Credit Card Processing Fees Explained

Credit card processing fees and how they work

Fees for accepting credit cards can differ from business to business based on the industry, location, type of card and number of transactions. When a customer pays with a credit card at your business, the payment goes through several stages before the funds reach your account.

First, the transaction is sent to a payment processor, which communicates with the credit card network (e.g., Visa, Mastercard) to verify the card details. After approval, the payment processor forwards the transaction to the customer’s bank (the issuing bank) to transfer the funds. The funds are then sent to your business’s bank (the acquiring bank), with any transaction fees subtracted, before being deposited into your account.

When accepting credit cards, you should be aware of fees from your payment processor (payment processing fees), card network (assessment fees) and card issuer (interchange fees). Other mandatory fees include the acquirer processing fee, fixed acquirer network fee, kilobyte access fee, and network access and brand usage fee.

For small businesses with $10,000 to $250,000 in annual credit card transactions, the average cost of processing these payments is currently 2.87% to 4.35%. However, additional fees (whether required or added by your payment processing provider) could make your rates higher than average.

How credit card processing fees are determined

When working with credit card payments, you are charged by three primary services: the payment processor, the card network and the card issuer.  

Payment processor

The payment processor is a financial institution, like Chase, that completes the credit card transaction. Most merchants work with a third-party company that facilitates this process for a financial institution, like Leaders Merchant Services.

The best credit card processing providers offer equipment for brick-and-mortar and online transactions. This equipment includes point-of-sale (POS) systems and credit card terminals. In addition, you can access payment software systems such as virtual terminals, contactless payments through RFID (e.g., Apple Pay, Google Pay), mobile payments, e-commerce shopping carts and payment gateways.

Payment processors charge a percentage of each card transaction plus a flat fee.

Card network

Card networks include American Express, Discover, Mastercard and Visa. They facilitate credit and debit transactions between the card issuer and the merchant. In addition, card networks partner with card issuers for credit cards and debit cards.

These are the average transaction costs from the top four credit card networks:

• American Express: 1.58% to 3.3%
• Discover: 1.53% to 2.53%
• Mastercard: 1.29% to 2.64%
• Visa: 1.29% to 2.54%

Card networks also determine where credit and debit cards are accepted. Credit cards used to have different acceptance rates, but major credit card networks now have relatively similar rates, with all four major credit card networks accepted at over 10 million U.S. locations.

Card networks are also responsible for any card perks or rewards. 

Card issuer

The card issuer makes money by charging the business owner a percentage of each transaction plus a flat fee (similar to payment processing providers). In addition, card issuers have the final say on whether a card transaction is approved or denied.

How much do credit card processing fees cost?

The average credit card processing fee per transaction is 1.3% to 3.5%. The fees a company charges depend on which payment company you choose (American Express, Discover, Mastercard or Visa), the merchant category code (MCC) and the type of card.

The table below shows interchange and assessment fees, but not processing fees, as they vary widely by credit card provider, card type and MCC.

Types of credit card processing fees

There are three main types of credit card processing fees: payment processing fees, assessment fees and interchange fees.

Payment processing fees

There are many payment processors that you can use to accept credit card payments. Generally, you will have payment processor equipment to take physical cards and an online payment gateway to accept credit cards through a virtual shopping cart.

The payment processing company determines your payment processing fees. It may choose to charge you in the following ways:

• A per-transaction fee
• A monthly service fee
• The cost of the credit card transaction equipment

Assessment fees

Major credit card providers receive assessment fees. For example, if you have a Capital One Visa credit card, Visa receives the assessment fee on every transaction.

The major networks’ average credit card assessment fees fall at or around 0.14%, broken down in this table:

Interchange fees

The bank that issues your credit card receives an interchange fee on every transaction. Interchange fees are set by each network and change every year in April and October. The average credit card interchange fee is 2%, as you can see in the table below.

Factors that influence interchange rates

The interchange fee helps cover the risk for the card issuer in the case of fraud and handling costs. The following risks influence the interchange rates.

Credit or debit card type

Credit cards have a higher risk than debit cards with a security PIN, so credit card transactions have higher interchange rates than debit card transactions do. However, debit cards that require a signature are processed like credit cards, and credit cards that double as rewards cards (travel, cash back, etc.) can also have higher interchange rates.

POS vs. CNP transactions

POS transactions may have lower interchange rates than card-not-present (CNP) transactions do. CNP transactions include online, phone, online invoicing and mail orders.

Charge amounts

If your business has a large number of small transactions, you can negotiate lower interchange rates to increase your profit.

MCC

When your business accepts credit cards, you are issued a four-digit number as an MCC. Your MCC helps with IRS reporting. It also categorizes your industry so that financial institutions can assign you a risk factor when determining interchange fees. For example, companies with a higher risk factor, like travel or gambling, are often subject to higher interchange fees.

Additional fees charged by card issuers and networks

If you accept credit cards, you will also be subject to the following fees. These costs are required by every payment processor and are consistent across processing companies.

• Acquirer processing fee: This is a charge on all U.S. business Visa credit card transactions.
• Fixed acquirer network fee: This charge is common to all card brands and is based on the presence or nonpresence of the card at the time of the transaction, the number of locations and volume.
• Kilobyte access fee: This is a per-transaction charge for settlement upon authorization.
• Network access and brand usage fee: Mastercard charges this fee for all settled or refunded credit and debit card transactions.

Negotiable fees charged by card issuers and networks 

Some fees are not required for your business to process credit cards. It’s in your best interest to choose a merchant services provider that is transparent about all of its costs. Negotiate the following fees with your payment processor to see if they can be waived: 

• Account fee: This administration fee helps maintain your payment processing account.
• Address verification service fee: This is a fee for matching a customer’s billing data with keyed-in transactions (per transaction).
• Batch fee: This is a fee for settling or closing out daily deposits (batch header fee).
• Charge-back fee: This fee is assessed every time a customer disputes a charge or returns a purchase.
• Contract cancellation fee: This penalty fee is assessed when you cancel your contract with the payment provider before its end date.
• Hosting fee: This is a fee for server-based POS systems.
• IRS reporting fee: This merchant-based fee covers the reporting of relevant information to the IRS.
• Marked-up discount rate: This is a charge above mandatory interchange rates.
• Minimum monthly processing fee: Credit card processors can impose a minimum monthly transaction quota. The minimum monthly processing fee can be charged regardless of whether you meet the processor’s requirements.
• Monthly fee: This is a flat-rate subscription fee to use the payment processing service or software.
• Payment gateway fee: This is a fee for the software and data security costs associated with processing online credit card payments.
• PCI compliance fee: This covers the cost of keeping you PCI compliant.
• Service fee: Similar to the account fee, the service fee is tied to running your payment processing account.
• Terminal lease fee: This is the monthly cost to lease your credit card machine.
• Wireless access fee: This is a fee for using a cloud-based POS system.

How to minimize credit card processing costs

Small businesses can reduce their credit card processing costs by implementing a few transaction rules.

Set a minimum credit card transaction amount.

Credit card processing costs can add up if you sell many inexpensive items, especially for sales under $10. Stipulations in the Dodd-Frank Act of 2010 combat this cost by allowing businesses to set a credit card minimum of up to $10 per transaction. 

However, check your state’s rules before you get creative with credit card policies. Most states require you to use the same minimum policy for every payment company you offer (Visa, Mastercard, etc.).

Minimize charge-backs.

If your business has a high rate of charge-backs, financial institutions automatically consider you high risk and can spike processing fees.

To lower your risk of charge-backs, use a credit card authorization form. Once a customer signs this form, you can charge the card on an ongoing basis. Having this document in hand when a charge-back case is raised can give you the upper hand.

Increase in-person transactions.

With online transactions on the rise, there will also be an increase in fraud. Accepting payments in person can reduce this risk and lower your overall processing fees.

Swipe smart: Choosing your perfect payment partner

Selecting the right credit card processing company is crucial for maintaining healthy profit margins and ensuring smooth transactions for your customers. By understanding the fees each provider charges, you can make an informed decision that aligns with your business’s financial goals. Whether you’re looking for low transaction rates, no monthly fees or a subscription-based model, the right choice will help you minimize costs while maximizing efficiency.

Amanda Clark contributed to this article.