A Comprehensive Guide to Payment Processing Fees

Processing fees—no one likes paying them. They are complicated, confusing, and lead you to question: Why? And yet, they are a necessary part of doing business and accepting credit and debit cards for payments.

We know it’s tempting to just pay the fees without much thought. After all, you have a thousand tasks on your to-do list as a business owner. Processing fees are just a fact of life, right? Who has time to worry about something you have to pay anyway? Try to avoid this pitfall of thinking. It could end up costing you.

We’ve created this guide to help you gain a basic knowledge of credit card processing fees, so you can better understand your credit card statement and the fees you are charged. That way, you can avoid unnecessary fees and find potential savings.

The Credit Card Payment Process

Before we do a deep dive into the various fees, it’s important to understand the payments process: who is involved and how payments work. This will help you understand who ultimately gets the fees, which fees are unavoidable, and how you can negotiate lower rates. Here are the major players in the payments process:

• Merchants: Businesses that accept card payments in exchange for goods or services. (That’s you!)
• Payment Processors: Also known as payment merchant account providers, acquiring banks or simply just acquirers, these companies receive authorization requests from merchants and forward them to the card associations and issuing banks for approval so that transaction can be completed. They also collect the money for each transaction.
• Card Associations: These companies operate global networks that process electronic card payments. They establish fees and rules for their networks. Examples are Visa, Mastercard, Discover and American Express.
• Issuing Bank: An issuing bank is a financial institution, such as Bank of America, Wells Fargo or Citibank, that offers or “issues” credit cards to consumers.
• Payment Gateways – These are online portals that collect card information and transmits it to an acquiring bank for processing. Usually, these are online forms where businesses manually enter the card information or online shopping carts.

How Payments Happen

It takes just a few seconds to process a card for payment, receive authorization, and complete a payment transaction. But, behind the scenes is a rapid fire process that involves all the key players mentioned above. The process repeats itself every time you run a card payment, so it’s a good idea to understand how it works.

So here it goes: A customer or client presents you with his or her card for payment. You collect the card data by swiping or inserting the card into a reader or by manually entering the information into an online payment gateway. That information is then sent to the payment processor, which requests authorization from the issuing bank through a card association network. The issuing bank then either approves or declines the transaction depending on whether the cardholder has sufficient funds in the associated account.

The payment processor returns the transaction to the merchant, who can either completed the transaction or request another form of payment if payment is declined. For approved transactions, the money will be deposited into the merchants bank account, usually within 24 to 48 hours.

Every player in the process receives compensation for their part by way of fees. Payment processors, card associations, payment gateways and issuing banks each receive their cut of the processing fees that the merchant/business owner pays.

The 3 Types of Fees

All processing fees can be grouped into one of three categories: transaction fees, flat fees, and incidental fees. Let’s learn more about them.

• Transaction fees are charged every time a customer pays using a card or electronic payment.
• Flat fees are paid on a monthly or annual basis and are essential fees to use your merchant processing account. They vary widely depending on the payment gateway or processor. You may also hear these fees called scheduled fees.
• Incidental Fees are charged when an event triggers an extra fee, such as a chargeback or non-sufficient funds occurrence. Again, these fees vary greatly based on you provider and are difficult to predict. Some months you may be charged multiple incidental fees, while other months you may have none.

Non-Negotiable vs. Negotiable Fees

It’s possible you have heard a salesperson throwing around words like “wholesale” and “markup” in regards to fees. We like to refer to these as “non-negotiable fees” and “negotiable fees,” because they are straightforward, easy to understand, and you immediately know where you can find potential cost savings. Still, you’ll want to be familiar with the terms markup and wholesale in case you hear them.

Non-negotiable Fees

Also known as wholesale fees, these are fixed fees that are established by the card associations (Visa, Mastercard, etc) and standardized throughout the industry. That’s why they are non-negotiable. Interchange fees and card association fees are the two best examples of this type of fee. They stay the same regardless of what payment processor you use. The specific rates will vary, however, based on a number of factors such as card brand, card type (debit vs. credit), and transaction type (swiped vs. manually entered).

Negotiable Fees

Also known as markup fees, these are various fees charged by your payment processor above and beyond the fixed fees set by the card association. These fees vary from processor to processor, meaning you can shop around for lower fees or even negotiate a lower rate.

The Interchange Fee and Its Importance

The interchange fee accounts for the largest percentage of fees that businesses pay for the ability to accept card payments. This non-negotiable fee is established by the card association and collected by the banks that issue credit cards to consumers.

The pricing structure for interchange fees is complex, with variable rates based on a number of factors including your business industry, transaction volume, average transaction size, card type, and how the card is accepted. Credit cards generally have higher interchange rates than debit cards due to the increased risk for fraud and non-payment by a cardholder. And, in-person transactions that are swiped or dipped will have a lower rate than manually entered transactions.

Because interchange makes up the majority of processing costs, it is the primary basis for the various pricing models used by payment processing companies. Knowing what interchange rates your business will pay for its transactions will help you to find a processor with a pricing model that could add dollars back to your bottom line.

NOTE: You can view current interchange rates for the major card networks at the following links: VISA, MasterCard, Discover, American Express.

Rates and Pricing Models

When comparing payment processors, you’ll likely discover a variety of companies that offer a variety of rates and pricing models. Understanding how these models are structured will help you choose the best processor for your business. Let’s take a look at the four primary pricing models for card payments:

Interchange Plus Pricing

In an interchange plus pricing model, a processor will charge the cost of the interchange plus a nominal markup fee, which can be a percentage, a per-transaction fee or both. For example, a processor may charge a markup of 0.20% and 10 cents over and above the interchange costs of the transaction.

This pricing model is the most transparent because a processor will separate your monthly statement into interchange rates, assessment fees, and markups. You’ll know exactly how much is going to the issuing bank, the credit card company, and your processing company. Since you are aware of these costs from the beginning, it is easier to select a processor that offers fair rates. For this reason, the interchange plus model has the potential to offer the greatest cost savings.

Flat Rate Pricing

Flat rate processors, such as Square, Stripe, or QuickBooks Payments, charge a single flat fee for all credit and debit card transactions that covers the interchange fees, assessment fees and other processing markups. These processors will charge a lower flat rate for swiped transactions than for manually entered transactions.

This pricing model has become popular because it is simple to understand and eliminates many unexpected fees. However, it’s not transparent nor is it often the lowest cost solution. It usually includes some of the highest percentages, which disguises the processing markup.

Membership or Subscription Pricing

A membership or subscription pricing model is similar to the interchange plus model in that the interchange and assessment fees are charged separately from the markup fees. So, you get the same high level of fee transparency.

The difference here is that membership providers tend to offer lower rates in exchange for a fixed monthly membership fee. Some will even eliminate per-transaction percentages entirely. Whether the fee is worth it depends on your business. If the difference in rates is great enough to cover the membership fee, this can be a great cost saving option.

Tiered Pricing

This is the most traditional and therefore most common pricing model. Unfortunately, it is also the least transparent. In a tiered model, the processor separates transactions into three tiers—qualified, mid-qualified, and non-qualified—based on a variety of criteria which is set by the processor. Each tier is priced differently, making tracking your processing costs a real chore. That effect is made even worse when your statement comes around -- rather than showing each individual transaction, tiered contracts typically just show the number of transactions in a given tier.

While this approach simplifies your statement, it unfortunately also creates ambiguity around why transactions fall into one of the tiers. It also makes it nearly impossible to know how much of the processing costs is going to your processing company as markup or to plan for future processing costs.

Glossary of Fees

As you have probably discovered, the credit card processing industry is riddled with countless fees. Some you are familiar with, while others may have appeared on your monthly statement and you are wondering why. We’ve put together a short list of common fees for your reference.

Transaction Fees

These fees are charged every time a customer pays using a card or electronic payment.

• Interchange Fees: These are fees paid by a merchant to the bank that issues the credit cards used in a transaction. The interchange fee varies from transaction to transaction based on a number of factors such as card brand (Visa, Mastercard, etc.), the merchant’s industry, the type of card (debit, credit, rewards card, etc), and how the payment is processed (swiped, inserted, manually entered, etc). Typically interchange fees are represented by a percentage and a flat per transaction fee, for example: 2.0% + $0.10. This is a non-negotiable fee set by the card company that all merchants are required to pay to card issuing banks. Your processor has no control over these fees.
• Assessment Fees: Card companies like Visa, Mastercard, and Discover make money by charging an assessment fee for every transaction using a card in their network. Like the interchange fee, assessment vary from transaction to transaction based on a number of factors and vary from network to network. You can expect the assessment to be around 0.13% of the transaction amount, depending on the card network. This is one of the non-negotiable fees that you must pay to the card companies for the ability to accept one of their cards for payment.
• Processor Markup Fees: All credit card processors will add some form of markup to the interchange and assessment fees. This covers their processing costs and allows for a profit as well. Depending on the pricing model your processor uses, this will either be blended into the interchange fee or kept separate. In the interchange plus pricing model, your processor’s markup could consist of a percentage and flat per transaction fee, like 0.20% + $0.10.

Flat Fees

These fees are paid on a monthly or annual basis and are required to use your merchant processing account. Even so, some of these fees are negotiable. They vary widely depending on the payment gateway or processor. You may also hear these fees called scheduled fees.

• Equipment Rentals: These are charged by payment processors to a merchant to lease point-of-sale (POS) hardware and credit card terminals for swiping, inserting, and tapping payments. Terminal leases typically end up costing the merchant more than purchasing the equipment outright.
• Monthly Processor Fee: A merchant pays this fee to use the services of a payments processor. Typically, this fee covers customer services such as phone-based support. If you are on a membership or subscription pricing model, you’ll pay a higher monthly fee in lieu of a per transaction percentage fee.
• On File Fee: Separate from a monthly membership fee, an on file fee is charged to merchants to keep their merchant account open. If, for example, you open a merchant account and do not use it to process payments for several months, the on file fee ensures that it will remain open. Failing to pay this fee may result in closure of your merchant account.
• POS Software Fee: The amount you pay monthly to use your POS software if you purchased the software from your processor. This may also show up on your statement as a hosting fee if you use a server-based POS system. This cost may also be built into your monthly merchant account fee.
• Monthly Minimum Fee: Fees assessed to merchants who do not reach a specific transaction total for the month or the year. This will account for the difference between the actual dollar total of credit card transactions and an agreed-upon monthly minimum.
• Statement Fee: Some payment processors charge a flat monthly fee for preparing and mailing your monthly statement. Some providers will offer free online statements, while others will still charge a statement fee for electronic statements.
• PCI Compliance: Some processors charge this fee to help your business become and remain compliant with the Payment Card Industry (PCI) standards. Unfortunately, many processors will charge this fee without providing any services to help you with compliance or will label this fee a PCI non-compliance fee. There are simple ways to remove this fee from your monthly statement, though it will cost you between $100-$500 depending on the size of your business.
• IRS Reporting: Some providers charge a fee to report your transactions to the IRS and provide you with the required Form 1099-K.
• Advantage Buyer Program: Some processors offer additional "perks" to their merchants, one of which is the Advantage Buyer Program. This program gives merchants access to discounted payments products as well as other common office supplies. Merchants who elect to participate in the program will incur a monthly fee.

Incidental Fees

These are charged when an event triggers an extra fee, such as a chargeback or non-sufficient funds occurrence. Again, these fees vary greatly based on you provider and are difficult to predict. Some months you may be charged multiple incidental fees, while other months you may have none.

• Chargeback Fees: A fee incurred when customers successfully dispute a charge on their credit cards.
• Retrieval Fee: Merchants can expect to see this fee when the customer's issuing bank requests substantiation for a transaction (such as an invoice, receipt, or sales draft) from the processor. These most often occur in cases of cardholder dispute, fraud inquiries, or when point-of-sale errors occur.
• Early Termination Fees: Otherwise referred to as an early deconversion fee, this is charged if you cancel your contract with your payment processor or merchant account before the period stipulated in your contract ends. This fee can be expensive, so you should try not to incur it if possible.
• Voice Authorization Fee: Occasionally, you will be required to call your payment processor to verify card information before a transaction can be approved. You will be charged this fee for dialing the toll-free number.
• Address Verification System (AVS): Used for keyed in transaction, the AVS matches a customer’s billing information to the card on file, incurred on a per-transaction basis.
• ACH or DBA Change Fee: If you need to update your deposit account information or change the "doing business as" name of the business associated with your merchant account, you will incur a one-time fee.
• Non-sufficient Funds Fee (NSF): Your payment processor will charge you a non-sufficient funds fee when you don’t have enough funds in your account to cover your expenses.
• Batch Fees: Charges for the settlement/closing out of your deposits each day.
• Setup Fee: Some processors will charge merchant a this fee to join their network and set up a merchant account. It would cover the costs of shipping equipment, a technician to install hardware, or phone-based support.

If you’re facing a fee you don’t see listed here, or if you’re hoping to reduce the processing fees you pay each month, feel free to contact the payments experts at SwipeSum. We’ll help you negotiate a better solution at a lower rate, guaranteed.