Understanding Credit Card Processing Fees

Every time a customer taps or swipes a card, a few percent of the sale goes to the companies that move the money. For many small businesses, processing fees are one of the biggest costs they never look at closely. Here is where that money goes and how to tell whether you are overpaying.

The Three Parts of Every Card Fee

1. Interchange

Paid to the bank that issued the customer's card. Interchange is the largest part of the fee and is set by the card networks. It varies by card type (debit, credit, rewards, business), by how the card is accepted (in person or online), and by your industry. You cannot negotiate interchange directly.

2. Assessments

Small fees paid to the card networks themselves, such as Visa and Mastercard. Like interchange, these are set by the networks and are the same no matter which processor you use.

3. Processor Markup

What your payment processor charges on top of interchange and assessments. This is the only part you can shop and negotiate, and it is where the biggest differences between providers show up.

Common Pricing Models

Flat-rate pricing charges one percentage, often plus a few cents, on every transaction. It is simple and predictable, and popular with new or low-volume businesses. As volume grows, flat rates often cost more than the alternatives.

Tiered pricing sorts transactions into buckets such as "qualified," "mid-qualified," and "non-qualified," each at a different rate. The processor decides which bucket each transaction falls into, which makes tiered pricing hard to audit and frequently more expensive than it first appears.

Interchange-plus pricing passes interchange and assessments through at cost and adds a fixed, disclosed markup. It is the most transparent model and usually the least expensive for established businesses, because you can see exactly what the processor is earning.

Fees Beyond the Rate

Read the statement and the contract for:

• Monthly or annual account fees
• PCI compliance or non-compliance fees
• Statement, batch, or gateway fees
• Chargeback fees
• Equipment leases, which can run for years and cost far more than buying
• Early termination fees

How to Check Whether You Are Overpaying

1. Pull your last full month's statement.
2. Divide total fees by total card sales. That is your effective rate.
3. Compare that figure with quotes that show the full cost, not just a headline rate.

If you cannot tell from your statement what your markup is, that by itself is a reason to get competing quotes.

Questions to Ask a New Processor

• What pricing model do you use, and what is your exact markup?
• What are all monthly, annual, and per-transaction fees?
• Is there a contract term or an early termination fee?
• Is equipment purchased, rented, or leased?
• How quickly are funds deposited?

Want processors to compete for your business? Compare merchant services providers.