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Credit card processing fees vary from bank to bank, but on average they can be around 3-5% of a transaction. Learn how credit card processing works and the impact it has on merchants who sell goods internationally or online with this article.
For in-person purchases, the typical credit card processing cost is roughly 2%. The typical cost for online and card-not-present payments is closer to 3%. Larger companies are able to negotiate or qualify for bulk discounts, resulting in reduced pricing. Small enterprises, on the other hand, may be able to pay somewhat higher rates.
Square Payments, for example, charges 2.6 percent + 10 cents for swiped, chip, and contactless payments and 2.9 percent + 30 cents for online and invoice payments, which is used by millions of small companies in the United States. Credit card transaction fees are normally 3.5 percent + 15 cents for each transaction when entered manually.
Fees for Credit Card Processing
Calculating your effective rate is the easiest approach to figure out how much you’re paying (and if it’s too much).
Total processing fees, generally represented as a percentage of total sales, are referred to as the effective rate.
Effective rates may range from as low as 1.7 percent for big organizations with a lot of low-risk in-person sales to as high as 5% for tiny internet enterprises with a lot of high-risk transactions. Expect an effective rate of roughly 3% when you first start out for most small firms, and after you’ve processed moreover $20,000 per month, your rate should drop to closer to 2%. High-risk enterprises, on the other hand, will always pay higher rates.
Your effective rate is influenced by a number of variables, which we go over in detail below. Credit card processing costs are usually divided into three parts:
1. Fees for Interchange
Interchange fees are transaction fees that retailers must pay to the customer’s card-issuing bank to cover the transaction’s handling costs and risks.
The default interchange fees are determined by the card organizations (Visa, MasterCard, Discover, American Express), but they are paid to the bank that actually provides the credit card (Chase, Bank of America, Wells Fargo, etc.). Per transaction, these fees generally vary from 1.29 percent to 3.5 percent.
If a consumer uses a Chase Visa credit card, for example, you will be charged interchange charges defined by Visa, which will be remitted to Chase for processing the transaction. 70%–90% of the entire transaction charge is made up of interchange fees.
2. Fees for assessments
Credit card organizations determine, charge, and collect assessment fees (Visa, MasterCard, Discover, American Express). Along with the interchange fees, these are applied to each transaction.
Card Brand Fees, Card Association Fees, and Network Access and Brand Usage Fees are all terms for assessment fees (NABU). These costs remain with the credit card organizations, unlike interchange fees, which go to the banks. Per transaction, they generally vary from 0.11 percent to 0.15 percent.
3. Markups on Merchant Services
The costs that merchant account providers and payment processors charge companies in order to process card payments are known as merchant services markups.
Services provided by merchants The most changeable aspect of credit card processing costs are markups. Processing firms that allow companies to take credit cards, such as Square or PayPal, charge a fee for their services. Payment processors, unlike interchange and assessment fees, which are largely standardized, employ a wide range of cost structures, making it difficult to evaluate choices and choose an inexpensive solution.
Merchant service providers are often classified into one of four charge structures:
Regardless of the card type, merchants get paid a predetermined sum for each transaction they perform. This cost structure is clear, simple to budget for, and provides a great deal of transparency.
The direct interchange and assessment fees, as well as a % and/or flat-fee markup, are passed on to merchant service providers in this approach. Companies that charge a flat price rather than a % markup are typically the best choice.
Businesses pay a fixed monthly cost, direct interchange and assessment fees, and often a tiny flat fee (such as $0.05–$0.10) for each transaction under this pricing scheme, which is similar to interchange-plus.
This price model, often known as bundled pricing, divides transactions into three categories: qualified, mid-qualified, and non-qualified.
- Customers swipe or enter qualified payments such as debit cards and non-reward credit cards at the point of sale. Because they are low-cost, low-risk transactions, the merchant service provider would impose the lowest markup under a tiered approach.
- The billing address must be validated at checkout with a mid-qualified payment, which is generally a swiped rewards card or a debit or non-reward credit card used online (for eCommerce purchases).
- Non-qualified payments, such as card-not-present (keyed-in) purchases and corporate or high-reward credit cards, are riskier or more expensive. In a tiered approach, merchant account providers would charge additional fees for certain sorts of transactions, perhaps as high as 4%.
Why Should Companies Avoid Tiered Pricing Models?
In a tiered pricing scheme, the costs that merchants pay might vary dramatically based on the kind of card that your consumer uses. As a consequence, you may end up paying larger costs than you would if you used a different model. As a result, we advise companies to avoid tiered pricing schemes in favor of flat-rate, interchange-plus, or membership-based merchant service accounts.
“Scammers know that small firms are seeking methods to save expenses,” the Federal Trade Commission warns small company owners. Some make false promises about cheaper credit card processing fees.” “Rates as low as X percent,” as advertised by merchant service providers with tiered pricing plans. On most transactions, the quoted rate will be the qualified tier, which may or may not be the amount you actually pay.
Additional Factors Affecting Credit Card Processing Fees
- Card-present transactions (swipe, chip, and NFC) are the least risky and have the lowest interchange rates. Because there is greater risk associated with online and card-not-present transactions, interchange rates are higher.
- Merchant Category Code (MCC) depending on business type: Every business has a Merchant Category Code (MCC) based on the kind of business. Various interchange rates are determined by credit card organizations for different codes. Retail, grocery, petrol, and transport firms, for example, all have various prices.
- High-risk merchant accounts: As previously stated, if your company is considered high-risk due to the items or services you offer, a history of high chargebacks, or personal credit, you may need to create a separate high-risk merchant account. Your credit card transaction costs will almost certainly rise as a result of this.
- B2B organizations: Large-volume B2B companies, such as suppliers and corporations that handle a lot of B2G transactions, may qualify for Level 2 and Level 3 processing, which allows them to get cheaper interchange rates. Businesses that utilize physical terminals or conventional e-commerce are not eligible for these reductions. The top B2B payment solutions are provided by some of the most renowned payment processors.
Flat-Rate and Interchange-Plus Pricing Models’ Average Credit Card Processing Fees
Assume you’ve sold a $100 item both in your brick-and-mortar store and online. Based on normal processing costs, here’s how much you could spend on fees (and in different payment methods).
For each kind of card, we utilized an average percentage based on normal rates for merchant accounts providing interchange-plus pricing.
Flat-Rate vs. Interchange-Plus
At first look, it seems that picking a merchant account that provides interchange-plus pricing for your credit card processing is significantly less costly than, say, Square, which charges flat rates. You are correct. With interchange-plus pricing, however, there are additional limitations, exclusions, and extra expenses that factor into the final amount you pay.
The amount you pay as a merchant varies substantially based on the kind of transaction, the type of card your consumer uses, and the nature of your company. Because the costs are upfront and consistent, Square’s flat price may be a preferable option for small companies. Furthermore, many merchant accounts that provide interchange-plus pricing have stringent application procedures and, in many cases, monthly fees or minimums that would disqualify or make small firms unviable.
It may take some research to identify the most cost-effective credit card processing for your company.
Accepting Debit Cards
Debit card payments often have cheaper transaction costs since the interchange rate is lower owing to the decreased risk of debit cards. Instead of credit, monies are taken immediately from a customer’s bank account when they use a debit card.
You’ll pay the same amount in transaction fees whether it’s a debit card or a credit card if you utilize Square or another flat-fee option for credit card processing.
Processing Fees
If you have interchange-plus pricing, you may discover that, in addition to decreased debit card rates, American Express prices are higher. Let’s start from the beginning and zoom out: American Express cards aren’t credit cards at all. They’re credit cards. This means that, in the vast majority of situations, consumers pay their debt in full each month, and American Express does not charge interest to clients as conventional credit card issuers do.
Other credit card organizations (Visa, MasterCard, and so on) will also enable other banks (Wells Fargo, Chase, and so on) to issue credit cards under their brand names. American Express, on the other hand, does not do this and instead works on a closed-loop or closed network model.
Closed network: A bank serves as both the credit card association and the issuing bank in a closed network.
Because of the restricted network, American Express has a lot more flexibility when it comes to setting interchange fees. In other words, American Express charges the highest rates the market will allow. Having a flat-rate merchant account that costs the same price regardless of card type is advantageous in this situation.
Conclusion
Transaction fees or credit card processing fees are a substantial expenditure for any small company. It’s difficult to know what type of pace you’re receiving since every processor works a little differently. It’s simpler to choose a fair supplier if you know who the primary actors are and where the various costs originate from.
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Frequently Asked Questions
What does processing a credit card mean?
Processing a credit card means that your transaction will be pending until the bank approves it. That’s why you’ll need to wait for at least 2-3 business days before your order arrives, as well as additional time after receiving the tracking number from UPS/FedEx
How much do credit card processors make?
The profit margin of a credit card processor is around 2.5%, with some companies making as much as 3% and others as little as 1%.
How a credit card is processed?
When you swipe your credit card, the data on that card is sent to a central database. The algorithm in this database then matches the information given against their own records and the banks’ records of who issued it to them. Once matched, they will be able to determine how much money should go out of which account for every purchase.
