Credit Card Processing Rates & Fees: Your Ultimate Guide
Published: November 24, 2023
In modern commerce, credit card processing (CCP) is a crucial element that enables businesses to accept customer credit and debit card payments. However, there are costs associated with payment processing that businesses must understand in order to make informed decisions and manage their finances efficiently.
In this blog post, we'll dive into the nitty-gritty of CCP rates to help you make sense of it all. We will explain the various types of fees that payment processors charge merchants, including interchange and assessment fees, as well as any additional charges from card issuers and payment networks. Keep reading if you want to gain a good understanding of the costs associated with accepting credit cards.
Breakdown of CCP Fees
Contrary to popular misconceptions, payment processing costs are not solely determined by credit card issuers. Three factors affect the typical credit card processing costs you pay each month.
Interchange fees are a fundamental component of credit card processor costs. The card networks (Visa, MasterCard, American Express, etc.) set these charges, and the acquiring bank pays them to the issuing bank per transaction.
This fee is a charge that covers the expenses incurred for risk management, fraud prevention, and the maintenance of the infrastructure required for secure and efficient transactions. It’s typically calculated as a percentage of your monthly credit card transaction fees, and the fee amount is revised twice a year in April and October. The interchange fee usually constitutes around 70% to 90% of the total transaction rate.
What determines your interchange fees?
- Merchant category: The type of business you operate matters. Specific industries, like high-risk businesses, may face higher interchange fees due to the increased potential for chargebacks and fraud
- Type of credit card used: Premium or rewards cards typically carry higher fees, as the issuing banks need to cover the costs of offering rewards programs. Merchants pay higher interchange rates when accepting credit cards due to the higher risk than debit cards
- Processing method: Card-present transactions, where the physical card is swiped or inserted in a point-of-sale (POS), generally have lower interchange rates than card-not-present (CNP) transactions, such as online purchases, where the risk of fraud is higher
Businesses are also subject to assessment fees, called Card Brand Fees, Card Association Fees, or Network Access and Brand Usage Fees (NABU). These prices are determined by the transaction amount, the customer's card type, and incidental fees, such as chargeback fees.
The card networks set, charge, and collect assessment fees, which support the upkeep and expansion of the card payment infrastructure. While interchange fees go to the customer's bank, assessment fees support the networks themselves. They are based on the total monthly sales per card brand and range from 0.13% to 0.16%.
Merchant service markups
Merchant service markups are the costs that credit card processing companies charge client companies in order to process credit card payments. These costs, calculated as a proportion of your total monthly transactions, are the most changeable component of payment processing fees; they are the only prices you can negotiate with the payment processing company to lower the payment charges.
Payment processing fees (or Discount Rates) encompass a combination of interchange fees, assessment fees, and merchant service markup. Square, PayPal, and other well-known payment processors charge different fees for their services.
Types of CCP Pricing Structures
When enrolling for a merchant account, your chosen payment processor, sometimes called a payment facilitator, will supply you with a recommended set of transaction rates. Typically, these prices can be categorized into one of the following four cost structures.
Tiered pricing, also known as bundled pricing, involves grouping transactions into different tiers based on factors like the type of transaction, card type, and processing method. Each tier has a corresponding rate, making it a simpler but potentially more expensive option for merchants, as they may not know the exact interchange costs.
The three tiers are:
- Qualified payments: These are regular debit or non-reward cards that customers use by swiping or inserting them when making a purchase (in-person transactions). Since these transactions are simple and have low risks, the merchant services provider would tack on the smallest additional charge in a tiered pricing system
- Mid-qualified payments: These are often transactions with a rewards card swiped in person or online purchases (online transactions) using debit or non-reward cards. A common requirement is verifying the billing address during checkout, especially for online purchases
- Non-qualified payments: These are riskier or more expensive due to increased exposure to chargebacks and susceptibility to fraudulent activities. They include transactions where the card isn't physically present (keyed-in transactions) or when using corporate or high-reward cards. In a tiered pricing system, merchant account providers may charge higher processing fees for these transactions, sometimes reaching as much as 4%
Interchange-plus pricing is a more transparent model where the merchant pays the interchange fee set by the card networks and a fixed markup fee set by the payment processor. This pricing model provides clearer insight into the true cost of each transaction but may involve higher upfront costs. For instance, if the interchange fee for a particular transaction is 1.5%, the merchant might pay 1.5% plus an additional 0.3% as the processor's markup.
Flat-rate pricing simplifies the fee structure by charging a fixed percentage for all transactions, regardless of the card type or processing method. While straightforward, this model may not be the most cost-effective for businesses with high transactions or those dealing with major credit card networks. It is recommended to use this method if you are a small business or a startup since it's transparent and easy to budget.
Some payment processors offer subscription-based pricing, where merchants pay a monthly fee in exchange for lower transaction fees. This model can be advantageous for businesses with consistent transaction volumes but may not be cost-effective for smaller enterprises. For example, a business paying a $50 monthly subscription fee may benefit from reduced transaction rates.
What are the average CCP prices for merchants?
Average credit card processing fees for merchants vary depending on factors such as pricing models, transaction volume, and card type. Businesses can choose between tiered pricing, flat rates, and interchange rates. Card network rates also play a role in determining average processing fees.
The average cost of processing credit card payments for small businesses with $10,000 to $250,000 in yearly credit card transactions is now 2.87% to 4.35%.
How to Offset Your CCP Fees
Managing payment processing fees is a balancing act, but there are strategies to offset these costs and enhance your bottom line.
- Negotiate with providers: Don't hesitate to negotiate prices with your payment processor. They may be willing to adjust their pricing, especially if you have a substantial transaction volume
- Optimize your setup: Regularly review your payment processing setup to ensure it aligns with your business needs. Consider switching to a pricing model that better suits your transaction patterns
- Encourage cash transactions: While not always feasible, offering discounts or incentives for cash transactions can help reduce the overall volume of transactions, lowering your processing costs
- Implement fraud prevention measures: By investing in robust fraud prevention measures, you can reduce the risk of chargebacks and potentially lower your interchange fees, especially if you operate in a high-risk industry
- Stay informed about industry changes: Stay up-to-date with changes in the payment processing industry. Understanding updates in interchange fees or payment processing regulations can help you make informed decisions for your business
- Explore alternative payment methods: Investigate alternative payment methods with lower processing rates. While credit cards are ubiquitous, other options, such as digital wallets or ACH transfers, might offer more favorable pricing structures
- Be aware of the additional fee: Stay vigilant about additional costs that may not be immediately apparent. Some processors may charge rates for services like chargeback resolution, statement fees, or PCI compliance. Awareness of these additional costs enables you to factor them into your overall budget and make better decisions about your payment processing setup
In conclusion, navigating the world of credit card processing costs and rates requires a clear understanding of the various components contributing to the overall cost. By comprehending interchange and assessment fees and the different pricing models available, businesses can make well-thought-out decisions to optimize their payment processing setup and minimize expenses. Additionally, implementing strategies to offset fees and regularly reassessing your approach can contribute to long-term financial success in an increasingly cashless business landscape.
It's also essential to consider the different types of payment processor fees, such as interchange-plus, flat rate, subscription, and tiered pricing models. Remember that excessive rates can impact your consumers, as they may result in higher prices or limited payment options.