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At the most basic level, credit card processing fees are the cost that a business owner pays to accept credit card payments. However, there are several pieces involved in determining this overall cost, including transaction fees, flat fees, and incidental fees. Generally, the average credit card processing fees range from 1.7% to 3.5% per transaction. Ultimately, though, the cost your business pays to process credit cards will depend on the payment processor you choose.
Deciding to accept credit cards as a form of payment is a key step for business growth. After all, you likely pay for most of your own expenses with your credit card, and you should let your customers do the same. But learning how to accept credit card payments at your point of sale or online can get complicated, and you’ll need to understand the various business credit card fees involved in this process.
We’ll admit that learning about these credit card processing fees—by which we mean the fees you, as the merchant, need to pay when you accept credit cards—isn’t the most exciting aspect of owning a small business. But these credit card processing fees can add up, and become a crucial component of your overall finances. In order to help you make the financial choices that best suit your enterprise, we’ve created this complete guide to credit card processing fees. We’ll explain what credit card processing fees are, their average cost, and how different providers will charge your business to accept credit cards.
In the simplest terms, credit card processing fees are the fees that you, the merchant, pay to accept credit cards as a form of payment at your business. Although this might sound easy enough to understand, there are a lot of parties involved in determining how much you actually pay—in fact, the term “credit card processing fees” can be used to refer to a few different kinds of fees involved in the overall process of accepting credit cards:
There are three main types of fees that can be included in the entirety of credit card processing:
Transaction fees: These are the fees that you’ll pay per transaction you process with a credit card. Transaction fees are made up of the interchange rate, the assessment fee, and the payment processor markup.
Flat fees: These are the fees that you’ll pay for working with a payment gateway or merchant services provider—the cost, essentially, for using their service. You’ll typically pay these fees on a monthly basis.
Incidental fees: Incidental fees are fees that you’re charged by your payment processor or merchant account provider as a result of particular occurrences—like in the case of a chargeback or non-sufficient funds.
Now that you know the types of fees that are involved in the whole of credit card processing, let’s break down what each type entails and what you can expect, as a business owner, in terms of both cost and process. Out of the three types of fees above, you’ll see the greatest cost from transaction fees, as there are several players involved in the overall cost per transaction. That being said, every time a customer swipes, dips, or taps their card at your on- or offline store, these entities are involved:
The issuing bank: This is the institution that issued your customer’s credit card.
The credit card network: This is typically one of four major companies—Visa, Mastercard, Discover, and American Express—though there are others involved in international transactions.
The receiving bank: This is the bank that receives the funds from the issuing bank, and deposits those funds in your business bank account.
The payment processor: This is the middle man between the issuing bank and the receiving bank. Depending on your particular business, your payment processor could be a merchant service provider or a payment gateway. A few common examples are Square, Stripe, PayPal—whatever platform you use to process credit cards at your point of sale. The processor handles issues such as cardholder verification and transaction disputes.
Each of these parties has to make a profit, so they all end up with a portion of the transaction fee involved in credit card processing. Every transaction fee is made up of the interchange rate, assessment fee, and the payment processor markup—and each one of the above parties receives a specific portion of this cost that you, as the business owner, pay. Let’s explain:
The interchange rate is a fee that the issuing bank charges the receiving bank every time a customer uses their credit card. Basically, it’s how the issuing bank makes a profit off credit card processes. You, the merchant, will pay some or all of the interchange rate, either directly or through an interchange reimbursement—which might be slightly less than the entire interchange rate. Either way, this is a non-negotiable cost, meaning it will be fixed regardless of the processor you use.
Interchange rates or reimbursements are typically calculated as a percentage of the total sale amount. The network for each card determines their own rates, which vary based on a few factors, like:
The interchange rate explains how the issuing bank profits when customers use a credit card. But what about the card network itself?
That’s where the assessment fee comes into play. The network charges a fixed fee, on top of the interchange rate or reimbursement, for every transaction. Collectively, the assessment fee plus the interchange rate or reimbursement is also known as the interchange fee. Each network sets their interchange fees (almost 300 different ones) and they’re updated twice per year. The calculation model is extremely complex and somewhat shrouded in mystery, but we do know that the card network uses certain codes to help them determine how much of a risk any given seller poses—that means the likelihood of nonpayment or fraud, for the most part. Much as lenders assign higher interest rates on business loans for risky enterprises, the businesses that the network deems more of a threat are assessed with higher interchange fees. Since the assessment fee comes directly from the card network and is part of the overall interchange fee, this is another non-negotiable fee, and again, it will be fixed regardless of your payment processor.
Although you can’t avoid the fixed costs of the interchange rate and assessment fee, you do have some control over the last piece involved in transaction fees—the payment processor markup. The payment processor markup is the fee that your payment processing company charges you on top of the interchange fee—again, so they can make a profit.
The markup, as you might expect, will depend on the individual payment processor whose specific pricing plans will vary. Whichever processing plan you choose (we’ll break down some top provider options later), try to avoid long-term contracts. That way, you can compare plans at any time and switch processors when you’ve become large enough, or when it’s otherwise advantageous. Always research and compare plans—if you know what other companies charge, you can use that information to fuel your negotiations.
Typically, payment processors sell their services in three packages:
With these plans, the cost of processing a credit card transaction falls into one of three tiers. Each tier is associated with the amount of risk that the processor assumes with each purchase. For example, in-person purchases made with a standard (not a reward-based) credit card are considered the least-risky transactions, since these transactions pose the least likelihood of fraud. In this case, for each transaction with a Visa credit card, you might be charged a 0.20% markup over interchange. Online sales, on the other hand, are placed in the highest-risk tier (and highest-rate) tier. So, if you need to accept payments online, you may want to consider another pricing plan.
Although tiered plans can be easier to understand than other arrangements, the processor itself determines which tier a particular sale falls into. You can never be totally sure which tier your customer’s transactions will fall into, which can prove expensive in the long run.
With these processing plans, you’ll pay the interchange fee plus a set percentage and/or additional fixed fee per transaction—as an example—0.25% + interchange on every in-store transaction made with a Visa Rewards card.
Some payment processors operate a subscription model as a variation of the interchange-plus model. In these cases, you’ll be paying a monthly subscription fee in addition to a fixed fee per transaction. To explain, this means for every transaction, you would pay the interchange rate separately, and then you would pay the processor markup, say $0.20 per transaction (instead of a percentage added onto the interchange), in addition to a monthly subscription fee.
While this model provides more transparency into your future costs than a tiered plan, the downside is that your statements are more complicated and you may or may not end up saving money.
Flat-rate plans are just as they sound: The processor charges the same fee regardless of the type of card your customer uses—and in some cases, regardless of whether the customer is physically present for the purchase or not.
Flat-rate plans may cost more than others, but they’re easier to understand and simpler to budget for, as you know in advance exactly how much the processor will charge. Processors calculate the flat rate as a percentage of the full transaction, or as a percentage of the purchase price plus an additional, fixed fee. Square, for example, is known for their flat-rate pricing—for each card present transaction, the Square fee is 2.75%.
A flat-rate plan is a good choice for brand-new small business owners who don’t yet have the volume necessary to negotiate with payment providers. Additionally, since flat rates are mostly based on a percentage of the larger transaction, the extra expense shouldn’t be too costly if your transactions are on the smaller side.
Whereas the transaction fee piece of the whole of business credit card fees is divided among several different parties, the flat fees you will pay to accept credit cards come directly from your payment processor. Essentially, these flat fees are what your processor charges you to utilize the different facets of their service. The specific fees vary based on the particular payment processor, but they’re typically recurring—charged on a monthly or annual basis. It’s important to note, however, that your payment processor might also charge one-time flat fees for certain services.
Depending on which payment processor you use, you may need to pay some combination of the following flat fees.
The following fees are often open to negotiation, or you might convince a payment processor to waive them entirely. Some providers charge more flat fees than others, so you’ll want to consider this when looking at individual plans. Certain providers even advertise the lack of these fees as a benefit of their particular service. A few of the most common flat fees you’ll see are:
The last piece involved in the overall cost for your business to accept credit cards is incidental fees. Like the flat fees, these fees come directly from your payment processor and are a result of a particular occurrence—meaning some months, you might not face any of these fees. The exact fee you’re charged, as well as the specific instances that trigger these charges, can vary from processor to processor. Here are some of the most common incidental fees:
Generally, when asking about average credit card processing fees, we’re actually talking specifically about transaction fees—and not necessarily including flat fees and incidental fees. This is understandable since as a business owner, a top concern is how much you’ll be charged per transaction, as this amount comes directly out of your sale.
That being said, credit card processing typically costs businesses between 1.7% and 3.5% per transaction (meaning the dollar amount from that percentage is split between the four players we’ve discussed). This range, of course, depends on the factors we mentioned earlier, like how the transaction is made, industry, kind of card, etc. At the end of the day, then, that means that if a customer spends $100 at your store, you’ll only end up with between $96.50 and $98.30.
The cost of flat fees and incidental fees ultimately depends on the payment processor you work with. As we mentioned earlier, some payment processors might charge more (in terms of cost and amount) of these kinds of fees than others. On the whole, however, it would be safe to say that these fees range from $5-100. Typically, certain flat fees, like monthly account fees, will range on the higher end of that spectrum, whereas most incidental fees will fall on the lower end. As an example, if you use Helcim as your merchant services provider, you’ll pay a monthly account fee of $15-50 (depending on your plan) and a chargeback fee of $15 per occurrence.
There are numerous payment processors available for you to work with, each with different features, services, and costs. Generally, however, a differentiator between providers is whether they’re a payment service provider (PSP), like Square or PayPal, or a merchant account provider, like Payline or Dharma.
Payment service providers have attempted to simplify the transaction fee part of credit card processing by charging a flat-rate fee on every transaction of the same type and eliminating long contracts and hidden fees. Although these providers may have pricing structures that are easier to understand, they may not necessarily be cheaper than traditional merchant account providers. Let’s break down the transaction fee pricing models of a few top payment service providers, as well as merchant account processors to see how their credit card processing fees differ.
As we mentioned, payment service providers are trying to simplify business credit card fees. You don’t have to purchase expensive merchant processing hardware to use a PSP, and you don’t have to sign a long-term contract or worry about hidden fees. You’ll pay the same flat-rate fee on every transaction of the same type.
PSPs charge a different fee for card-present payments, card-not-present payments, and online payments. For example, you’ll pay a lower fee when you accept a credit card at your retail shop. You’ll pay a higher fee if a customer wants to shop online on your website, or if you’re using information from a card that’s stored on file. Additionally, payment service providers generally provide greater business protection from chargebacks in comparison to merchant processors.
Square has quickly become one of the most popular credit card processing companies. The company facilitates $50 billion in transactions every year. In large part, Square is so popular because they offer one standard rate—2.75%—to any business that signs up, no matter how big or small the company and no matter what their payment volume is. Although business owners appreciate this simplicity, Square is costlier for most businesses than a traditional merchant account provider.
The only difference is that fees are slightly lower for brick and mortar merchants who use one of Square’s point of service solutions, such as Square Register or Square Terminal. Like most credit card processors, Square charges a higher rate to process manually entered card payments (e.g. with phone payments) and invoice payments. The invoice fee comes into play when you send your customer an invoice via Square that they pay online.
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PayPal is another popular credit card processor. They charge almost the exact same fees as Square, except for a slightly lower rate on swiped, inserted, or tapped cards. Another difference is that PayPal doesn’t have their own point of sale solutions. They do, however, partner with various point of sale systems.
Stripe takes a different approach from Square and PayPal, charging 2.9% plus $0.30 on every type of transaction. However, Stripe is primarily designed for online businesses, so if you’re a brick-and-mortar shop, you will save money by opting for a different processor.
Shopify rounds out the most popular payment service providers. On top of credit card transaction fees, Shopify charges a monthly fee. The monthly fee ranges from $29 to $299 depending on which Shopify plan you sign up for. Given the monthly fee, Shopify ends up as a good deal really only if you’re doing enough volume to justify the monthly price. Businesses that accept a high volume of payments will pay a higher monthly fee but lower per-transaction fees. If you already have a credit card processor, then you can use Shopify just as your ecommerce solution, but they’ll charge an extra 0.5% to 2% per transaction.
Merchant account providers are traditional credit card processors that have a more complicated, variable pricing structure for transaction fees. Although it is more complicated, merchant account providers provide the best deal on pricing, particularly for businesses that process a high volume of credit card payments. Of all the pricing models we discussed earlier, small businesses should probably avoid tiered pricing when it comes to merchant account providers (as many providers don’t tell you into which tier different cards fall) and opt for a provider that uses the interchange plus pricing model.
Dharma is a popular merchant account provider that uses an interchange plus pricing model. On top of the per-transaction fees shown below, they charge a small $10 monthly fee. Businesses that process more than $100,000 in credit card payments per month can earn a discount. Dharma also provides discounted pricing for restaurants because food service businesses rely so heavily on affordable credit card processing.
Dharma is a small business-friendly option—there are no long-term contracts or monthly minimums required. The company also provides an app called MX Payments, which allows you to easily run reports, accept online and phone payments, and store customer credit card information. There’s no credit card terminal that comes with Dharma Merchant Services, but they recommend Clover POS.
Payline is another well-known credit card processor. Their credit card transaction fees are slightly lower than Dharma’s. However, unlike Dharma, they don’t offer special pricing for restaurants or businesses that accept a large volume of credit card payments. But if you have a non-restaurant small business, you might be able to save money by going with Payline. Payline doesn’t require a long-term contract or any minimums. They charge a $10 monthly fee.
Small business owners who prefer the interchange plus pricing model should also consider Helcim as a merchant services provider. The interesting thing about Helcim is that pricing changes on a sliding scale based on your type of business and monthly payment volume.
The rates are as low as 0.10% + $0.05 above interchange for a retail business that processes more than $5 million monthly in volume. On the other end of the spectrum, rates are as high as 0.45% + $0.25 above interchange for an online business that processes less than $25,000 monthly in volume. Helcim offers a rate guarantee, which means your rate won’t change as long as you have an account with the company.
If you compare just the per-transaction fees, Helcim is less expensive than Square and PayPal. However, Helcim charges a monthly fee of $15 to $50. There are also chargeback fees if your customer disputes a charge and fees for changing your bank account. Square and PayPal don’t charge these types of incidental fees, so they usually work out to be less expensive.
As you can see, credit card processing fees can be complex and difficult to understand. However, breaking down all of the different elements that contribute to the overall cost, as well as how payment processors structure their pricing, can help you sort through this process. At the end of the day, credit card processing fees will be a significant (but necessary) cost for your business, so it’s all the more important to understand what kind of fees you’ll be facing so that you can budget your finances accordingly. That being said, choosing the right payment processor can make a huge difference in mitigating credit card processing fees. You’ll want to use the specifics of your business—industry, sales volume, how you’ll accept payments, etc.—to determine the payment service provider or merchant services that work best for you.
Additionally, you’ll want to pay close attention to the features and services any provider offers, where they have flat or incidental fees, and negotiate your fees whenever possible to make sure you’re getting a fair price that you can afford. That being said, in general, companies like Square and PayPal have significantly simplified credit card processing fees, forcing traditional merchant account processors to be competitive and keep up. The result is more affordable, clearer credit card transaction fees across the board—a win for any small business that accepts credit card payments.