Everything about Payment Processing. Discover how payment processing fees impact your business and learn ways to reduce costs with our comprehensive guide. Understand the types of fees involved, how payment processing works, and how to ensure you're getting the best deal possible.
Business owners are all too aware that conducting their day-to-day operations and keeping their doors open can incur massive expenses. And for many of these merchants, some of the largest expenses they deal with are credit card processing fees. Accepting card payments is essentially a necessity in today's world, but the associated fees can eat into profits. To make matters worse, what you're paying for may not be clear. Monthly statements vary from processor to processor and can be tricky to read. Fees are often left undisclosed during the sales process. And depending on your pricing structure, there can be a lot of hidden costs.
This may seem overwhelming, and that's because it's designed to be. There is very little transparency in the world of payments, and as a result, business owners are not equipped to make well-informed decisions. This guide will shed some light on credit card processing fees and provide tips to get the best deal possible by tackling some key issues:
Payment processing is the series of steps a business takes to accept and handle payment transactions from customers. This involves capturing the payment details, verifying the funds, and transferring the money from the customer's bank (or credit card account) to the business’s account. It typically includes interactions between the merchant, customer, payment gateway, and financial institutions, ensuring that payments are securely processed and settled.
The average payment processing fee for a given transaction consists of a percentage of the transaction amount plus a fixed fee. Many factors play into the total fee amount for each transaction, but on average, the percentage you pay will range anywhere from 0.50% - 3.50%, and the fixed fee will be between $0.05 and $0.30. However, we have seen rates at 0% and $0.02 for a Fortune 100 company. Since several different entities take a portion of the total fee amount, the amount allocated to each can and will vary with each transaction. But at the end of the day, you, as the business owner, will be taking on the full brunt of the fees.
Any business that accepts credit and debit cards as a form of payment will pay credit card transaction fees. Each time a card is swiped, a portion of the transaction amount is taken out in fees. These fees accumulate with each transaction and are automatically taken out of your credit card processing account. This means, unlike other business expenses, you will not necessarily receive a bill that must be paid. However, you will receive a monthly statement from your processor that outlines all of your processing activity and related fees.
Unless you want to stop accepting card payments altogether, there is no way to avoid credit card processing fees completely. However, there are certain measures you can take to cut down on costs and ensure you’re getting a fair deal. This basically boils down to doing your due diligence and having a working knowledge of the payments industry. This may seem overwhelming, but once you know where to point your efforts, the rest of the process will go much smoother.
Reading through your monthly credit card processing statement is an important practice for any business as it contains valuable information about the fees you are paying. The fees you find in this document can be categorized into three main groups: Interchange Fees, Association Fees, and Processor Markup Fees. Some of these fees are unavoidable, but some can be negotiated down or eliminated altogether.
Interchange fees are an inherent cost of processing credit and debit cards, so any business that accepts cards will have to pay them. They are set by the card brands (Visa, Mastercard, Discover, American Express) but are actually paid to the cardholder's issuing bank. They apply to each transaction and consist of a percentage of the transaction amount plus a fixed transaction fee (i.e. 2.30% + $0.10). The percentages range from 0.05% - 3.15%, and the fixed fee is usually $0.10, although there are exceptions. The card brands ordinarily update these interchange fees twice a year, once in April and again in October.
The interchange fee applied to a given transaction depends on several factors, including card brand, card type, and whether or not the card was present during the transaction. This means that interchange fees will fluctuate month-to-month. As your monthly card transaction volume increases, you can also expect your interchange fees to increase.
Like interchange fees, association fees are mandatory for all businesses that accept card payments. They are an obligatory component of credit card processing fees, so no matter what processor you choose to partner with, you will end up paying these association fees. Similar to interchange fees, they are set by the card brands, but the difference is that these fees go directly to the card brands rather than the issuing bank. There are numerous potential association fees, but a handful that businesses tend to incur more regularly than others. Here are some of the most common association fees.
- Visa/MasterCard/Discover/AMEX Assesment Fee: 0.13% - 0.165% | Applies to all volume for a given card brand. Fee amount can change depending on credit/debit, foreign/international, or ticket size.
- Visa Authorization Processing Fee (APF): $0.0195 (credit), $0.0155 (debit) | Applies to all Visa authorizations or auth reversals where merchant, card issuer, and cardholder are all located in the U.S.
- Visa Fixed Acquirer Network Fee (FANF): $2.00 - $85.00 (card present locations), $0.00 - $70,000.000 (card-not-present and fast food restaurants) | A fixed monthly fee applied to all merchants that accept Visa. Fee amount changes depending on tax identification number (TIN), monthly Visa volume, number of locations, merchant category code (MCC), and whether the card is present.
- Visa Base II System File Fee: $0.0018 | Applies to all Visa transactions - sales, returns, reversals, chargebacks, and chargeback reversals.
- Mastercard Auth Digital Enablement Fee: 0.02% | Applies to all Mastercard card-not-present authorization requests.
- Mastercard Merchant Location Fee: $1.25 | Monthly fee that applies to each merchant location that accepts Mastercard transactions.
- Discover Data Usage Fee: $0.0025 | Applies to all Discover sale transactions.
- Discover Digital Investment Fee: 0.01% | Applies to all Discover card-not-present sale transactions.
- American Express Acquirer Transaction Fee: $0.02 | Applies to all AMEX OptBlue sale transactions.
Processor markup fees are charged by your payment processor and go directly into their pockets. Processors charge these fees for their services, and they are added on top of base costs (interchange and association fees). Since these are the fees that directly impact the processor’s margin, this is usually where you will find that you are overpaying.
Typically, the most significant portion of markup fees you pay will come in the form of a "discount rate." This is a percentage of the transaction plus a fixed fee charged on top of interchange. For example, let's say for a given transaction, the interchange rate is 2.25% + $0.10, and your discount rate is 0.25% + $0.05. You would effectively pay 2.50% + $0.15 in processing fees for that transaction.
In addition to discount rates, processors often charge other transactional and monthly fees. There are a plethora of these fees, and unlike interchange and association fees, there is very little standardization among markup fees. Processors are able to describe their fees however they want and charge them based on criteria that they come up with. A good rule of thumb is that if you see a fee on your statement that does not have a prefix with the name or abbreviation of a card brand, there is a chance it is a markup fee and worth investigating if you're overpaying.
Although these fees are more or less unregulated, there tend to be certain ones that merchants will find themselves being charged each month. Here are some common markup fees you will likely see on your statement and expected price ranges.
- Monthly Account/Maintenance Fee: $5 - $50, Charged monthly for keeping your credit card processing account open.
- PCI Non-Compliance: $15 - $125, Charged monthly or annually to merchants who do not meet the PCI DSS standards for handling cardholder information.
- Monthly Minimum Fee: $10 - $50, Charged monthly for not meeting your processor's required processing volume amount.
- Batch Fees: $0.05 - $0.15 per batch, Charged for settling your deposits.
- Authorization Fees: $0.02 - $0.15 per authorization, Charged for each authorization request.
- Chargeback Fees: $10 - $100 per chargeback, Charged when a customer initiates a transaction dispute. In certain scenarios, your processor will refund this fee if you win the dispute.
Payment processing fees typically range from 2% to 4% of the business’s gross sales volume per month. The processing fee includes three primary types of fees billed by the payment processor: interchange fees, assessment fees, and processor/acquirer fees. Businesses should look for payment processors that offer transparent and competitive pricing.
All of these fee types apply to debit cards and credit cards, although the fee amounts tend to be lower for debit cards. This is due to the fact that there is much less risk involved for processing debit cards than credit cards. Debit cards do not create unsecured debt like credit cards do, but rather provide direct access to the customer’s funds. This creates much less risk for the organizations facilitating the transactions. Interchange rates for debit cards are lower than the rates for credit cards across the board, with some even being regulated for certain debit cards. By law, a debit card issued by a bank with more than $10 billion in total assets has a set interchange rate of 0.05% + $0.22. If you find a regulated debit card interchange line item on your statement that is higher than this, it is a telltale sign that your processor is inflating your interchange fees and should motivate you to investigate further.
When it comes to lowering merchant account fees, you are your own best advocate. Credit card processing account fees are one of the highest operational costs for many merchants. Therefore, ensuring you are paying a fair price is imperative for the overall health of your business. If you feel like you are being overcharged, the best thing to do is speak up right away.
Express your unhappiness with your processor, and be prepared to make a switch if they are troublesome to work with. Getting quotes from multiple processors, being meticulous in the negotiation process, and analyzing your monthly statements thoroughly will give you the ammunition you need to lower your credit card processing account fees.
As intensive as it sounds, failing to stay on top of your monthly fees could cost your business a tremendous amount over time. Here are some tips on how to go about dealing with your processor in order to drive down your fees.
One of the best things you can do to minimize your credit card processing account fees is to get quotes from multiple processors. You can then leverage these offers against each other in order to drive down the price. If you only communicate with one processor and don't leave room for other candidates, you are shooting yourself in the foot. If your current processor isn’t worried about losing your business, they will have no incentive to lower your fees.
Also, throughout the negotiation process, push for the proper pricing structure. Interchange-plus (also known as cost-plus) pricing is widely accepted as the most beneficial for the merchant. This is because it is the most transparent and often the cheapest pricing structure available. With others, such as tiered or flat rate pricing, there is more potential for hidden fees, and there is not much clarity as to the exact fees you're paying monthly.
It is imperative to read through each statement you receive and ensure the fees you are paying line up with what you agreed to. Processors offer different levels of detail in their statements, so if you feel like yours doesn’t have enough information, it would be wise to request a different statement or a transaction report from your processor. No matter what statement you receive, you should be able to calculate your effective rate, which is simply your total fees divided by your total volume. This is a quick first step to take in order to determine if you are paying a fair amount in credit card processing fees.
Also, announcements will often be posted on your statement. These will usually contain notices about any upcoming fee increases, so reading these will keep you from getting caught off guard. These fees could either be negotiable or non-negotiable, so if you see something questionable, get clarification from your provider.
If you've taken the first steps toward minimizing your credit card processing fees and find yourself overwhelmed, it might be wise to hire a consultant. Finding areas where you are overpaying and deciding to switch service providers can be a complex undertaking as well as detract from the daily operations necessary to keep your business afloat. A consultant can take this off your plate and provide a level of expertise that might have been otherwise unachievable.
Some agencies, such as Swipesum, even offer free consultations. Once they are provided a few recent months of statements, an overview of your current payment processing setup, and what you are trying to accomplish by making a switch, they can get to work curating a list of potential partners. And throughout the process, they'll be able to give actionable advice about making the transition as smooth as possible. Typically there’s no hard commitment, so at the end of the day, if you decide to stick with your current provider, there’s no harm, no foul.
Without much knowledge of credit card processing fees or the payments industry in general, it can be challenging to determine if you are overpaying. Even if you aren’t an expert, calculating your effective rate each time you receive your monthly statement is the easiest and quickest way to get an idea of the fairness of your deal. As a rule of thumb, an effective rate over 3% is too high, and anything under 2% is a great deal. If you find yourself in the 2% - 2.75% range, there is likely a way to bring that down, but it shouldn't be considered a gross overcharge.
If you notice a significant hike in your effective rate over the months, that should be your first clue to investigate further. An increase in your effective rate can be expected as your volume grows, but it shouldn't be ignored if it seems like a drastic change. You should keep a copy of your original agreement as well as each statement you receive so that you can reference those and see where the fee increase is coming from. If you notice new fees coming that you were not being charged previously, that is something to bring up to your processor.
The payment processing landscape is constantly evolving, with new technologies emerging to improve the efficiency, security, and convenience of transactions. Some of the most promising emerging payment technologies include:
Payment processing is a crucial part of business operations, and understanding how it works can help business owners prepare to accept payments securely and efficiently.
By choosing the right payment processor, offering diverse payment options, and implementing payment-processing best practices, businesses can enhance the customer experience, minimize the risk of fraud, and maintain compliance with industry regulations and standards.
Credit card processing fees are an inevitable yet manageable part of operating a business in the modern day. As a merchant, it is your responsibility to choose the processor that best fits your business, ensure that you are paying a reasonable price, and keep informed about all the fees coming your way.
These can be daunting tasks, but luckily Swipesum is there to take this responsibility off your plate. When you work with us, our team of experts will help you determine if your current solution is a good fit at a fair price. If you decide it's time to part ways with your current processor, we will connect you with one of our preferred partners and sit on your side of the table throughout the entire negotiation process. We do all of this at no cost to you, so that way, all you have to do is sit back, relax, and watch the savings roll in.
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Michael Seaman
Michael Seaman is the co-founder and CEO of Swipesum. A veteran of the payments industry and former employee at one of the largest payments companies, Michael, along with his brother Stephen, has led Swipesum since its inception in 2016. Swipesum is committed to providing innovative payment solutions and exceptional service to its diverse clientele. In his free time, Michael enjoys traveling with his wife Kelsey and their three children, pole vaulting, and engaging in typical Midwestern dad activities.
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