an owner’s credit card processing company.

Pricing models

Amad Ebrahimi, chief executive officer and founder of Merchant Maverick, a Redwood City, California-based business and e-commerce site, said that business owners can usually choose from two main pricing structures when choosing a merchant account provider.

  • Interchange plus: In this model, business owners will be charged the interchange fee and assessments that the credit card company charges for each transaction plus a wholesale fee or markup fee charged by their merchant account provider.
  • Tiered pricing: Ebrahimi says tiered pricing, in which merchant account providers assign transactions to cheaper or more expensive tier levels, is the worst type of arrangement for business owners.

“A business owner might process a transaction that is classified in a lower tier and now that owner is paying more,” Ebrahimi said. “Other times, the processor might make a mistake and incorrectly classify a purchase in a lower tier. You are giving your credit card processor the authority to determine exactly what they want to charge you.”

How much should you pay?

Several factors determine what you’ll pay each month for a merchant account.

  • What industry your business is in.
  • How much you sell in an average month.
  • How you accept cards: Expect to pay different fees if you accept cards in person, over the phone or online.
  • You will also pay less if your business only accepts card transactions in person, Cunningham says.

She said that a good effective rate each month – what business owners would actually pay in total to process credit card payments, including base costs and markup – would be equal to about 2 percent of their credit card transaction volume when dealing with in-person purchases and 2.3 percent to 2.5 percent for credit transaction volume registered through online purchases.

See related:  How high of a fee do businesses pay to accept cards?

A good effective rate each month – what business owners would actually pay in total to process credit card payments, including base costs and markup – would be equal to about 2 percent of their credit card transaction volume.

How to cut costs from credit card processing fees

If you are a business owner and don’t want to spend too much time researching merchant services accounts, these are your options for paying as little as possible.

  • Rate locks: Require that your provider offers a lifetime rate lock on fees. This way, your fees will remain the same every month. Service providers often tempt business owners with low initial costs, Cunningham said. But over time, these rates slowly creep up. Before long, business owners are paying far more than they expected.
  • No cancellation fees: Cunningham says that owners should never sign a merchant account contract that charges cancellation fees. Without these fees, business owners can cancel their accounts and go with a lower service provider without having to pay a hefty cost to do so.
  • Tiered or bundled is a no-no: Under these pricing packages, merchant account providers classify certain purchases as qualified and others as nonqualified, with qualified purchases costing less per transaction.

Too often, what is considered a qualified credit card purchase is left up to the discretion of merchant account providers, Cunningham said. For instance, some providers might only consider a debit card transaction that requires a PIN to be qualified purchases. Those purchases would cost less, but all others – the majority – would cost more.

“If the merchant account providers don’t feel they are making enough money, they can send more transactions to the nonqualified rate,” Cunningham said.

  • Institute a minimum: Jim Angleton, president of Miami-based credit card consulting company AEGIS FinServ Corp., recommends that small-business owners institute a minimum amount for credit card sales.
  • The Federal Reserve says that merchants can require that consumers make a purchase for at least $10 before they’ll accept a credit card payment.
  • You must assess this minimum for all credit card types. You can’t have a $10 minimum for Mastercard purchases but no minimum for Visa payments.

Having this minimum might persuade more consumers to use cash for smaller purchases, saving you money, Angleton said. It will also save the fees for each of these smaller transactions.

See related: Can I impose a minimum transaction of $10 for card purchases?

Consider simplicity versus costs

These fees are confusing, and some providers – such as Stripe or Square – promote themselves as a simpler solution, charging a monthly flat fee for credit card processing services.

Cunningham said it’s usually just small businesses with transactions that average $10 or less, such as coffee shops, that benefit from working with providers such as Square or Stripe.

Businesses with larger transactions will generally pay more each month.

“In some cases, merchants don’t mind that. They are OK with paying more for simplicity,” Cunningham said. “That is fine, but you need to understand this. Don’t confuse simplicity with competitiveness.”

See related: What are some low-cost options to process credit cards for my business?

Variety of payment options pays off

New York City’s Rob Eisenstein, owner of online collectibles merchant, said that it’s important for business owners to accept a wide variety of payments, even if some of these payments, such as credit cards, will cost more.

For Eisenstein, this means accepting not only all credit cards but gift cards, prepaid debit cards and even bitcoin as payment.

Eisenstein relies on e-commerce platform Shopify to handle credit card transactions. He says he spends $35 a month on fees from Shopify.

“The fees do add up,” Eisenstein said. “But what we pay is a drop in the bucket compared to the amount of business we do through them. I know we do a lot more business because we do accept so many diverse forms of payment.”

See related: Is it safe for merchants to accept new digital payment forms like PayPal, Venmo, Zelle?

Don’t forget about support

Gary Jackson, vice president of sales of online payment processing company CCBill, which has its corporate office in Tempe, Arizona, warns business owners against focusing only on price when choosing a merchant account provider.

Business owners also want to look at the type of support they’ll receive.

“You want someone who can provide you guidance,” Jackson said. “Some providers give you the software and say, ‘Here you go.’ If you have a bad launch, it can be detrimental to your business. You can lose customers left and right. You might want a company that provides more hands-on support.”

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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