Whether you’re a merchant who runs your own business or someone with a side hustle, if you accept credit card payments, fees are likely going to eat into your gross profit. But how much are credit card processing fees?
Average credit card processing fees can range anywhere from 1.40% to 4.35%. While a few percentage points may seem low, these fees can add up and impact your business’ bottom line. Read on to learn more about these fees and how you can reduce them.
What Is a Credit Card Processing Fee?
A credit card processing fee describes all of the fees charged to take credit cards as a form of payment. These, which are incurred by merchants that accept credit card payments, include interchange fees, payment processor fees, and assessment fees.
Processing fees can run over 4% of a total transaction. Rates can vary based on the size and location of a business, as well as the types of transactions and cards that are accepted.
Generally, businesses bake credit card transaction fees into their pricing in the form of credit card merchant fees. However, some businesses may provide a discount if a customer pays with cash. Others may set a minimum payment amount they’ll accept by card. Understanding how credit cards work can give insight into why some businesses don’t accept credit card payments.
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Types of Credit Card Processing Fees and Costs
Credit card processing fees actually combine several fees. When talking about credit card processing fees, merchants are generally talking about.
• Interchange fees
• Assessment fees
• Payment processor fees
Some of these fees, like payment processor fees, can vary depending on the credit card processor a merchant chooses. Others, like interchange fees, are set by the credit card companies and depend on the cards used.
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Interchange fees are collected by credit card issues from the merchant when a credit card or debit card is used. Interchange rates vary depending on the type of card used, the type of business, and the amount of the transaction. Interchange rates can also vary depending on whether the payment was made online or in store.
Generally, interchange rates are presented as a percentage of the sale, plus a flat fee. For example, if Mei buys $50 worth of groceries with XYZ card, the grocer would have a set interchange rate based on XYZ card, which may be slightly different than ABC card. XYZ card may have a 1.15% interchange rate, plus a flat fee of $0.30. That would mean that, from Mei’s transaction, the store would owe $0.88 as an interchange fee.
An assessment fee is levied by the credit card network (the brand name on the card a cardholder uses, such as MasterCard or American Express). This fee may vary depending on whether the card is a credit card or debit card, as well as on the volume of transactions a business makes. There also may be larger international fees.
Unlike the interchange fee, an assessment fee is standard across transactions. It is also generally lower in amount than an interchange fee.
Card Processor Fees
Payment processor fees go to the payment processor, which facilitates the transaction. The card processor is the intermediary that communicates between the card issuer and the merchant bank. It may also include the point of sale (POS) system and provide the devices to take credit card payments.
The merchant does have some control over the amount of these fees. Credit card processing fees vary depending on the payment model selected. Costs could include per-transaction fees, a monthly service fee, and equipment rental fees.
Average Card Processing Fees in 2022
As discussed, card processing fees in 2022 depend on several factors, including whether payments are primarily processed in person or online. That said, average credit card processing fee ranges are provided below for the major credit card networks:
Average Credit Card Processing Fees By Network
|Network||Processing Fee Range|
|Visa||1.29% + $0.05 to 2.54% + $0.10|
|Mastercard||1.29% + $0.05 to 2.64% + $0.10|
|Discover||1.48% + $0.05 to 2.53% + $0.10|
|American Express||1.58% + $0.10 to 3.45% + $0.10|
Note that American Express is considered a bit differently than other credit card companies. Unlike the other three credit card companies in the table above, American Express is a closed-loop network. This means that it is not backed by another financial institution, which gives it more control over its practices and charges. American Express calls the fees it charges “discount fees,” which operate similarly to interchange fees.
If you do have an American Express card, this wouldn’t have any impact on things like your credit card limit or credit card minimum payment, but it may affect where your card is accepted due to generally higher fees.
Factors That Determine Interchange Fees
Adding to merchant confusion, interchange fees vary depending not only on the merchant, but also depending on what sort of credit card is used in a transaction. Interchange fees are usually between 1% and 3% of the overall sale, but the actual percentage varies on a host of factors that we’ll discuss below.
Credit Card Type
Credit card type plays a role in determining the amount of the interchange fee — even if all cards fall under the same brand. In general, debit cards have lower interchange rates than credit cards, which are unsecured debt.
Part of how a rate is assigned is based on risk level. For a merchant bank, a debit card can be less risky because the money is already accounted for within your account. (This is also why the process of how to apply for a credit card is more involved than it is for a debit card.)
Merchant Category Code
Shopping at a grocery store? Then you may be paying a different interchange rate than you would at the hardware store or dry cleaners. Every merchant has a category code, and those merchants within the same category will have the same fees.
Method of Processing
How a payment is processed will also affect the rate of interchange fees. Card companies assess the risk of the transaction, considering the potential for fraud, chargebacks, and other things that may go awry. For this reason, they may assign different interchange rates based on whether a purchase was completed online, in person, or even whether the purchase was made via swipe or chip technology.
Each credit card network sets its own fees based on merchant type. While the majority of the fee goes to the bank that issued your card, a small amount will go to the card network itself. This money will then be used to fund perks, rewards, and protections offered by the card — all key parts of what a credit card is.
Pricing Models for Processing Fees
There are various pricing models for processing fees, and merchants can assess which one works best for them based on how they do business. There are three common models to consider: flat rate pricing, interchange plus pricing, and tiered pricing.
Flat Rate Pricing
Like the name suggests, flat rate pricing provides a fixed rate for all transactions, which is inclusive of processing fees and interchange fees. This can be convenient, as it makes it easy to predict costs. However, it also could mean that your business is overpaying for transactions that have lower interchange rates, such as purchases made with a debit card.
Interchange Plus Pricing
Interchange plus pricing provides a detailed analysis of fees by breaking out interchange fees, assessment fees, and processor fees. This can be great for businesses looking for a level of detail into the fees they’re paying, and it can also help ensure that you’re not overpaying fees. However, some businesses may find this level of detail overwhelming.
With tiered pricing, prices for interchange rates are separated into one of three tiers: qualified, mid-qualified and non-qualified. Tiering is dependent on how payment occurs (for example, in person or online) as well as how the card processing occurs (a payment may be downgraded based on how the card is processed).
While statements can be easier to read with this model, there’s less transparency than with interchange plus pricing. Additionally, because merchants can’t separate interchange fees from processing fees, it can be challenging to see a fee breakdown.
Other Credit Card Processing Fees and Costs
In addition to the credit card processing fees outlined above, you also may pay a monthly subscription fee for processor use. This is independent of the number of transactions and may include customer service, POS equipment, and more. Sometimes, a higher subscription fee may result in a lower fee per payment.
You may also pay a fee for the initial setup when you sign up for a credit card processing company. Further, you could owe fees for if a customer disputes a credit card charge, in the instance of any chargebacks, and for non-sufficient funds.
How Often Do Payment Networks Update Their Interchange Fees?
Interchange fees are typically updated twice a year, in April and October. However, the COVID-19 pandemic caused Visa and Mastercard to pause changing certain interchange rates on transactions.
As for the amount of typical fee hikes, the most recent increases by Mastercard and Visa resulted in a jump of 0.05 to 0.10 of a percentage point for payments made by credit card. This may not sound like a lot, but this can add up significantly — especially as more consumers are using cards over cash. Just think if your annual percentage rate (APR) on your credit card was to inch up by that much.
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Understanding credit card processing fees isn’t only helpful for entrepreneurs and small business owners. It can also help consumers understand why there might be an additional fee charged for certain payments made with cards, such as if you decide to pay taxes with a credit card.
When it comes to choosing a credit card, however, you don’t necessarily have to think about interchange rates — that’s the job of merchants. What you do need to consider is any fees involved and whether the interest rate is a good APR for credit card.
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What is the typical fee for credit card processing?
The typical fee for credit card processing in 2022 is 1.40% to 4.35% for transactions. The rate is dependent on the type of transaction (in general, debit cards cost less to process than credit cards) and the processing system the merchant chooses. The actual percentage per swipe varies based on a host of factors.
Can I avoid credit card processing fees?
There are no ways to entirely avoid credit card processing fees, but there may be ways to make fees more manageable. One common way for businesses to manage credit card processing fees is to bake them into pricing and to offer cash discounts. Another way to potentially avoid credit card processing fees is to accept ACH payment methods for services.
Can the type of credit card determine processing fees?
Yes, the type of credit card is one factor that determines processing fees. For example, different categories of cards, such as reward cards, can have different fees than other cards, like debit cards.
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