Credit card processing fees: How do they work?

When you use your credit card to pay for something at the store, you might feel the effects of credit card processing fees. But how do the fees work, how much do they cost businesses and how do fees relate to customers?

Sometimes referred to as credit card transaction fees or credit card merchant fees, credit card processing fees can range from 1.5% to 3.5%. Learn more about different types of fees.

What you’ll learn:

• Credit card processing fees are paid by the vendor, not by the cardholder.

• Businesses can pay credit card processing fees to the buyer’s credit card issuer, to their credit card network and to the payment processor company.

• On average, credit card processing fees can range between 1.5% and 3.5%.

• Fees can be charged per transaction, per month or per year depending on the credit card network a business works with and the network’s pricing model.

When a credit card transaction takes place between a business and a consumer, a credit card processing service completes the transaction behind the scenes. Payment processors facilitate the payment and serve as middlemen between consumers, vendors, card issuers and card networks.

Then, for completing this service, the merchant account or the payment service provider involved in the transaction charges small fees to the business.

There are three main types of processing fees—also known as merchant discount rates—vendors are likely to encounter as part of their credit card transactions: interchange fees, assessment fees and payment processor fees. It might help to understand these fees prior to opening a credit card.

An interchange fee is often the largest one vendors will pay. It’s charged by the business’s credit card network—sometimes called a payment network—to help cover the costs of processing the transaction. Offline credit card processing, where the payment is made in person, can lead to higher interchange fees.

An assessment fee is charged by the vendor’s credit card network based on the vendor’s total monthly sales. These networks can sometimes differ from the buyer’s credit card issuer. Most businesses work with four main credit card networks in the United States: American Express®, Discover®, Mastercard® and Visa®. The former two companies can issue their own credit cards. To get a Mastercard or Visa, consumers must apply through separate issuing banks or financial institutions.

The payment processing company the vendor works with—usually separate from a consumer’s credit card issuer or a vendor’s credit card network—might charge an additional fee for managing transactions. These fees can be charged monthly, annually or upfront when the transaction goes through.

According to analysts, the average credit card processing cost to vendors ranges between 1.5% and 3.5%. However, these rates can vary depending on the credit card network a business operates through and the type of pricing model offered to the business.

Three main types of pricing models are commonly used to determine credit card processing fees: tiered pricing, flat-rate pricing and Interchange plus pricing.

Under this pricing model, credit card processing companies categorize their fees by different transaction types:

• Qualified: This tier includes credit cards without rewards programs and debit cards.

• Mid-qualified: This tier includes cards with certain types of reward programs.

• Non-qualified: This tier includes corporate cards and cards with high-end rewards programs.

Certain qualified transactions can receive lower rates, while other transactions might receive higher rates.

With flat-rate pricing, credit card processors charge businesses a certain percentage of the transaction plus a small per-transaction flat fee—typically $0.20 to $0.30.

Under Interchange plus pricing, businesses pay their credit card network’s interchange rate as well as a predetermined transaction fee. Interchange plus pricing can vary based on the credit card network, the type of credit card and whether or not the card is present. Card-not-present transactions are more expensive than in-person transactions.

Under membership pricing, processors charge a membership fee instead of taking a percentage of what you generate in sales. Depending on the processor, they may charge an annual fee or a monthly fee. They may also ask for a per-transaction fee on top of an interchange fee. In some cases, this is the most cost-effective option.

Credit card processing fees can add up quickly, especially in a new or small business. Here are some ways businesses can try to keep their fees under control: 

• Pay attention to chargeback fees. Chargeback fees are levied when a customer disputes a transaction. This can be caused by unauthorized card use, billing errors and more. Vendors can use a contactless or chip card reader to help minimize liability for fraud.

• Shop around for processors. Different payment processing companies have different rates. By shopping around, vendors can try to find the best price.

Credit card processing fees are a common component of business transactions. And if you’re a consumer who makes credit card payments, it helps to understand how the fees that vendors pay may also impact you. Learn more about fees and some ways you might be able to avoid common credit card fees.