Accepting credit card transactions is no longer a decision of whether to but rather how to. With cashless now BEING king, credit and debit cards are the primary method for your customers to make payments.
Pre-pandemic, 62.3% of consumer payments came through card payments. And electronic payments were at 14.2%, closing in on cash at 15.5%. While the figures aren’t from the COVID-affected spending period, it’s fair to assume that cash is down while cards and electronic payments are way up. Credit card and debit card payment processing fees apply to them all.
With the number of debit and credit card purchases increasing, it’s important you’re able to calculate credit card processing fees. To help you do that, we’ve put together the ultimate guide.
TL;DR
- Credit card processing is a complex process that involves several parties in addition to the merchant and consumer – and quite a few steps more than a simple swipe, tap, or dip.
- For a merchant to accept credit cards, they need to pay both credit card processing fees to the banks involved and for the soft and hardware required to process cards. Typically, the merchant’s payment processing software will build the credit card processing rates into their fee.
- Choosing the payment processor and other items in your credit card processing tech stack will depend entirely upon your business model.
Processing Credit Cards How It Works
Paying for something with a credit card is deceptively simple. Physically, it appears to be a quick insertion, swipe, or other entry of numbers. But digitally – there are many more steps and parties involved in the transfer of money.
The parties involved in processing a credit card transaction:
- Cardholder: The individual or entity holding the credit card and initiating the transaction.
- Merchant: The business or entity selling goods or services and accepting credit card payments.
- Acquiring Bank (Merchant Bank): The financial institution that establishes and maintains the merchant’s account, enabling them to accept credit card payments.
- Issuing Bank: The bank or financial institution that issued the credit card to the cardholder.
- Card Network (e.g., Visa, Mastercard): The intermediary networks facilitating transactions between acquiring and issuing banks.
- Payment Gateway: A service provider that facilitates communication between the merchant’s POS system and the acquiring bank’s payment processing system.
- Processor: An entity responsible for handling transaction data between the merchant, acquiring bank, and card networks. They often provide services such as authorization, clearing, and settlement.
The steps to process a credit card transaction
Step 1: Authorization Request
The process initiates when a customer presents their credit card for payment. The merchant’s point-of-sale (POS) system sends an authorization request to the acquiring bank (also known as the merchant bank) via a payment gateway. This request contains crucial information such as the card number, transaction amount, and merchant details.
Step 2: Authorization Approval
Upon receiving the authorization request, the acquiring bank forwards it to the card network (Visa, Mastercard, etc.) which then routes it to the cardholder’s issuing bank. The issuing bank evaluates the request, checking factors like available credit, fraud risk, and account status. If approved, the issuing bank sends an authorization code back through the same channels.
Step 3: Settlement
With the authorization code in hand, the merchant proceeds with the transaction. At the end of the business day, the merchant batches all authorized transactions and submits them to the acquiring bank for settlement. The acquiring bank debits the funds from the cardholder’s account and credits the merchant’s account, minus interchange fees.
Step 4: Clearing
After settlement, the card network facilitates the clearing process. During clearing, transactions are sorted, and funds are transferred between the issuing and acquiring banks. This ensures proper reconciliation and transfer of funds to the merchant’s account.
Step 5: Payment
Once clearing is complete, the issuing bank transfers the funds to the acquiring bank. The acquiring bank then deposits the funds into the merchant’s account, typically within a couple of business days. This marks the completion of the credit card payment process.
Who Sets the Credit Card Processing Fees?
Contrary to popular belief, it’s not just the credit card companies setting the credit card processing fees. There are three parties that influence what makes up the average credit card processing fees you pay every month:
- Credit Card Networks – Companies, such as Visa, Mastercard, American Express, and others, that partner with the banks
- Banks – Financial institutions that issue the above cards to consumers, such as Capital One, Chase, Bank of America, and others
- Payment Processors – Companies responsible for securing the payments and processing the credit card transaction.
To make fee predictability extra tricky, each of these parties determines their own credit card processing fees independently. Understanding how they each function helps to figure out the math behind the final fee.
How Merchant Fees Are Made Up
The unavoidable basics of credit card processing fees are interchange rates and assessment fees.
Interchange Fees
Although interchange fees go toward paying the issuing banks, the major credit card networks — Visa, Mastercard, and the likes — control the interchange rates. This is the largest chunk of the merchant fees that need to be paid for payment processing, amounting to between 70% and 90% of the average credit card processing fees.
Typically, Visa and Mastercard would adjust these fees twice each year. However, 2020 and 2021 have been exempt from these changes, which are paused until April 2022, giving merchants some respite from the financial stress of the pandemic.
While the pause on adjustments is welcome, interchange fees are still tricky to calculate.
These fees are charged whenever a credit card or debit card transaction is made, whether they checkout in-person, online or through digital payment. The basis for these fees is the credit risk that these financial institutions take on when handling credit card transactions.
As risk-based fees, these institutions have calculated different rates for different classifications of transactions. Visa, for example, currently has more than 150 different classifications. Each network has its own. Amex and Visa, as a result, will have different interchange fees.
Considered in the fees are the types of credit card, processing type, and type of business — e.g., the merchant category code (MCC).
The credit card type reflects whether the payment is made with a credit or debit card. Then, there are also different rates for business credit cards and cards tied to rewards programs.
The processing type factors in whether it’s a card-present transaction (taken at a point of sale system) or a card-not-present transaction. Card present transactions tend to be the cheapest option as they are the lowest risk. Payments made via e-commerce platforms and through mobile devices can also have different rates.
Finally, the merchant category code (MCC) is a four-digit number that credit card companies use to classify consumers’ transactions. This looks at the use of particular cards as well as the category of your business. Restaurants, for example, will be charged differently to hotels, which will then be charged differently to utility companies.
Assessment fees
Assessment fees are paid to card networks, i.e., Mastercard, Visa, and Discover. They are determined and adjusted by the credit card networks — not the payment processors — and they cover the operating costs of credit card networks. These are also known as pass-through fees.
These fees are determined by a range of factors:
- The type of card used by the cardholder
- The transaction amount
- Incidental fees (such as processing foreign transactions).
Each network sets and charges its own assessment fees. As of January 2021, according to Wells Fargo, those fees are as follows:
Network Assessment Fee Description
| Network | Assessment Fee | Assessment Fee Description |
|---|---|---|
| Visa | 0.14% | Applies to credit card transactions |
| Visa | 0.13% | Applies to debit and prepaid card transactions |
| Mastercard | 0.1375% | Applies to all Mastercard sale transactions |
| Discover | 0.13% | Applies to all Discover sale transactions |
| American Express | 0.16% | Applies to all Amex sale transactions |
Additional Network and Card Issuer Fees
In some cases, you may have to pay the fees below, which come from the card brands (Amex, Discover, Mastercard, and Visa):
- Fixed Acquirer Network Fees (FANF): Charged based on whether the transaction is card-present or card not present, number of locations, and sales volume.
- Kilobyte Access Fee (KB): Charged for each authorization transaction that is submitted to the card network for settlement.
- Network Access and Brand Usage Fee (NABU): Charged by MasterCard on all settled or refunded credit/debit card transactions.
- Acquirer Processing Fee (APF): Charged by Visa on all US-based businesses Visa credit card authorizations.
- Chargeback fees are applied when a customer files a chargeback against you.
- Credit card processing company fees like early termination fees or fees to adhere to security standards.
Your merchant account provider is the organization you’ll deal with most. While interchange and assessment fees are unavoidable, the power to impact your fees the most comes with which payment processor you choose to work with.
Payment Processor Pricing Models
Payment processors work under four different pricing models:
1. Flat-rate pricing
Flat-rate pricing blends all of the fees into one, easy to predict flat-rate fee. This is a great relief for many merchants that want to avoid the surprises that can come with other pricing models. However, flat fee structures factor in a buffer to ensure that the merchant services provider covers the fees they have to pay to the issuing banks and credit card networks. This can work out a little more costly than other options.
Square and PayPal are two that have popularized this model.
The benefit of flat-rate pricing is its predictability. No matter the transaction type – credit card, debit card, reward card – the fees are the same. These are typically charged with a percentage as well as a per-transaction rate — e.g., 3% + $0.10.
2. Interchange plus pricing
Interchange plus pricing is a pricing model that charges based on whatever the interchange rates are at that particular moment, “plus” a markup fee that pays your processors processing costs — e.g., 2.1% + $0.10 per transaction.
The benefit of the interchange-plus pricing model is transparency. When your transactions are in lower interchange fee categories, you get to benefit from those lower rates. The same is true for higher interchange rates, also. So it’s important to be mindful of whether your transactions are mostly in high or low categories.
The challenge with interchange plus can be the math behind it. Forecasting can be tricky when you have to predict the interchange rate, plus the transaction fee. These can add up.
Helcim and Stripe are the more popular payment processors offering interchange plus pricing models.
3. Tiered pricing
Tiered pricing is structured into three tiers, qualified, mid-qualified, and non-qualified. Essentially passing on the risk costs from the credit card networks, the tiered model offers the lowest rates for qualified transactions and the highest for non-qualified transactions.
Qualified rates typically apply for debit cards and non-reward credit card transactions, while the transactions that attract higher rates are the “fancier” cards, such as business cards and rewards cards. Standard credit cards can fall in the mid-qualified range.
Additional factors that can impact tiered pricing are:
- Card-present or swiped cards (qualified)
- Keyed-in transactions (mid or non-qualified)
- Card-not-present transactions (non-qualified).
With tiered pricing, merchants typically pay 1.5% to 2.9% for card-present transactions, while keyed-in transactions attract a rate of around 3.5%. Card-not-present transactions also attract higher fees.
4. Membership-based pricing
Unlike all of the other models, membership pricing does not take a cut out of your sales. E.g., that $0.10 fee for every transaction. Membership pricing instead is a subscription model where you pay a monthly fee and then whatever the interchange rates are at the time of transaction.
The membership model has one of the most transparent credit card processor account fees. The predictability of your bank account fees makes membership/subscription pricing models ideal for small businesses looking to set up credit card processing.
Membership-based processors, such as Stax make their money through the annual or monthly fees, rather than taking a cut of your sales.
Average Credit Card Processing Fees
Based on 2021 data from Visa, Mastercard and Discover, and American Express, the average credit card processing fees are currently:
Payment network average credit card processing fees
- 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
What Do You Need When Processing Credit Cards?
When it comes to processing credit cards either in-person or online, merchants require a mix of hardware and software. What that exact mix will vary merchant to merchant, based on their specific needs.
Credit Card Processing Hardware
Hardware options are most notably different between in-person and online credit card processing. For in-person payment processing you’ll need:
- A point-of-sale (POS) system that serves as the central hub for in-person transactions. It typically includes hardware components such as a touchscreen monitor, barcode scanner, cash drawer, and receipt printer. Modern POS systems often come with built-in card readers capable of accepting various payment methods, including EMV chip cards, magnetic stripe cards, and contactless payments (NFC).
- A credit card reader or terminal for swiping or dipping physical credit cards or accepting or other mobile payment options like Apple Pay or Google Pay. EMV-compliant terminals are essential to process chip card transactions securely, reducing the risk of fraudulent activities. Additionally, NFC-enabled terminals support contactless payments, allowing customers to tap their cards or mobile devices for swift transactions.
- Seamless internet connectivity for real-time authorization and transaction processing. Merchants should ensure they have stable internet access, either through Wi-Fi, ethernet, or mobile data, to avoid disruptions during peak business hours.
While eCommerce merchants will need:
- A computer or mobile device with internet access to facilitate online credit card transactions. Whether it’s a desktop computer, laptop, tablet, or smartphone, the device should be equipped with a web browser and compatible with the selected payment gateway and eCommerce platform.
- Optional: While physical card readers are not required for online transactions, some merchants may opt for virtual terminals to process card-not-present transactions securely. Virtual terminals allow merchants to manually enter card information obtained over the phone or via mail order, facilitating remote payments.
Credit Card Processing Software
When it comes to software, there’s one system both online and in-person merchants will want: payment processing software.
Integrated payment processing software is essential for managing transactions, authorizations, and settlements seamlessly. This software interfaces with the POS or eCommerce system and facilitates communication with the acquiring bank and payment gateway. It should support various payment methods, encryption standards, and compliance requirements to ensure data security and regulatory compliance. This software needs to be EMV compliant to handle chip card transactions securely.
Online merchants will need a far more robust stack of software systems:
- An eCommerce platform to serve as the foundation for online sales, providing merchants with a digital storefront to showcase products, manage inventory, and process transactions. Popular eCommerce platforms such as Shopify, WooCommerce, and Magento offer built-in payment processing capabilities or integrate with third-party payment gateways for seamless transactions.
- A payment gateway is essential for securely transmitting payment data between the merchant’s website and the acquiring bank. It encrypts sensitive information such as credit card numbers, validates transactions in real-time, and facilitates authorization and settlement. Merchants should choose a payment gateway compatible with their eCommerce platform and capable of supporting their preferred payment methods.
- Secure Socket Layer (SSL) certificates to encrypt data transmitted between the customer’s web browser and the merchant’s website, ensuring privacy and data integrity. SSL certificates are particularly crucial for online transactions to protect sensitive information from interception by malicious actors.
Finding the Right Credit Card Processing Company
With so much to consider and myriad different fee structures to navigate, the best way to find the right provider for your small business is to shop around. Put merchant account providers through tough scrutiny and see which is going to cover all of your needs without any hidden fees.
The best providers are those that can grow with you. If you expect to expand, ensure that you research which provider suits your business at its level now as well as when your transaction volume increases. Stax can ensure that while you grow, your credit card processing fees don’t.
Request a custom quote to see how the Stax can reduce your credit card processing fees.
FAQs about Credit Card Processing Fees
Q: What are credit card processing fees for merchants?
Credit card processing fees are the costs associated with accepting credit and debit card payments. These fees are set by three parties: Credit Card Networks, Banks, and Payment Processors. They can vary depending on factors like the type of card used, the transaction amount, and the type of business.
Q: Who sets the credit card processing fees?
Credit card processing fees are set by three entities Credit Card Networks (such as Visa, Mastercard, American Express), Banks (that issue the credit cards), and Payment Processors (companies responsible for securing the payments and processing the transactions).
Q: What are Interchange Fees and Assessment Fees?
Interchange fees are a part of the credit card processing fees that go toward paying the issuing banks. They are controlled by the major credit card networks and make up the largest chunk of the merchant fees. Assessment fees, on the other hand, are paid to card networks and cover the operating costs of credit card networks. They are determined and adjusted by the credit card networks and also known as pass-through fees.
Q: What factors determine the Interchange Fees?
Interchange fees are determined by the credit risk that financial institutions take on when handling credit card transactions. They are influenced by the types of credit card, processing type, and type of business.
Q: What are the different pricing models used by Payment Processors?
Payment Processors work under four different pricing models: Flat-rate pricing, Interchange plus pricing, Tiered pricing, and Membership-based pricing. These models differ in their fee structures, transparency, and how they impact the total processing fees.
Q: What is the average credit card processing fee for merchants?
Based on 2021 data, the average credit card processing fees typically range between 1.29% + $0.05 and 3.45% + $0.10 per transaction. However, these fees can vary widely depending on several factors, including the credit card network, the type of credit card used, and the merchant’s industry.
Q: How can merchants find the right credit card processing company?
Merchants can find the right credit card processing company by comparing different providers, understanding their fee structures, and assessing their growth potential. It’s important to choose a provider that can grow with the business and doesn’t have hidden fees.
Q: What are some additional network and card issuer fees?
In addition to interchange and assessment fees, merchants may have to pay Fixed Acquirer Network Fees (FANF), Kilobyte Access Fees (KB), Network Access and Brand Usage Fees (NABU), and Acquirer Processing Fees (APF). These fees are set by the card brands and vary depending on factors like transaction type and sales volume.
Q: What is the impact of credit card processing fees on small businesses?
Credit card processing fees can significantly impact a small business’s bottom line. It’s essential for businesses to understand these fees and choose a credit card processing provider that offers competitive rates and transparent pricing.
Q: Can credit card processing fees change over time?
Yes, credit card processing fees can change over time. For instance, major credit card networks like Visa and Mastercard typically adjust their fees twice a year. However, changes have been paused until April 2022 due to the pandemic.
