Expense management is an essential part of running a successful business. But while calculating costs for things like rent and inventory may be straightforward, credit card processing fees often aren’t. And if you don’t understand how much credit card processing fees will cost, you could struggle to keep your expenses within your budget.
Read this guide to learn everything you need to know about card processing fees and how much they’ll typically cost you as a business owner.
What are credit card processing fees?
Before you start to think about how to accept credit card payments, you need to partner with a company that can process them. Credit card processing companies charge fees for every credit card transaction your business accepts. There are numerous different fees you may need to pay for credit card processing, including interchange fees, payment processor fees and assessment fees.
As a business owner, you must pay interchange fees directly to the credit card company that issued the customer’s card. The amount varies based on the brand of credit card (e.g., Mastercard, Visa, Discover) and your business's industry.
The credit card company levies interchange fees to offset the costs it incurs for handling fees and fraud. If you operate a business in an industry that’s considered high-risk — like gambling or CBD — your business may face higher interchange fees.
Payment processor fees
Payment processor fees are paid to the merchant services provider that makes it possible for your business to accept credit cards. For example, PayPal, Stripe and Square collect fees for their payment processing services.
Your merchant services provider may charge a variety of processing fees, including monthly charges, per-transaction fees and equipment lease fees. Rates may also differ for online credit card processing and in-store payments.
The best payment gateways and merchant services providers vary in terms of their fees. The optimal fit for your business will depend on your goals. For example, you could choose a provider with a low fee per transaction, but it may be worth it to pay more for a payment gateway that accepts more forms of payment or international currencies to help you attract customers from a broader base.
Like interchange fees, assessment fees are paid to the credit card company. Assessment fees depend on your business’s monthly transaction volume with each credit card company. For example, if you have an online store that does $5,000 in monthly sales paid for with Visa cards, Visa will charge you a percentage of that $5,000 in assessment fees. This is in addition to any interchange fees you may incur for those transactions.
What are the average credit card processing fees?
According to industry analysts, average credit card processing fees are 1.5% to 3.5% of each transaction. However, this doesn’t include fees you pay to merchant services providers for payment gateways, equipment rentals and monthly account charges.
Be mindful that your business may or may not qualify for typical credit card processing fees. Industries that are considered higher risk tend to have higher fees to account for the increased possibility of fraud that credit card companies must assume responsibility for.
Payment processor pricing structures and how they work
As a business owner, you don’t have much control over your interchange and assessment fees. Credit card companies set those fees, which are typically the same for all businesses within similar industries. However, you can control which merchant services provider you choose, some of which offer more affordable plans than others.
In the following section, you can learn about the most common types of payment processor pricing structures and decide which one is right for you and your business.
Tiered pricing structures charge different percentages based on (1) the type of card customers use to pay for their transactions and (2) how they use them. For example, in-store EMV (Europay, Mastercard and Visa) debit card transactions are considered less risky because they don't require credit and usually require a PIN, reducing the likelihood of fraud. As a result, EMV debit transactions typically incur lower processing fees.
High-risk transactions are more likely to involve fraud. Online credit card payments, for example, are considered high-risk since anyone with your card number could submit a transaction on your behalf. Payment processing companies place these transactions in higher pricing tiers with larger fees.
Tiered pricing is one of the least transparent types of pricing because it’s not always clear what percentage of your transactions belong in each fee tier. Here’s an example of how a tiered pricing structure could look:
- Qualified transactions: These represent the least risky credit and debit card transactions and are charged at the lowest rates.
- Mid-qualified transactions: These involve a medium level of risk and are charged at medium rates.
- Non-qualified transactions: These are the riskiest credit card transactions and are subsequently charged at the highest rates.
A tiered pricing structure can work for some businesses, but its lack of transparency can make it challenging to precisely manage credit card expenses or create accurate financial projections. The more pricing tiers a processor uses, the more difficult it can be to understand your monthly bills.
Flat-rate pricing is the easiest pricing structure to understand. This uniform rate applies to any card transaction your business processes, making it easier to create accurate financial projections and precisely manage your expenses.
However, you'll rarely find the best deals with flat-rate pricing. Companies that offer flat rates often charge more for convenience, so you may end up paying a higher rate for low-risk transactions than you would with other pricing models.
It’s also worth noting that some processors with flat-rate pricing charge different flat rates for mobile and in-store credit card processing. It’s important for you to understand a processor’s policy for mobile card transactions before signing a contract with that company, especially if you frequently accept mobile payments.
With an interchange-plus pricing structure, the credit card company sets your interchange and assessment fees, and you pay an additional small markup on each transaction for the processor’s services. Often, your monthly statements will show each of these fees separately. This makes it easy to identify how large the processor’s markup is, which can help you choose the most competitive option for your business.
Keep in mind that your payment processor is not obligated to charge the interchange and assessment fees that the credit card companies set. Some processors may mark up those fees to earn more per transaction.
Some credit card payment processing companies offer membership pricing — a set monthly fee you pay to avoid per-transaction markups. For example, you might pay the payment processor a monthly fee of $9.99. Your cost per transaction would include the base interchange amount plus a small fee of around 20 cents. This option may make sense for your business if you want to avoid non-transparent fees.
Membership fees sometimes include access to point of sale (POS) systems and other equipment rentals. If your business needs POS equipment, look for providers that offer it with their membership pricing.
How to calculate credit card processing fees
As you choose a credit card processing company, compare each option's fees. Start by understanding each provider's pricing model, as described above. Once you understand a company's pricing structure and the rates they offer, use an online credit card processing fee calculator to check your rates in different scenarios.
For example, a company with flat-rate pricing may charge 3% on all transactions. Calculate your monthly fees by multiplying your card-based revenue by 0.03 (the decimal form of 3%). If you make $5,000 per month in card-based revenue, multiply $5,000 by 0.03 to arrive at an average monthly processing bill of $150.
How to offset credit card processing fees
Credit card transaction fees erode your company’s profit margins, which can be frustrating. But there are steps you can take to offset some of those costs. In this section, you’ll find some tips that your business could benefit from taking advantage of.
1. Reduce your chargeback risk
A good first step is to minimize credit card processing fees that aren’t part of your standard per-transaction costs. For example, most card processing companies charge extra fees for chargebacks, so minimizing your number of chargebacks could reduce your monthly bill.
To reduce your risk of chargebacks, you could consider only accepting more secure card payments — like debit card purchases and swiped transactions — to minimize the amount of potential fraudulent charges your company receives. These types of transactions tend to have lower fees because credit card companies view them as less risky.
Examples of relatively insecure credit card transactions include online payments and transactions requiring you to input customers' credit card information manually rather than having them swipe, tap or insert their cards. Minimizing less secure transactions will help keep your average per transaction fee as low as possible.
Additionally, cutting down on chargebacks that aren’t a result of fraud but due to customers changing their minds about purchases will help. Reduce your risk of these types of chargebacks by crafting a clear refund policy, providing accurate product descriptions and offering strong customer support.
2. Choose an affordable credit card processor
Your choice of credit card processor may be the most significant factor in determining your average monthly expense for credit card fees. However, the cheapest credit card processing option may not always offer your desired pricing structure or the features your business needs. As you evaluate the best credit card processing companies, consider affordability and features like customer service and transparency.
Remember, your per-transaction fees are just one piece of the pie. Companies with affordable rates may hide fees or use other strategies to offset the lower rates they offer. For example, a company might use a tiered pricing strategy without defining the types of transactions that belong to each tier. If you sign up for one of these plans, a higher percentage of your transactions than expected could land in the most expensive tier.
Some companies also mark up the interchange and assessment fees that credit card companies charge without informing you. A processing company could, for instance, charge 25 cents in interchange fees per transaction, even if the credit card company has only requested 20 cents. This is why looking beyond per-transaction or monthly costs is important when evaluating affordability.
3. Set a minimum for card purchases
Credit card processing companies charge fees on a per-transaction basis. If a customer’s total bill is not at least equal to the sum of all your processing fees, you will actually lose money on that purchase. To avoid this, many small business owners set minimum purchase amounts for credit card payments. For example, you could post a sign at your register stating that you only accept credit or debit cards if a customer's transaction total is at least $5.
That being said, you don’t want to make it difficult for people to shop at your business. Instead, you can choose to pass the merchant credit card processing fees onto the customer unless their purchase total reaches your minimum threshold. This strategy ensures that everyone who wants to use a card is able to do so, but customers may face an additional expense if their total isn’t large enough to offset the fees you incur as the merchant.
4. Adjust the prices of your products or services
Another way to minimize credit card processing costs is to increase your prices. Even a small price hike could be enough to completely offset your credit card processing fees. Compare the benefits of increasing your costs with the shift in consumer demand that may result from higher prices. The price increases needed to offset your card processing fees are often small enough to warrant little consumer reaction.
Summary of Money's how much are credit card processing fees
Understanding how credit card processing fees work can help you anticipate your business costs and run a more successful company. By choosing the right pricing structure and rates for your needs, you can save money, gain more insight into your business expenses and create more accurate financial projections. Fees are one of the main factors to consider when looking for a credit card processing service. Using this guide as a resource throughout your decision-making process will help you make the best choice when picking a credit card processing company.