Understanding Merchant Fees: A Comprehensive Guide

Understanding the intricacies of merchant fees, especially for debit and credit card processing, is vital for the financial health of your business. Grasping how your payment processing service calculates these fees is crucial, particularly given the various pricing structures based on your sales volume. Since these models consider your monthly transactions, it's important to discern when lower advertised rates apply. Remember, merchant service charges aren't always consistent - choosing an unsuitable pricing model could lead to excessive merchant fees.

Exploring Merchant Fees

Merchant fees are incurred when processing credit and debit card payments. Typically, these fees represent a small fraction of the product's sale price. Along with the basic transaction cost, merchants also pay interchange fees and assessment fees. These fees facilitate transaction authorization between the merchant and the customer's credit card accounts.

Calculation of merchant fees varies, offering diverse pricing models for small businesses. Popular models include tiered pricing, flat-rate pricing, and interchange-plus pricing.

Credit Card Transaction Charges for Businesses

Credit card processing fees generally range from 1.3% to 3.5% per transaction. The actual cost depends on the chosen pricing model. Factors like the payment network (Visa, Mastercard, American Express, Discover), card type, and the merchant's business category all influence these fees. However, the range of average credit card processing fees can vary significantly, typically between 1.5% and 3.5% per transaction, based on the type of transaction and the merchant's pricing plan​¹.

Merchants pay a blend of monthly and per-transaction fees, determined by their transaction and sales volumes. Additional fees may apply based on business type.

Various Credit Card Processing Fees

Business owners incur interchange fees, assessment fees, and payment processing fees for credit card transactions. The interchange and assessment fees, forming the base costs or discount rate, are charged by the credit card network on every transaction.

Interchange Fees

Interchange fees are paid by the merchant's bank to the customer's bank (issuing bank) to cover transaction processing costs. These fees are levied every time a credit or debit card is used. For instance, when a transaction is made with a Chase credit card, Chase (the issuing bank) receives the interchange fee, as part of the Visa payment network.

Assessment Fees

Assessment fees correlate with your monthly transaction volume. Card associations like Visa, Mastercard, and Discover charge a small, flat-rate percentage on monthly debit or credit card sales. These fees form the primary operating income for these card associations and appear on merchant statements under various labels.

Payment Processing Fees

Payment processors, who handle credit card payments and facilitate transactions through a payment gateway or card reader, set their processing fees. These may include a per-transaction fee, a monthly service fee, and costs for transaction processing equipment.

For instance, card-present transactions (where the card is physically used at the merchant's location) tend to be cheaper than card-not-present transactions (like online purchases), mainly due to the higher risk and potential for fraud associated with card-not-present transactions².

Interchange-Plus Pricing

This model combines interchange fees with a markup set by the processor. Known for its transparency, interchange-plus pricing typically costs about 2.2% + $0.22 for business owners.

Flat-Rate Pricing

This model charges a uniform fee for all transactions, usually around 2.75% for swiped payments, simplifying cost calculations.

Tiered Pricing

In this more complex model, processors set three tiers - qualified, mid-qualified, and non-qualified - each with different rates. Most transactions fall into the mid or non-qualified tiers, often leading to higher costs.

Comparing Credit, Debit, and Cash Transactions

The fees for credit and debit card transactions differ. Credit card transactions are costlier due to the higher risk assumed by the processor. Debit card transactions, especially those using a PIN, are less risky as they directly transfer funds from the customer's bank account. Signature-required debit transactions incur higher fees, as they utilize credit card technology.

Cash transactions are the least costly for merchants as they bypass credit card processing.

Credit Cards with Lower Merchant Fees

Among major credit cards, Visa generally offers the lowest processing fees, closely followed by Mastercard and Discover. American Express, traditionally higher due to its exclusivity, reduced its fees in 2018 to align more closely with other networks.

Footnotes:

1. "What Are the Average Credit Card Processing Fees & Tips to Minimize Them", Podium, 2023. Podium
2. "Average Credit Card Processing Fees (2023)", Merchant Cost Consulting. Merchant Cost Consulting