Credit Card Processing Fees and Costs
In each business transaction involving credit cards, processing fees take a bite out of the total profits. We generally see credit card processing fees be somewhere around 2% of each purchase. Let A&B Payments guide you when it comes to fee’s.
Businesses have some power to minimize costs by shopping around different payment processors. They can end up receiving competitive rates that can end up saving them a significant amount of money over time. In order to be able to shop around, it’s important to be well versed in the topic at hand. To that end, we’ve put together this guide on credit card processing fees, so that merchants are better equipped when setting up credit card payments for their business.
While those are value’s we generally see, it is an estimated average. In reality, much more goes into processing fees for a business and individual fee’s will highly vary based on a number of factors. We outline and describe some of the costs that contribute the most in the sections below.
- The Discount Rate The percentage of a sale that goes towards paying credit card processing fees is referred to as the discount rate. This involves all the fees which are paid to card issuers and networks via interchange fees and assessment fees. These sections give an overview of what factors can impact these fees.
- American Express Processing Fee’s– American Express is a special case, as it is the only card network that is also a card issuer. Amex’s unique position also makes them work a little differently when it comes to credit card processing fees. With this issuer, they tend to be more expensive than what other networks charge, especially when it comes to processing returns.
- Other Cost & Fee’s – Accepting credit card payments comes with some additional costs to consider. In many cases you will be required to pay a monthly fee’s to your MSP, as well as cover the cost of card readers. This section outlines some common practices by payment processors, which you should be aware of before beginning to shop comparatively.
The Discount Rate
A discount rate applies to all the credit card processing fees a merchant must pay to their merchant service provider with each transaction. Though it can consist of many more fine components, we can think of it as follows: the discount rate = interchange fee + assessment fees.
The first two components are decided by credit card networks, and are fixed. This means that no matter which MSP you pick, you will pay the same discount rate. Prices will only begin to differ between markup fees, which are a separate payment you make to your credit card payment processors.
Credit Card Interchange Fee
The biggest piece of the pie will be eaten up by interchange fees, which are collected mainly by credit card issuers.
- Network– MasterCard, Visa, American Express, and Discover are the four major credit card networks, and they all charge slightly different interchange rates. As noted previously, American Express tends to be the most expensive of the group for several reasons, which we discuss below. There is also price variation within the individual networks. For example, a World Elite MasterCard will have different interchange fees than a World MasterCard would.
- Card Type– Fees are also impacted by whether the card being used in the transaction is a debit or credit card. Furthermore, the type of credit card is also important. Business credit cards tend to be the most expensive to process, followed by rewards credit cards and regular credit cards closing the group off.
- How the Payment is Processed– Whether you, the merchant, swipe the credit card through a reader or punch in its number directly into the system will also impact the fees you are charged for a particular transaction. Credit card networks will also discriminate between online and mobile payments, and card-not-present transactions. In general, we’ve observed fees on swiped transactions to be lowest.
- Merchant Category Code (MCC)– The way in which you categorize your business and each sale you make will also have an effect on the interchange you will pay per transaction. While this affects the interchange rate, it rarely does so by more than few tenths of a percent. Note that trying to classify your restaurant as a ground transportation service to get lower rates is not a good idea. Card issuers are still examining data that is being fed to them in each transaction. Any attempted manipulation of transaction data is sure to be discovered and punished.
The assessment fee is a much smaller credit card processing fee, one that you pay directly to the card network (Visa, MasterCard, Discover, etc.). These fees will also depend on a number of factors, that differ from network to network. Some will charge higher rates for credit card vs debit card usage, while other networks may charge higher rates when the transaction volume is greater. Other incidental fees may arise from specific transactions being unique, such as foreign transactions being processed. Some of the most impactful assessment fees for three major networks can be seen in the table below.
American Express Credit Card Processing Fees
American Express is considered the priciest in terms of credit card processing fees. Thier high discount rates, which often reach 3.5%, are higher than that of competitors like MasterCard and Visa. While more expensive, up until recently Amex has kept its pricing model simple, meaning most merchants paid the same (high) credit card processing fees.
One of the major sought after changes by merchants is the way in which Amex handles returns. While other card issuers will refund the business part of the cost of the credit card processing fees charged to the merchant, American Express did so only when after merchants agreed to paying higher processing fees per transaction.
Other Credit Card Processing Fees & Costs
Merchant service providers also charge consumers monthly fees and minimums. The costs are vary widely from provider to provider.
Most common fee’s that a merchant will see is “PCI Compliance”. Another cost to consider is the price of equipment. If you want to process credit card payments in-person, your business will need at least one credit card reader. Merchants are presented with a wide set of choices in this department. Your personal needs and wants for the equipment will govern how much of a cost you will have to bear here.