The Guide to Credit Card Processing Fees & Costs

Interchange fees

Interchange fees are paid to the customer’s issuing bank (the bank that issued their credit card) every time they use their credit card in a transaction. These fees cover the bank’s cost of processing and authorizing the payment. They also compensate for assuming risk and processing the transaction, making them one of the largest portions of overall processing costs.

Interchange fees usually include a percentage of the transaction amount and a small flat fee. However, they may vary depending on factors such as the type of card (rewards or business cards often cost more), transaction method (in-store swipes typically cost less than online payments), and industry (riskier industries often face higher fees)^[1].

Processing fees

Processing fees, or processor markups, are charged by the payment processor for handling and facilitating credit card transactions for you. These fees vary widely depending on their pricing model^[1]. Some of the main pricing models you may find include:

• Flat-Rate Pricing: One consistent rate for all transactions, providing predictability.
• Interchange-Plus Pricing: The interchange fee plus an added percentage or fixed amount. This model offers transparency, as businesses can see exactly what goes to the processor versus the issuer.
• Tiered Pricing: Rates are divided into tiers based on transaction type (qualified, mid-qualified, non-qualified), with “qualified” rates generally being the lowest.

Assessment fees

Assessment fees are charged by the card networks (Visa, Mastercard, Discover, American Express) to cover the costs of operating and maintaining them. When applied on top of the interchange fee, they are typically smaller in amount. Businesses consider the total amount a swiping fee. Most of the time, these fees are based on your company’s monthly sales^[2].

Service fees

Service fees include additional costs for account maintenance, customer support, and sometimes PCI compliance. These can vary, with some processors charging a flat monthly fee for general account services, fraud prevention, or customer support access.

Chargeback fees

Chargeback fees are imposed when a customer disputes a transaction, resulting in the funds being reversed back to the customer’s account. This fee is in addition to the refunded transaction amount, which the merchant must also cover.

In addition to incurring a fee, high chargeback rates can also lead your processor to charge higher processing fees for businesses, as they indicate your business is high-risk.

Early Termination fees

Early termination fees occur when your business cancels an agreement with a payment processor before the end of your contract term. Depending on the provider, this fee can be a flat amount or a percentage of the remaining contract value.

These fees help processors recoup costs associated with setting up your merchant account and other onboarding expenses. Early termination fees discourage businesses from switching processors before fulfilling their contracts.

Non-Qualified Transaction fees

Non-qualified transaction fees are added costs for certain transactions that don’t meet the processor’s criteria for lower “qualified” rates. These fees help processors cover the added risk and expense of processing transactions that fall outside standard, lower-risk parameters. These transactions might include manually entered payments, international transactions, or the use of corporate or rewards cards.

Non-qualified fees can be significant, often adding an extra 1% – 3% to the base processing rate.

Industry & Business Type

Payment processors assess certain industries as “higher risk,” resulting in increased fees. These usually include businesses like eCommerce, travel, and hospitality, as well as companies in sectors with high chargeback rates, such as online gambling or adult entertainment^[4].

These businesses are known to encounter fraud or transaction disputes, leading processors to charge more to cover potential losses. A good example of how industry and business type affect credit card processing fees is that a traditional retail store with in-person transactions might pay lower fees than an online electronics store because the latter is more likely to experience fraud or returns.

Transaction Volume

The total number of transactions a business processes each month can also affect credit card processing fees. Businesses with high transaction volumes can often negotiate lower processing rates with providers since they generate more consistent revenue for the processor.

For example, A large retailer processing thousands of transactions daily may receive a lower rate than a small boutique processing only a few dozen transactions a month.

Transaction Size

The average size or value of each transaction in your business can also influence credit card processing fees. In particular, if the processor uses a per-transaction fee structure and a percentage-based fee, this can greatly change the fee per transaction.

Small businesses with high average transaction values (like jewelry stores) may pay more in percentage-based fees, while businesses with smaller transaction sizes (like coffee shops) may be more affected by per-transaction fees.

Card Types

The type of card a customer uses can also significantly affect credit card processing fees. Premium cards, such as rewards or corporate cards, generally incur higher interchange fees due to the added perks and benefits they provide to cardholders^[5]. Debit cards, on the other hand, often have lower fees, especially if they are processed using a PIN.

Thus, if your business often accepts premium or corporate credit cards, you may face higher overall processing costs due to their increased interchange fees.

Optimize Transaction Process to Reduce Lower Risk

Risk is a strong reason a credit card processing fee is added to every transaction. Optimize certain aspects of your transaction process, and credit card processors may perceive your business as less prone to risk, which often leads to lower payment processing fees.

One way you can do this is by creating clear, secure transaction policies and ensuring your customers follow them. For example, you can place QR codes near your store’s point-of-sale that link directly to your website’s return policy page, giving customers notice before making a purchase and thus reducing the chance of chargebacks or disputes from occurring^[6].

A few other methods of reducing risk through improving your transaction process include:

• Using address verification services to verify cardholders through their billing address^[6].
• Encourage customers to use physical cards in their transactions.
• Require online payments to include the cardholder’s CVV

Incentivize Using Different Payment Methods

The simplest solution to reducing your credit card processing fees is to encourage your customers not to use their credit cards. Of course, this method won’t work with 100% of customer transactions, but the goal is to reduce the overall number that involves using — and processing — a credit card.

Offering a discount rate for your goods or services is one way to encourage customers to use other payment methods. This gives them a reason to consider using cash or their debit card instead. In addition, make sure you can provide other non-credit forms of payment, like ACH payments, which often have lower processing fees than credit cards^[6].

Try to Negotiate With Processors

After partnering with your credit card processor, you can negotiate fees. Initially, you should show them that your business operates efficiently and reliably. This can easily be done by performing the risk-reduction steps we discussed earlier.

Once you have a track record of minimal chargebacks and consistently large volumes of successful transactions, you’re in a great position to discuss more reasonable fees with your credit card processors^[7].

Always Stay Compliant With Regulations

To reduce risk and appear more favorable to your payment processor, you must stay compliant with credit card security regulations, especially the Payment Card Industry Data Security Standards (PCI-DSS). These standards ensure businesses across industries follow the security requirements necessary for safe, fraud-free electronic card payments, including credit card payments.

If you want to stay compliant and benefit from a more secure payment system, invest in point-of-sale technology with encryption capabilities that prevent hackers from accessing sensitive customer payment information. This, along with following many other requirements, will ensure you receive PCI-DSS certification. This will then ensure you avoid non-compliance fees and allow you to reduce your other fees in the future.