Accepting card payments is an inexorable way of conducting business today. No business that wants to thrive and succeed can do so without tools as critical as those that credit cards represent. As credit card acceptance and usage grows, the role played by cash seems to be decreasing considerably. This fact makes accepting credit card payments not just something useful to a business but a true necessity.
However, accepting credit cards is accepting that there are going to be fees associated with their use. Knowing how much these fees will end up impacting your bottom line is essential. Being unaware of their impact on your net profits can be a huge mistake.
How much do merchants pay on average?
There is not one single answer to this question since there are several factors that play a role in how much a merchant pays in credit card fees. If you are a merchant or business owner, it pays to be informed as to what they are and what steps, if any, you can take to lower those rates as much as possible.
What is the average cost for credit card processing?
On average, it ranges from 1.5% to 3.5% in the case of cards that are swiped and it stands at 3.5% when it comes to keyed-in transactions.
The four major credit card networks have their own individual ranges for these fees, and they are:
- For American Express, you would be paying between 1.58% and 3.30%
- Discover charges you between 1.53% and 2.53%
- Mastercard’s fees go from 1.29% to 2.64%
- Visa’s fees range between 1.29% and 2.54%
How are merchant processing fees determined?
You may believe that the credit card companies themselves determine their own credit card processing fees. However, that is not the case. As a matter of fact, there are three parties involved in the determination of these fees. These are;
- The bank that issues the card – This could be, for example, Bank of America, Chase, or Barclays, just to name a few of the financial institutions that offer cards.
- The credit card network that has partnered with the bank, such as Visa or Discover.
- The payment processor, which is the company that is responsible for actually securing and carrying out the transaction.
What do businesses pay?
In the majority of cases, businesses must pay a fee that is known as the interchange fee on the total of the transaction. Additionally, they have to pay a flat fee to the credit card company.
It’s important to note that interchange fees are not static but constantly change. This is why it is so hard to predict the fees that businesses will have to pay. Plus, interchange fees tend to be considerable since they make up between 70% and 90% of the total amount a merchant will have to pay the financial institution.
Additionally, merchants generally owe a commission and a flat fee to the processing company as well. This is not a universal number since the processor’s fees will swing to reflect factors such as your credit card processing volume, the type of business that you run, and the payment model the processor uses.
What factors play a role in setting interchange fees?
These factors are responsible for determining interchange fees:
The Network
Every single major credit card network (such as American Express or Visa) charges a different amount for their interchange rates. And within these networks, the credit card itself will carry a different interchange fee. For example, a Platinum American Express card or an Amex Everyday card will pay different fees.
The Type of Credit Card
If it is a debit card or a credit card, the rates will vary. Also, if the credit card is connected to a business, it will most likely carry the highest fees. A second tier is cards tied to rewards programs while the third tier is made up of regular credit cards.
The Type of Processing
Another important factor is whether the card is swiped or if its numbers are entered directly into the system. If you are looking for the most affordable option, a card that is swiped is the less expensive one. Different amounts are also charged for card-not-present transactions and for purchases that are done online.
The Merchant Category Code or MCC
MCCs are four-digit codes that credit card companies use to classify consumers’ transactions while they use specific cards. Your category of business will also represent another code. You may have to fight the temptation to classify your business in a lower classification in order to save some money and if you do this, you should know that card issuers take this information seriously and take the needed time to examine all payment data. This means that your scheme would be discovered right away.
How are payment processor fees determined?
These fees are the ones you would pay to your credit card processor. As opposed to interchange fees which are determined by the card network, these fees are set by the provider that you select.
The four pricing models they use are:
Tiered Pricing
They are divided into three main tiers: qualified, which have lower rates, mid-qualified, and non-qualified.
Flat-Rate Pricing
In this case, the processor charges a flat rate for all transactions, regardless of whether the card is a credit, debit, or rewards card.
Interchange-Plus Pricing
Two components make up these rates: the interchange rate which has been described above, and the plus, which is basically the markup of your processor.
Membership-Based Pricing
This one is the most favorable model of all. In this case, they do not take a cut out of your sales but you only pay the interchange rates set by the card network. Money is made through monthly or yearly membership fees.
Are there other factors to consider?
As mentioned above, whether the card is swiped or keyed in and the type of card used play a role in setting the rates. There are other fees that you may be able to negotiate. It is recommended that you read more about hidden fees and other costs that may impact your business’ bottom line.
Interesting related article: “All about Credit Cards.”