Credit card processing fees explained

The US is seeing a surge in cashless payments, with credit card transactions and debit cards leading the way. Payments Dive found that non-cash payments are set to grow by 6.4% this year, reaching $252.6 billion, while digital wallets and instant payments are also on the rise. Despite the convenience for customers, credit card processing fees can be a burden for business owners. These costs (ranging from interchange fees and assessment fees to monthly fees) add up quickly.

Credit card processing fees come from a variety of sources, including credit card networks, credit card processors, and card issuers. For businesses, understanding these credit card transaction fees is essential. 

In this blog, we’ll explain everything from credit card processing costs and monthly fees to how interchange fee structures work and what payment processing companies charge for credit card payments. Whether you're dealing with in-person transactions, online purchases, or other pricing models, we’ll cover the various credit card processing services and help you navigate these costs.

• The different types of credit card processing fees and what they mean for your business
• Factors that impact your processing costs, including card type and transaction volume
• Hidden fees to watch out for and tips to reduce your merchant fees

Let’s get into it.

Types of credit card processing fees

There's not just one type of credit card processing fee out there, there's actually a few. These include:

Interchange fees

Every time a customer pays with a credit card, you’re charged a fee called an interchange fee. This fee is paid by the merchant’s bank (or payment processor) to the customer’s bank. Interchange fees are set by the credit card networks and are usually updated twice a year, in April and October. In 2023, these fees averaged 2.24%, reaching a record high of $172.05 billion, with over 80% coming from Mastercard and Visa (you can check their websites for current rates).

The purpose of interchange fees is to help the card-issuing bank cover risks like fraud and processing costs. Several factors affect how much you’re charged, including:

• The card type: Debit cards (with PINs) generally have lower fees than credit cards, while rewards or business cards tend to have higher fees.
• How the transaction is processed: In-person, card-present transactions at the point of sale (POS) typically have lower rates than card-not-present (CNP) transactions, like online payments or phone orders.
• The transaction amount: Merchants with smaller transactions but higher sales volume may qualify for lower rates to reduce costs.
• The type of business: Every business is assigned a merchant category code (MCC) based on their industry, which influences how much they’re charged. Higher-risk industries like travel, gambling, or financial services often face higher fees.

Now, American Express works a bit differently, as they act as both the card network and issuer, so their fees vary. However, if you use a service like Epos Now Payments, all major credit cards, including Amex, will have the same processing fee.

Assessment fees

Payment processors also collect something called assessment fees (which are also known as service fees, FYI), which are paid to card networks like Visa or Mastercard. These fees cover the use of their card brand and allow you to process transactions through their credit card network.

Unlike interchange fees, which are charged per transaction, assessment fees are based on your total monthly sales. They’re generally lower than interchange fees but vary depending on factors like the card type (credit or debit), transaction volume, and whether the transaction was international.

Just like interchange fees, assessment fees are reviewed twice a year. You can check your monthly credit card statement to see if there are any changes. The exact fees vary by network, with each having its own rates for Mastercard, Visa, and Discover.

Payment gateway fees

A payment processing fee is what you pay your credit card processor for using their service. This fee and any hidden or monthly fees are usually charged per transaction.

Factors influencing your credit card processing cost

Card type

The card type being used is a major factor in determining processing fees. Debit cards, especially those with a PIN, usually have lower fees than credit cards. This is because debit transactions pose less risk, the funds are available immediately, reducing the chance of chargebacks. On the other hand, credit cards, especially rewards cards, business cards, and those with more perks (like travel points), tend to have higher fees because they pose a greater risk to the card issuer.

Number of transactions carried out

The volume of transactions your business processes also impacts your fees. If your business carries out lots of smaller transactions, your payment processor might offer you a lower per-transaction rate to help reduce costs. Businesses with fewer, larger transactions might face higher fees. Additionally, whether a transaction is in-person or online (card-not-present) can alter the fee structure, with online or manually entered transactions typically costing more due to increased fraud risk.

Your business industry

Each business is assigned a Merchant Category Code (MCC), and some industries are considered higher risk, like hospitality, gambling, or travel. These industries often see higher fees because they are more likely to experience chargebacks and fraud. Conversely, low-risk businesses like retail or service providers usually have lower processing rates.

Your business risk profile

Your business’s chargeback history, fraud incidents, and overall transaction patterns play a role in determining your processing fees. If your business has frequent chargebacks or refunds, payment processors may classify it as a higher risk, increasing fees. On the other hand, maintaining a clean transaction history can help you secure lower rates, especially if you negotiate with your provider.

Hidden payment processor fees to be aware of

When you're choosing a payment processor, hidden fees can sneak up and eat into your profits. Here’s a breakdown of the common ones to watch out for:

Monthly rates

While some payment processors advertise a flat fee or low transaction costs, many sneak in monthly rates just for using their services. These can range from platform fees to account maintenance charges, which might not be obvious upfront. Make sure to look into those contracts and ask about any ongoing fees you’ll be responsible for.

PCI compliance fees

If your business accepts card payments, you must meet PCI DSS (Payment Card Industry Data Security Standards), which helps protect customer card information. Unfortunately, some payment processors charge extra for this, typically labeled as PCI compliance fees. These can be billed annually or monthly, and if you're not aware of them, they can feel like a frustrating surprise.

TIP: Want to keep your customers' payment information safe? Learn more about PCI compliance in our handy guide! Our guide breaks down what PCI compliance is, why it matters for your business, and how you can easily achieve it. 

Chargeback fees

When a customer disputes a charge, the payment processor has to investigate the claim, which often results in chargeback fees. On top of refunding the transaction, you could be hit with a fee (ranging from $15 to $100), even if the dispute is resolved in your favor. High chargeback rates can also lead to increased transaction fees over time, so it’s crucial to minimize disputes.

Early termination fees

Thinking of switching processors? You might be stuck with an early termination fee. This fee, hidden in many long-term contracts, can cost hundreds of dollars if you decide to leave before the end of your agreement. Be sure to understand any cancellation policies before signing up for a payment processor to avoid this costly mistake.

Tips to reduce merchant fees

Nobody wants to watch their hard-earned profits slip away into the void of merchant fees. Luckily, there are some savvy strategies you can use to keep those costs down and maximize your earnings.

Negotiate rates with your provider

Many merchants assume that the rates they’re given for their merchant accounts are set in stone, but that’s not always the case. Your provider wants your business, and they may be willing to offer better rates or terms to keep you happy.

So, gather up your courage, grab your phone, and give them a call. Come prepared with some data (like competitors’ rates or your transaction history) and let them know you’re considering shopping around. You’d be surprised how often providers will adjust their fees to avoid losing a client. Just remember to keep it friendly but firm. After all, you're not asking for a favor, just a fair deal.

Use a point-of-sale system to optimize your transaction times

Next, let’s talk about the power of a POS system. This advanced, cloud-based tech isn’t just for taking payments. No, it can also help you optimize transaction times and save on fees. When you streamline the checkout process, you’re reducing the time your customers spend in line and, in turn, cutting down on the number of failed POS transactions or chargebacks that can lead to fees.

Look for POS software with features like robust inventory management and customer tracking. These capabilities can help you spot trends, manage stock efficiently, and even provide loyalty programs that keep customers coming back for more. And let’s face it, a happy customer is a repeat customer.

Review your contracts regularly to remain updated with any changes

Now, onto the boring but oh-so-important stuff: reviewing your contracts regularly (Cue the dramatic sigh.) You might be thinking, “Contracts? Yawn!” But hear us out. Payment processing agreements can have hidden clauses that can change over time, leading to unexpected fees that sneak up on you like a thief in the night.

Set a reminder to review your contracts every six months or so. Look for any changes in rates, fees, or terms. Think of it as your financial spring cleaning—except you don’t have to dust anything. If you find anything fishy, it’s time to get on the phone with your provider and ask questions. Be proactive about understanding your agreements, and don’t let them catch you off guard.

Focus on certain payment methods to keep the costs low

Last but definitely not least, let’s chat about payment methods. Not all methods are created equal when it comes to merchant fees. So, if you want to keep costs low, it might be worth your while to focus on certain payment methods that are more affordable.

For instance, credit card payments typically have higher fees than debit card transactions or ACH transfers. If your customers are open to it, encourage them to use lower-cost options. Offer incentives, like a small discount for choosing a debit card over a credit card. Plus, if you notice a particular payment method racking up more fees, consider reducing your acceptance of it.

Simplifying Payments with Epos Now

In this blog, we explored how important it is for businesses to keep track of credit card fees and payment processes. Many business owners struggle with confusing charges and hidden costs that can eat into their profits. Understanding these fees is key to making smart decisions and growing your business.

That’s where Epos Now Payments comes in! Our payment solution is designed to make things easier for you. With Epos Now Payments, you get clear and straightforward pricing. You won't have to worry about surprise fees that show up later. We believe in being honest about what you pay for all major credit cards.

Our system is easy to set up and works well with your existing POS setup. You can accept payments quickly, which means happier customers. Plus, you can access simple reports that show your sales clearly, helping you make better business choices.

Liked this blog? Check out our financial resources guides: Learn more about credit card authorization forms and find out how payment processing works. These guides make it easy to understand money matters.