Credit Card Processing Fees: The Complete Guide

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.

What Are Credit Card Processing Fees?

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.

Credit Card Processing Fees: Transaction Fees

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:

Interchange Rate

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 card’s brand
• The type of card (like a rewards, debit, or business credit card)
• How risky the card network considers the merchant’s business and industry
• How the merchant accepts payment, like a swipe, insertion into the terminal, typing into the terminal, or online, as each carries a different level of exposure for the network.

The Assessment Fee

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.^[1] 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.

Payment Processor Markup

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:

Tiered Plans

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.

Interchange-Plus Plans

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

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 2.6% + $0.10.

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.

Credit Card Processing Fees: Flat Fees

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.

Recurring Flat Fees

Depending on which payment processor you use, you may need to pay some combination of the following flat fees.

• Monthly or annual account fees: This is a recurring charge by the payment processor to keep your account open and to run your processing through them.

• Monthly minimum processing fee: Some credit card processing companies have a monthly minimum fee. If you didn’t reach the required minimum amount of charges each month, you may have to pay the difference between how much you incurred in processing fees and their monthly minimum.

• Terminal lease or rental fees: Most payment processors require you to lease or rent a credit card terminal. See if you can negotiate to receive at least some equipment for free.

• Withdrawal fee: A processor may impose a fee if you move funds from your payment processor account into your business bank account.

• Payment gateway provider fee: Remember that if you sell products or services online, you’ll need a payment gateway provider. Many processors charge for these services, but some are included—you’ll want to compare different provider offerings if you need this functionality.

• Statement fees: A processor might tack on a fee to provide statements, whether on paper or online.

• IRS reporting fee: Some payment processors levy a fee to report your transactions to the IRS and to provide you with the requisite tax reporting forms. If you see this fee on your monthly statement, you should dispute it. Best practices demand that the processor provide this service for free.

• Payment card industry (PCI) fees: The Payment Card Industry Data Security Standard (PCI DSS) is a set of data storage requirements that applies to all entities that accept credit cards. Although not federally mandated, most major card companies insist that any business affiliated with them adhere to these standards, and some states have adopted them into law. Failure to comply with PCI DSS leaves a company open to penalties, legal action, and even federal audits, so your payment processor might charge you a fee to cover the cost of compliance. You should pay this fee only if your payment processor provides support to ensure that you remain in compliance with PCI DSS. Most of the time, though, these are “hidden” fees that merchants don’t even realize are on their statements. If you see this fee on your statement, ask about it. If you’re not already complaint, request assistance to do so, so that you don’t actually need to pay this fee.

One-Time 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:

• Account setup fee: You may have to pay the payment processor to open a merchant account with them. This might cover a technician that comes to set up the necessary hardware, or who provides customer support for the setup over the phone.
• Terminal purchase fee: You can purchase your credit card terminal—which may be a good investment compared with renting or leasing equipment—but you might convince the payment processor to include a complementary terminal with your contract.
• Cancellation fee: This is a penalty charged by the payment processor for early termination of your contract, and it can be costly. Ask if the processor will waive this fee, and be sure the contract you sign reflects such a waiver.

Credit Card Processing Fees: Incidental Fees

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:

• Cardholder dispute fees: Processors may charge you a fee each time a customer disputes a transaction.
• Chargeback fees: You may need to pay a fee if the customer dispute results in a chargeback, meaning a refund to the cardholder.
• Non-sufficient funds fee (NSF): If you don’t have enough funds in your business banking account to pay your payment processor, they may charge you an additional fee.
• Batch payment processing fee: Your processor may charge a small fee every time your business submits a batch of credit card purchases, which might be as often as once or twice a day.

Average Credit Card Processing 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.

Payment Service Providers vs. Merchant Account Providers

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 Data or Dharma Merchant Services.

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.

Payment Service Provider Credit Card Processing Fees

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 Credit Card Processing Fees

Square offers one standard rate—2.6% + $0.10—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.

Type of Transaction	Square Fee
Swiped, Inserted, or Tapped Card	2.6% + $0.10
Manually Entered Card	3.5% + $0.15
Invoices and Online Payments	2.9% + $0.30

 

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PayPal Credit Card Processing Fees

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.

Type of Transaction	PayPal Fee
Swiped, Inserted, or Tapped Card	2.7%
Manually Entered Card	3.5% + $0.15
Invoices and Online Payments	2.9% + $0.30

Stripe Credit Card Processing Fees

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 Credit Card Processing Fees

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.

Type of Fee	Basic Shopify	Shopify	Advanced Shopify
Monthly Cost	$29/month	$79/month	$299/month
Online Payments	2.9% + $0.30	2.6% + $0.30	2.4% + $0.30
In-Person Payments	2.7%	2.5%	2.4%

 

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Merchant Account Provider Credit Card Processing Fees

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 Credit Card Processing Fees

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.

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Type of Transaction	Dharma Fee
Retail Payments	0.25% + $0.10 above Interchange
Online Payments	0.35% + $0.15 above Interchange
Online Payments	0.20% + $0.07 above Interchange

Payline Credit Card Processing Fees

Payline Data 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 Data. Payline doesn’t require a long-term contract or any minimums. They charge a $10 monthly fee.

Type of Transaction	Dharma Fee
Retail Payments	0.2% + $0.10 above Interchange
Online Payments	0.3% + $0.20 above Interchange

Helcim Credit Card Processing Fees

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.

The Bottom Line

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.

Article Sources:

1. Visa.com. “Visa USA Interchange Reimbursement Fees“