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Accepting credit cards gives customers more options when shopping with your business. However, as a merchant, it’s essential to understand the credit card processing fees and rates you’ll need to pay.
Credit card processing fees can be a major expense for any business. Understanding how they work can help you avoid overpaying for credit card processing.
What do credit card processing fees include?
Credit card processing fees are paid with each transaction, and they consist of:
- Interchange fees: The fee a merchant’s bank account pays whenever a customer makes a payment using a credit or debit card. These fees cover handling costs as well as risks involved in approving the payment.
- Payment processor fees: The fee paid to the processor.
- Assessment fees: The fee paid to the card network, such as Visa or Mastercard.
What determines the interchange fees you pay?
Interchange fees are percentage-based and applied to every credit card transaction. They are set by the four major credit card networks:
- Visa
- Mastercard
- American Express
- Discover
It’s important to note that these fees are not static and may change throughout the year. Visa and Mastercard change their interchange rates twice per year.
Interchange fees are typically a flat rate plus a percentage of the sales total. Fees may be affected by:
- The type of card. Debit cards with PIN numbers generally have lower rates than credit cards because the risk is lower.
- Industry and business size. Some industries pay higher rates than others, such as supermarkets. Larger businesses generally pay lower fees because they can negotiate lower rates.
- Type of transaction. Point-of-sale transactions tend to have lower fees than card-not-present (CNP) transactions because the risk is lower. Online purchases, for example, are charged a higher interchange rate because they are classed as CNP.
How is interchange pricing better than a flat rate?
If interchange pricing fluctuates, why would it be better than flat-rate pricing? To understand why you need to know how flat-rate pricing works.
Flat rate processing charges a single, flat fee – usually 2-3% of every purchase – to process transactions. The percentage is the same regardless of which credit card is used.
Although flat rate pricing is easy to understand (because it never changes), it prevents you from taking advantage of lower interchange rates you may be eligible for.
In other words, you’re likely overpaying for your credit card processing if you’re paying a flat rate. Interchange-plus pricing is more transparent and allows you to take advantage of lower interchange fees.
What is an effective rate?
One important thing to consider when it comes to credit card processing fees is the effective rate.
The effective rate is your:
- Total processing fees / total sales volume
Your effective rate usually appears on your statement as a percentage, and you can use it to determine whether you’re paying too much in merchant account fees.
An acceptable effective rate is 3-4%, but there may be legitimate factors that increase your rate beyond the norm, such as:
- Being a high-risk business
- Having small transactions
- Having international transactions
The effective rate is just one more piece of the puzzle when it comes to credit card processing fees.
It’s important to understand how credit card processing fees work and the pricing models used by payment processors. Knowing more about the process can help you determine whether you’re overpaying for your credit card processing.
