Understanding Payment Processing Fees: A Simple Guide

Let’s talk money, specifically, the money that just disappears every time a customer swipes their card. If you own a business, you’ve probably noticed that credit card processing fees can quietly eat into your hard-earned profits. 

You have to accept cards because, well, who carries cash anymore? But knowing what exactly it is you’re paying for isn’t always easy. Your monthly statement looks like hieroglyphics, and you can never seem to find the hidden fees lurking in the fine print.

It’s not that anyone’s out to trick you - but, let’s be honest, the system isn’t exactly built for clarity either. That's why we're here to help you get the best deal possible. We’ll do this by giving you absolutely everything you need to know about what credit card processing fees really mean and how you can avoid getting stuck with extra costs.

What Are Credit Card Processing Fees?

Credit card processing fees are the charges you pay every time a customer swipes or taps their card to buy something from your business. Whether it’s a credit or debit card, you’re going to pay fees to process those payments. It's just how the system works.

Definition and purpose

Credit card processing fees are what you pay to a payment processing company to handle the transaction between you, your customer, and the major credit card networks like Visa, Mastercard, Discover, or American Express. These are called credit card transaction cost and these fees cover the cost of handling the money transfer, verifying it, and making sure everything goes smoothly. Every time someone uses a card, there’s a fee attached, regardless of whether it's an online payment processing transaction or an in-person transaction.

Why businesses should understand these fees

So why does it matter? Because credit card processing rates and fees can take a big chunk out of your profits. If you’re not paying attention to things like credit card processor fees or transaction fees credit card, you could be overpaying without even knowing it. Many small businesses get caught off guard by hidden fees in their statements. Understanding exactly what you're paying for, and how it’s structured, lets you make informed decisions when it comes to processing payments.

TIP: Read a little more about how payment processing works in our guide!

The role of payment processors and card networks

The payment processor is the middleman. They’re the ones who make sure that when a customer pays, the money gets from their credit or debit card to your account. But it doesn’t stop there, the major credit card networks also play a role in making sure transactions go smoothly. For card-not-present transactions (like online payments, for example), there’s even more admin involved, and that’s why the fees tend to be higher.

Types of credit card processing fees

There are different types of charges for credit card transactions you should be aware of, including:

Interchange fees

These are the biggest chunk of the credit card processing fee, and they go straight to the issuing bank (that’s the bank that issued the credit card your customer used). Think Chase, Citi, and Bank of America. They're the ones making the big bucks off of this.

Assessment fees

These go to the card networks. Fees help cover the cost of keeping the whole system running. And fun fact: the networks actually set these fees themselves. 

Processor fees

This one goes to the company you’re using to process all those card payments for your business. Think Epos Now Payments or any other payment processing provider. You know, the ones with the cool apps and tools. Depending on who you’re working with, you might even be able to haggle these fees down. It’s worth asking, you never know until you try!

Common pricing models

The average credit card processing fee varies. Credit card processing fees for small business usually fall into any of the below categories:

Flat rate pricing

Under this pricing structure, you're paying a small percentage of the total transaction as well as a flat fee. For example, you may get a rate of 2.5% plus 12 cents for in-person transactions.

Interchange-plus pricing

Interchange-plus pricing tends to be the least expensive choice for high-volume businesses (this just means companies that process a lot of transactions). However,  it has the most variability, and this means that your fees can change a lot. 

The interchange rate depends on things like the card network (for example, American Express tends to be the most expensive which is why many businesses don't accept credit card payments from them), the type of card being used (like rewards cards usually cost more than regular cards), and the transaction type (online transactions tend to cost more than in-person transactions).

With interchange-plus pricing, you pay two parts. First, you pay the interchange rate set by the card network. Then, you’ve got a defined markup or transaction fee that goes to your payment processor.

Tiered pricing

This one’s based on three levels which we call 'tiers':

1. Qualified - Debit cards and cards without rewards programs.

2. Mid-qualified – Cards with some rewards programs.

3. Non-qualified – Think corporate cards or those with big rewards programs

The average credit card transaction fee varies, and rates are lowest for qualified cards and highest for non-qualified cards.

Pros and cons of each model

Now let’s break down the pros and cons of each pricing model so you can figure out which one works best for you:

Flat-rate pricing

Pros:

• You know exactly what you’re paying. No surprises.

• Your fees stay the same no matter what type of card is used (no guessing games.)

• You don’t have to be a payment processing expert to get it.

Cons:

• If you get a lot of rewards cards or corporate cards, you might end up paying more than you would with other pricing models.

• You don’t have much control over the rates.

Interchange-plus pricing

Pros:

• You can see exactly what you’re paying for with the interchange rate and markup.

• If you're processing a lot of in-person transactions or debit card transactions, this might save you money.

Cons:

• Depending on the card used, the fees can change, and they’re not always easy to predict.

• It’s not as simple to understand as flat-rate pricing, so it takes a little more effort to keep track of.

Tiered pricing

Pros:

• If you get a lot of debit card payments or basic credit cards, you might pay less.

• It can be a cheaper option if you’re accepting a mix of cards.

Cons:

• If you accept a lot of premium cards with big rewards programs, expect to pay more.

• You’ll have to deal with different rates depending on the type of card, and that can make it harder to plan.

Factors that affect processing fees

There are quite a few factors that can change your processing fees. Spoiler alert: it’s not just about the numbers, they change depending on a few key things:

Card type: credit, debit, and rewards

Payment methods really affect your fees. If you’re swiping a debit card, your fees are typically lower. But when it’s a credit card, especially a rewards card, the fees can jump up (those points and perks come at a cost, right?) Rewards cards tend to have higher processing fees because the banks want to make back the money they give out in rewards.

Card-present vs. card-bot-present transactions

If your customer swipes or inserts a card in person, it’s a card-present transaction. These are usually cheaper to process. Card-not-present transactions (like when someone buys something online) are riskier for fraud, so the fees tend to be higher.

Merchant Category Code (MCC)

Your MCC is basically the label that tells the payment processor what kind of business you run. It can affect your rates because different industries have different risk profiles. For example, if you’re in a higher-risk industry (like online gambling or CBD), your credit card merchant fees might be higher to cover the potential for chargebacks and fraud.

Business type and risk profile

Speaking of risk, business type and risk profile matter too. If your business has a lot of chargeback fees (which just means when customers dispute charges), or if you deal with high-value transactions, you might see higher fees. Payment processors like to cover themselves, so they charge higher rates for riskier business types.

Number of transactions carried out

Volume also matters here. If your business is running a high number of transactions each month, you might be able to negotiate better rates with your provider.

Hidden & additional fees to watch out for

Hidden fees are the sneaky costs that love to catch you unexpectedly. These are the fees that really add up if you’re not careful.

Monthly fees

You pay monthly fees just for having an account with your payment processor. Always ask about them upfront so that you're not deadline with a surprise bill. These fees vary a lot depending on the payment processor but can range from $10 to $50 per month for account maintenance

Chargeback fees

These fees occur when a customer disputes a transaction, and the acquiring bank decides in their favor. Chargebacks are expensive. On average you can expect to pay around $20 in chargeback fees, but it could even be as much as $100 per incident.

Monthly minimum fees

Some processors charge a minimum fee every month, even if you don’t hit a certain amount in transactions. So, if your sales dip below that minimum, you’re still paying that fee. Payment processors may charge monthly minimum fees ranging from $25 to $50 if transaction volumes fall below a set threshold.

PCI compliance fees

If you're handling card payments, you've probably heard about PCI compliance. These fees cover the cost of making sure your business is following the Payment Card Industry Data Security Standards. If you're not PCI compliant, you could face a fine which varies from $5,000 to $100,000 per month until you're compliant.

Fixed acquirer network fees

And finally, there are Fixed Acquirer Network Fees. These are fees charged by the acquiring bank that processes payments for you. They’re usually small but can add up over time.

How to identify and avoid hidden fees

So, how do you spot these hidden transaction fees on credit cards?

• Read your contracts carefully. (We know, it’s not the most fun thing to do, but it’s worth it.)

• Ask your payment processor to break down everything you're being charged for, and don’t be afraid to negotiate. You’d be surprised how much wiggle room there is sometimes.

• Keep track of your monthly statements and watch for any charges that don’t make sense. Remember, if something feels off, it probably is. Trust your gut.

How to lower your credit card processing costs

If you’re like most business owners, you’re probably not thrilled with what you’re paying to accept credit card payments. But the good news is, you can do something about it. Here’s how to start saving money on payment processing costs:

Compare multiple payment processors

Shop around. Don’t just settle with the first processor you find. Compare payment processor fees, services, and terms across multiple providers. Some, such as Epos Now Payments, might offer better credit processing rates, better service, or more flexibility.

Negotiate rates and terms

Payment processors want your business. So, if you’ve been with one for a while or have a strong track record, ask for lower rates or better terms. They might be willing to budge, especially if you’re ready to switch.

Optimize your MCC classification

Your MCC can affect your fees, so make sure it’s classified correctly. If your business is incorrectly classified, you might be paying higher fees than you need to. Get it checked, and if it’s wrong, ask your processor to fix it. It’s a small detail, but it could save you a lot of money.

Promote debit card usage

Debit card transactions typically have lower fees than credit cards, so if you can nudge your customers in that direction, you’ll save some cash. You could offer a small discount for customers who pay with debit.

Use secure and updated terminals

If you’re still rocking old-school equipment, it could be costing you more in processing fees and liability. Chip card machines and contactless payments are safer and faster, and they reduce fraud risk compared to swiping. 

TIP: Learn more about secure payment processing today. We’ve written a fab guide just on this!

Pass credit card fees to consumers

You can also pass on those fees to your customers, but there’s a catch. You’ve got to do it right. Consider a cash discount program where customers get a small discount if they pay with cash instead of a card. Or you can add a credit card surcharge, which is an additional fee for card payments. But, watch out, because there are rules and regulations for these programs (for example, this practice is not allowed in places like Connecticut, Massachusetts, and Puerto Rico).

Comparing major credit card networks

Here is a comparison of the most popular credit card networks based on fees based on data provided by Direct Paynet:

Visa

• Transaction fees: Range from 1.15% + $0.05 to 2.40% + $0.10 per transaction.

• Assessment fees: $0.0195 per transaction + 0.14% (Visa) of volume.

Mastercard

• Transaction fees: Range from 1.15% + $0.05 to 2.40% + $0.10 per transaction.

• Assessment fees: 0.1275% (Mastercard) of volume.

Discover

• Transaction fees: Similar to Visa and Mastercard, ranging from 1.40% + $0.05 to 2.40% + $0.10.

• Assessment fee: $0.0195 per transaction + 0.13% of volume.

American Express

• Higher fees: Ranges from 1.43% + $0.10 to 3.30% + $0.10 per transaction.

• Assessment fee: 0.15% of total volume, reflecting its premium pricing model.

Choosing the right payment processor

Choosing the right payment processor can feel like choosing a partner, pick the wrong one, and things could get messy. Let’s talk about how you can make sure you pick a processor who’ll treat you right.

Features to look for

Does the processor offer the right payment methods you need? We're talking in-person payments, online transactions, and even mobile payments, make sure they support it all. Does it come with cool features like inventory management or fraud protection? These things can save you time and stress down the line.

You’ll also want to check if the processor offers multi-currency support (particularly if you’re dealing with international customers) and if it’s scalable. As your business grows, you want a processor that can grow with you, not leave you stranded.

Pricing transparency and support

The processor should lay all your costs out clearly, so you’re not second-guessing your monthly bills. If they give you the runaround or avoid answering your questions, run.

Customer support is just as important. The best processor won’t just take your money and disappear. You’ll need a provider that’s easy to reach when things go wrong. Make sure they offer 24/7 support or at least have a support team that’s responsive when you need them.

Evaluating long-term costs

Finally, when looking at pricing, don’t just focus on the initial costs. Think about the long-term. Are there hidden fees down the road, like termination fees or monthly maintenance fees? What about chargeback fees? How do they handle those? Some processors might look cheap upfront, but if they hit you with extra costs as you grow, and it could hurt you in the long run.

Passing credit card fees to customers

Before you start charging up the wazoo to offset your fees, let’s talk about the legal stuff you need to know.

Legal considerations and compliance

You’ve got to follow the rules. Many states and card networks have specific laws and regulations around credit card surcharges. For example, some states don’t allow it at all (looking at you, Connecticut and Massachusetts). Others allow it but with strict guidelines on how much you can charge and how you disclose it. The last thing you want is a surprise legal battle because you didn’t read the fine print.

Surcharge rules by state and network

Different card networks have their own surcharge rules. They don’t all agree on how much you can charge, and they definitely don’t agree on how to communicate it to your customers. Each has a set of terms and conditions that you need to follow, so it’s a good idea to get familiar with those.

Best practices for implementing surcharges

Once you've done your homework and you’re ready to add that surcharge, here’s how to do it right:

1. Make sure your customers know about the surcharge before they checkout. Add a clear notice on your website or on your physical checkout screen.

2. Don’t go overboard with the surcharge. Stick to the legal limits and keep it fair.

3. If possible, encourage alternative payment methods like cash or debit cards.

4. Whether it's on your receipts or on your website, make sure your surcharge terms are super clear.

5. If you’re running a promo or special event, consider waiving the surcharge. Sometimes, offering a no-fee deal can make a big impact and keep your customers coming back for more.

Simplifying payments with Epos Now

That's it from us. We've officially covered everything and anything you need to know about credit card processing fees, from the types and models to how to reduce them.

At Epos Now, we’ve made payment processing simple, transparent, and efficient. No more worrying about hidden fees or confusing pricing structures. With Epos Now Payments, you can take payments at one fixed rate, anytime, anywhere, without any surprises. 

• We integrate with your retail or hospitality point of sale system.

• Let your customers choose their preferred payment method.

• With Standalone Mode and Offline Mode, you’ll never miss a sale again, even in areas with no connection. With 99.9% uptime and a 4G backup, your payments are always secure.

• Track every transaction, gain insights into cash flow, and optimize your business with real-time reports.

Get in touch with our sales team today to learn more about our payment processing solutions and how we can help you save on payments and keep your business running smoothly.