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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.

This isn’t surprising: Business owners don’t pay just one fee when closing a sale with a credit card. Instead, business owners pay fees to three different parties whenever customers make purchases with plastic.

  • The credit card network associated with the card a customer uses, either 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 businesses use to scan and process credit card payments.

The challenge here? Credit card payments can be costly while shopping around for the lowest processing fees can be tricky.

See related: Best small business credit card processing companies

The basics of credit card fees

Ellen Cunningham, marketing and content manager at Tech180 and former manager at CardFellow, a site that provides advice and resources to businesses on credit card processing issues, said 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.”

What if you as a business owner don’t have the time to fully research credit card processing fees? It might make sense to take a closer look at what is known as your merchant discount, the final rate that you’ll pay to accept credit transactions.

Unfortunately, the merchant discount is made up of main parts, your base costs and markups. And both of these fees are made up different parts, too.

Base costs

Understanding base costs is important for business owners. The first thing to understand is you can’t negotiate these costs no matter which credit card processing company you choose. These costs always remain the same.

Base costs are made up of two different fees, interchange fees and assessment fees.

Interchange fees

These are the fees paid to the banks that issue credit cards.

  • This fee is paid out every time business owners accept card payment.
  • Visa, Mastercard, Discover and American Express each charge their own interchange fees.

Interchange fees vary depending on:

  • Whether customers swipe their cards in person or make purchases online or by phone.
  • Fees will vary, too, depending on the type of card – Visa, Mastercard, American Express or Discover – that 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.

For example:

  • Visa charges businesses 1.51% of the sale plus 10 cents for credit cards swiped in some stores.
  • But Visa might also charge 1.65% plus 10 cents if you use a Visa Signature in that same store or 2.10% plus 10 cents if you use a Visa Infinite card.
  • Mastercard charges businesses 1.90% of the sale for certain credit card transactions for gas but 1.58% and 10 cents for lodging and auto rental credit card purchases.

Assessment fees

Interchange fees are annoying for small business owners, but credit card companies don’t earn any money from them.

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

  • Visa charges a 0.14% assessment fee for every charge made with its credit cards and a 0.13% fee for transactions made with its debit cards.
  • Mastercard charges 0.1375% for credit transactions of $1,000 or lower and 0.1475% for those of $1,000 or higher.
  • Discover also charges 0.13% as an assessment fee on its credit cards.
  • American Express charges 0.15%.

Markup fees

If you want to negotiate fees, markup fees are the ones to target.

These are the fees charged by a business owner’s credit card processing company. While you can’t negotiate with Discover, American Express, Visa or Mastercard to reduce interchange or assessment fees, you can negotiate with your credit card processing company on the fees they charge you.

See related: Pandemic boosts cashless payments, potentially affecting swipe fees

Pricing models

Amad Ebrahimi, CEO and founder of Merchant Maverick, a business and e-commerce site, said business owners could usually choose from two main pricing structures when selecting 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 single wholesale fee or markup fee charged by their merchant account provider.
  • Tiered pricing: Ebrahimi says tiered pricing, in which merchant account providers assign different 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.”

Several factors, then, 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.

Although costs will vary, a fair 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% of their credit card transaction volume when dealing with in-person purchases and 2.3% to 2.5% for credit transaction volume registered through online purchases.

See related: Does your small business need a self-checkout machine?

How to reduce your credit card processing fees

Want to reduce your credit card processing fees but not interested in spending too much time researching merchant services accounts? Here are some 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. But over time, these rates can slowly creep up. Before long, business owners are paying far more than they expected.
  • No cancellation fees: Never sign with 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.

Merchant account providers have too much discretion when determining what is considered a qualified credit card purchase. Some providers might only consider a debit card transaction that requires a PIN to be a qualified purchase. Those purchases would cost less, but all others would cost more, an expensive proposition for business owners.

“If the merchant account providers don’t feel they are making enough money, they can send more transactions to the non-qualified 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 merchants can require that consumers make a purchase of at least $10 before they’ll accept a credit card payment for that buy.

Be sure to follow the Fed’s rules, though. For instance, you must assess this minimum limit 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.

Making your decision: Consider these factors, too

Price isn’t the only factor you should consider when deciding on a merchant services provider.

How important is simplicity?

Credit card processing fees are confusing, so it’s not surprising that 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.”

Consider accepting a wide variety of payments

New York City’s Rob Eisenstein, owner of online collectibles merchant, said 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. The goal is to convince more customers to make more purchases. By offering more payment options, you can reach this goal.

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.”

Don’t forget about support

Gary Jackson, formerly vice president of sales at online payment processing company CCBill and now a self-employed digital consultant, warns business owners against focusing only on price when choosing a merchant account provider.

Business owners should also consider the type of support they’ll receive if something goes wrong.

“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.”

Bottom line

As a small-business owner, you’re busy. Navigating the confusing world of credit card processing fees is both tedious and time-consuming. But this research can pay off: Every bit of savings can help a small business meet its yearly financial goals. By reducing the money you pay in processing fees you could provide a financial boost to your small business.

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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