Understanding Credit Card Processing Fees for Merchants: The Math Behind Payment Processing

Accepting credit card transactions is no longer a decision of whether to but rather how to. With cashless now BEING king, credit and debit cards are the primary method for your customers to make payments.

Pre-pandemic, 62.3% of consumer payments came through card payments. And electronic payments were at 14.2%, closing in on cash at 15.5%. While the figures aren’t from the COVID-affected spending period, it’s fair to assume that cash is down while cards and electronic payments are way up. Credit card and debit card payment processing fees apply to them all.

With the number of debit and credit card purchases increasing, it’s important you’re able to calculate credit card processing fees. To help you do that, we’ve put together the ultimate guide.

Who Sets the Credit Card Processing Fees?

Contrary to popular belief, it’s not just the credit card companies setting the credit card processing fees. There are three parties that influence what makes up the average credit card processing fees you pay every month:

  • Credit Card Networks – Companies, such as Visa, Mastercard, American Express, and others, that partner with the banks
  • Banks – Financial institutions that issue the above cards to consumers, such as Capital One, Chase, Bank of America, and others
  • Payment Processors – Companies responsible for securing the payments and processing the credit card transaction.

To make fee predictability extra tricky, each of these parties determines their own credit card processing fees independently. Understanding how they each function helps to figure out the math behind the final fee.

How Merchant Fees Are Made Up

The unavoidable basics of credit card processing fees are interchange rates and assessment fees.

Interchange Fees

Although interchange fees go toward paying the issuing banks, the major credit card networks — Visa, Mastercard, and the likes — control the interchange rates. This is the largest chunk of the merchant fees that need to be paid for payment processing, amounting to between 70% and 90% of the average credit card processing fees.

Typically, Visa and Mastercard would adjust these fees twice each year. However, 2020 and 2021 have been exempt from these changes, which are paused until April 2022, giving merchants some respite from the financial stress of the pandemic.

While the pause on adjustments is welcome, interchange fees are still tricky to calculate.

These fees are charged whenever a credit card or debit card transaction is made, whether they checkout in-person, online or through digital payment. The basis for these fees is the credit risk that these financial institutions take on when handling credit card transactions.

As risk-based fees, these institutions have calculated different rates for different classifications of transactions. Visa, for example, currently has more than 150 different classifications. Each network has its own. Amex and Visa, as a result, will have different interchange fees.

Considered in the fees are the types of credit card, processing type, and type of business — e.g., the merchant category code (MCC).

The credit card type reflects whether the payment is made with a credit or debit card. Then, there are also different rates for business credit cards and cards tied to rewards programs.

The processing type factors in whether it’s a card-present transaction (taken at a point of sale system) or a card-not-present transaction. Card present transactions tend to be the cheapest option as they are the lowest risk. Payments made via e-commerce platforms and through mobile devices can also have different rates.

Finally, the merchant category code (MCC) is a four-digit number that credit card companies use to classify consumers’ transactions. This looks at the use of particular cards as well as the category of your business. Restaurants, for example, will be charged differently to hotels, which will then be charged differently to utility companies.

Assessment fees

Assessment fees are paid to card networks, i.e., Mastercard, Visa, and Discover. They are determined and adjusted by the credit card networks — not the payment processors — and they cover the operating costs of credit card networks. These are also known as pass-through fees.

These fees are determined by a range of factors:

  • The type of card used by the cardholder
  • The transaction amount
  • Incidental fees (such as processing foreign transactions).

Each network sets and charges its own assessment fees. As of January 2021, according to Wells Fargo, those fees are as follows:

Network Assessment Fee Description

Network Assessment Fee Assessment Fee Description
Visa 0.14% Applies to credit card transactions
Visa 0.13% Applies to debit and prepaid card transactions
Mastercard 0.1375% Applies to all Mastercard sale transactions
Discover 0.13% Applies to all Discover sale transactions
American Express 0.16% Applies to all Amex sale transactions

Additional Network and Card Issuer Fees

In some cases, you may have to pay the fees below, which come from the card brands (Amex, Discover, Mastercard, and Visa):

  • Fixed Acquirer Network Fees (FANF): Charged based on whether the transaction is card-present or card not present, number of locations, and sales volume.
  • Kilobyte Access Fee (KB): Charged for each authorization transaction that is submitted to the card network for settlement.
  • Network Access and Brand Usage Fee (NABU): Charged by MasterCard on all settled or refunded credit/debit card transactions.
  • Acquirer Processing Fee (APF): Charged by Visa on all US-based businesses Visa credit card authorizations.
  • Credit card processing company fees

Your merchant account provider is the organization you’ll deal with most. While interchange and assessment fees are unavoidable, the power to impact your fees the most comes with which payment processor you choose to work with.

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Payment Processor Pricing Models

Payment processors work under four different pricing models:

1. Flat-rate pricing

Flat-rate pricing blends all of the fees into one, easy to predict flat-rate fee. This is a great relief for many merchants that want to avoid the surprises that can come with other pricing models. However, flat fee structures factor in a buffer to ensure that the merchant services provider covers the fees they have to pay to the issuing banks and credit card networks. This can work out a little more costly than other options.

Square and PayPal are two that have popularized this model.

The benefit of flat-rate pricing is its predictability. No matter the transaction type – credit card, debit card, reward card – the fees are the same. These are typically charged with a percentage as well as a per-transaction rate — e.g., 3% + $0.10.

2. Interchange plus pricing

Interchange plus pricing is a pricing model that charges based on whatever the interchange rates are at that particular moment, “plus” a markup fee that pays your processors processing costs — e.g., 2.1% + $0.10 per transaction.

The benefit of the interchange-plus pricing model is transparency. When your transactions are in lower interchange fee categories, you get to benefit from those lower rates. The same is true for higher interchange rates, also. So it’s important to be mindful of whether your transactions are mostly in high or low categories.

The challenge with interchange plus can be the math behind it. Forecasting can be tricky when you have to predict the interchange rate, plus the transaction fee. These can add up.

Helcim and Stripe are the more popular payment processors offering interchange plus pricing models.

3. Tiered pricing

Tiered pricing is structured into three tiers, qualified, mid-qualified, and non-qualified. Essentially passing on the risk costs from the credit card networks, the tiered model offers the lowest rates for qualified transactions and the highest for non-qualified transactions.

Qualified rates typically apply for debit cards and non-reward credit card transactions, while the transactions that attract higher rates are the “fancier” cards, such as business cards and rewards cards. Standard credit cards can fall in the mid-qualified range.

Additional factors that can impact tiered pricing are: 

  • Card-present or swiped cards (qualified)
  • Keyed-in transactions (mid or non-qualified)
  • Card-not-present transactions (non-qualified).

With tiered pricing, merchants typically pay 1.5% to 2.9% for card-present transactions, while keyed-in transactions attract a rate of around 3.5%. Card-not-present transactions also attract higher fees.

4. Membership-based pricing

Unlike all of the other models, membership pricing does not take a cut out of your sales. E.g., that $0.10 fee for every transaction. Membership pricing instead is a subscription model where you pay a monthly fee and then whatever the interchange rates are at the time of transaction.

The membership model has one of the most transparent credit card processor account fees. The predictability of your bank account fees makes membership/subscription pricing models ideal for small businesses looking to set up credit card processing.

Membership-based processors, such as Stax make their money through the annual or monthly fees, rather than taking a cut of your sales.

Average Credit Card Processing Fees

Based on 2021 data from Visa, Mastercard and Discover, and American Express, the average credit card processing fees are currently:

Payment network average credit card processing fees

  • Visa:  1.29% + $0.05 to 2.54% + $0.10
  • Mastercard:  1.29% + $0.05 to 2.64% + $0.10
  • Discover:  1.48% + $0.05 to 2.53% + $0.10
  • American Express:  1.58% + $0.10 to 3.45% + $0.10

Finding the Right Credit Card Processing Company

With so much to consider and myriad different fee structures to navigate, the best way to find the right provider for your small business is to shop around. Put merchant account providers through tough scrutiny and see which is going to cover all of your needs without any hidden fees.

The best providers are those that can grow with you. If you expect to expand, ensure that you research which provider suits your business at its level now as well as when your transaction volume increases. Stax can ensure that while you grow, your credit card processing fees don’t.

Request a custom quote to see how the Stax can reduce your credit card processing fees.

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