A Guide to Credit Card Processing Fees

Credit Card Processing Fees can be complex, and rather frustrating. However, you have to pay them if you want to process credit cards through your business. Rather than paying these charges blindly, you should try to understand them. That way, you can challenge any expenses you assume are unfair or get a better deal from your payment provider. With any luck, this overview will help you do just that.

Here is what we will cover in this article.

  • Who are the parties involved in a credit card purchase?
  • Where Do They Fit Into a Deal?
  • Types of Costs
  • Wholesale vs. Markup
  • Breakdown of All Credit Card Processing Charges
  • Pricing Models or How You Might Be Charged
  • Recap

Female design professional using mobile card reader with digital tablet

Parties Involved in a Purchase Transaction in Your Business

Prior to you can start to understand processing costs, you need to know about the parties included with them. Think about these the financial “middlemen” in between a customer and merchant. They consist of:

Credit Card Organizations:

These are certainly the business that produce the credit cards, like Visa, MasterCard, and American Express. These kinds of are the guys that set the guidelines.

Credit Card Issuing Financial institutions:

These are the financial institutions that the credit cards, like Chase, Citi, and Wells Fargo. Some card organizations take on the role of a bank as well, creating and releasing their own cards. Good examples include Discover and American Express.

Credit Card Processors:

Also referred to as Acquiring Banks also known as Acquirers, these organizations act as mediators in between merchants and credit card associations. They successfully pass batch information and authorization requests along so that merchants can finish transactions in their businesses. A merchant may run into a number of acquirers for one purchase– one that creates monthly statements, one that handles technical support, and one that issues dollars to a bank account.

Merchant Account Providers:

These are firms that handle credit card processing (e.g. sales, support, etc.), normally through the help of an acquirer. They could be financial institutions, independent sales companies, or double-duty acquirers, depending on the situation.

Payment Gateways:

These are unique websites that route purchases to an acquirer, generally in the case of an online shopping cart.
Where Do They Fit Into a Purchase?

In any kind of provided purchase, the above-mentioned parties play a role. Here’s a visuas to help you picture the circulation of a normal credit card purchase. (Note: Payment Processor and Merchant Account Providers normally fill the exact same function inside a transaction, so that’s why you just see “Payment Processor” listed below.).

payment gateway

Types of Charges.

Now that we’ve covered all the parties included, let’s talk about the various types of costs in any given credit card purchase.

Transactional Charges.

These fees are assessed every time you run a purchase. They represent the biggest cost of operating a merchant account.

Flat Costs.

In addition to transactional costs, you may be demanded some flat charges as well. They differ by name, value, and applicability, but at least some of them will show up on your regular monthly statements.

Ancillary Charges.

Flat charges are always demanded, but subordinate charges only appear per incidence. When a chargeback occurs, for instance, you are demanded a chargeback cost. Some months you will certainly not have any type of chargebacks, and, consequently, the cost will certainly not be billed. However, there’s more than just one incidental charge so keep reading to figure out what they are.

Wholesale vs. Markup

All of the above costs (transactional, fixed, irregular) fall into one of two classifications: (1) wholesale costs, and (2) margins. Just remember, margins are flexible, while wholesale charges are not.

Wholesale Costs

I’m using the word “wholesale” to help you envision the significance responsible for this type of cost, but it can go by other names as well, like, “base charge” or “pre-markup” etc. Your wholesale charges are specifically like they sound– the wholesale cost of your sales transactions. These costs are established by the credit card issuing financial institution and the credit card associations (Visa, MasterCard, etc.). They are consistent regardless of that provider you choose. In other words, don’t try to shop around for reduced wholesale charges or rates from numerous credit card processors. It’s simply not going to happen.

Markups

Your markup charges are how your credit card processor is preparing to make a profit from your company. By having the appropriate processor, these charges will be small. With the incorrect processor– you’re in trouble. What’s worse is that some processors make it as hard as feasible to know how much markup you’re paying out by using overwelming terms and pricing models that would frustrate even the most skilled business owner. Markup costs are various from processor to processor and are what you should be contrasting when preparing to open a new merchant account.

Detailed list of All Credit Card Processing Charges

Remember the various types of charges we reviewed above? This is where we break each of them down.

Transactional
Interchange Reimbursement Costs and Assessments:

These are the charges the card-issuing banks and the credit card associations bill for each purchase, and they stand for the largest expense merchants (should) pay per sale and per month. Interchange charges commonly consist of a percentage of each transaction accompanied by a flat per transaction fee (2.50% +.15). Assessments are typically based on a portion of the total transaction amount for the month. Examples of these non-negotiable interchange and assessment merchant account charges include: Merit 1/ecommerce/CNP fees, NABU/APF/data usage fees, Dues and assessments. Each card association publishes their interchange and assessment costs online (e.g. Visa, MasterCard, Discover, American Express). Remember, these are the wholesale rates. Now, let’s say you’re on an interchange-plus pricing structure. Your processor will quote you something like (.25% +.15). That is their markup. That is the quantity that they will add to the wholesale rates. But, if you’re on a tiered pricing plan, you’ll get a quote with the Qualified, Mid-Qualified, and Non-Qualified rates that we talked about earlier. Those quotes have the margin baked right into the quote, thus making it more difficult to tell what the processors margin is.
Flat Charges

Terminal Costs:
Credit Card Machine

Credit Card Machine

These are charged to businesspersons who have physical stores, where they straight swipe a customer’s card. If you operate a company on the internet, you will not have to worry about this. Some carriers try to lock merchants into terminal lease contract, but as we’ve stated before, don’t rent a terminal. Most of our favored service providers will urge you to buy your machine straight-out for a low one-time fee. This can save actually thousands of bucks in the long-run. For an example of this, check out Fattmerchant.

Payment Gateway Costs:

These are similar to terminal charges, but they are applied to ecommerce companies instead. Some processors have in-house payment gateways that are free of charge (CDGcommerce). You can learn more about payment gateway’s here.

PCI Fees:

These are costs paid to the Payment Card Industry, either for noncompliance or compliance. In the case of noncompliance, you have to pay because your business is not upholding PCI standards, which could cost you even more money in the long run. In the case of compliance, you have to pay the merchant account provider to make sure you remain in line with the regulations at all times. Unfortunately, some providers charge for this service without actually providing it, so you need to make sure you are being cared for at all times.
Annual Charges:

These are charges charged every year to cover the basic use of a provider’s services. In my opinion, this is a bogus fee. Most of the better merchant account providers will not charge it.

Early Termination Charges:

This is pretty self-explanatory. It is a charge that is charged if you cancel your contract early. Another fee you definitely want to avoid.

Monthly Charges:

These are costs that are charged each month, usually for the purpose of covering call center costs. Ironically, most of the phone calls that come in are the result of mistakes made by the merchant account providers, making them the cause of their own costs. If you’re looking for the lowest monthly fee possible (a good idea if you have a low volume) take a look at Payline Data. They have a plan for just $5 per month.

Monthly Minimum Fees:

These are costs charged to merchants who do not reach a certain transaction total for the month or year. The minimums will vary by provider, but most of them are around $50,000 a year. This is another fee that is not charged by some of the better providers like Dharma Merchant Services.

Statement Costs:

These are charges charged to cover printing and mailing costs for credit card statements. Some merchants bypass these costs by using electronic bill statements, but others pay as much as $20 a month for miscellaneous processing costs.
IRS Report Costs: These are costs that merchant account providers charge in exchange for reporting transaction information to the IRS (1099-K). Most of these charges range from $2 to $5, depending on the provider.

Online Reporting:

These are alternatives to statement charges, charged to merchants who choose to view their statements online. Most providers will not charge this kind of fee, and those that do often lump it together with others.

Network Costs:

The card networks charge certain non-negotiable costs that are passed through to the merchant, such as the FANF.
Incidental Costs

Address Verification Service (AVS):

If you have an e-commerce or telephone order business, beware of the AVS charge. It will be charged on every single transaction. For retail businesses that occasionally key-in card information, you don’t need to worry about it as much.

Voice Authorization Fee (VAF):

Rarely you may be required to call a toll-free number in order to verify certain information before a transaction is authorized. This doesn’t occur often, so don’t worry about it too much.

Retrieval Request Cost:

Every time a customer initiates a dispute on a charge from your business, it sets into motion the chargeback protocol. This retrieval request is the first step. The fee covers any expense related to the retrieval request.

Chargeback Cost:

After the retrieval request, the actual chargeback may occur depending on the circumstances. If it does, expect another charge on top of losing the money from the sale.

Batch Cost:

Every time you submit a batch of transactions, a batch fee (or batch header) is charged. It only happens once or twice a day, so don’t worry too much about an extra dime or two.

NSF Fee:

If you don’t have enough funds in your bank account to cover your merchant account expenses, you will be assessed a NSF (non-sufficient funds) cost.

Pricing Models

When it comes to selling merchant accounts, there are four prominent ways of pricing: interchange-plus, tiered pricing, subscription/membership, and blended.

Interchange Plus

The first is referred to as an interchange plus pricing model. This is the most self-explanatory pricing model with the most reasonable terms and charges. Interchange-plus itemizes wholesale fees and markups and plainly lists them on your month-to-month statement. It may make your statement a little bit more difficult to read, but it’s worth it since you’ll understand precisely what the distinction in between your wholesale costs and markups are.

Tiered

If you aren’t lucky enough to be on interchange plus pricing, chances are you’re tied up in a tiered or ‘bundled’ pricing model. In fact, the vast majority of business owners are on a tiered plan, which may make it more difficult to review and understand some statement charges.

Tiered pricing plans categorize credit card transactions into several groups– qualified, mid-qualified and non-qualified Generally, certified rates are the lowest, and the transaction rates boost for mid-qualified and are highest for non-qualified transactions. Qualified transactions need to satisfy all of the processor’s criteria for processing, such as a swipe in-person with a batch settlement the same day. Failing to meet one or more standards may result in a ‘downgrade’ to mid-qualified or non-qualified tiers.

Even though tiered pricing plans aren’t always a bad thing, some suspicious merchant account processors will take advantage of this more difficult price plan to charge merchants too much charges. You might end up paying a lot more than you want to with little way of identifying precisely what you are paying for. This is since processors frequently fail to make known which tiers the merchant’s deals are falling into, making it near difficult to establish the markup rates.

Subscription/Membership

This is a rather brand-new pricing system, but it’s catching on. It is similar to interchange-plus in that the actual expense of the purchase is billed independently from the mark up. But the distinction is that you do not pay out any portion markup, just a little purchase fee. For merchants with large purchases especially, this kind of pricing can save a lot of money without decreasing transparency. Check out Payment Depot for an excellent instance of this kind of pricing.

Blended

This is like tiered pricing, but without having the tiers. Rather all transaction cost the exact same portion and transaction cost, regardless of the wholesale cost. All costs are blended together to create one consistent rate and cost. This tends to make the transaction expense very high, particularly for debit transactions. But given that processors using blended rates (like Stripe and PayPal) typically do not charge a month-to-month cost, this pricing model often makes sense for low-volume businesses.

Recap

Each credit card and merchant account supplier has a various set of costs associated with its companies. Some of them are inescapable, but others can be bargained. Remember to pick interchange-plus, and keep in mind that most of the flat costs can be worked out. If you refine a lot of purchases, don’t be afraid to deal with your processor. With that in mind, there are several processors out there that are extremely transparent with their costs and are more than delighted to place you on interchange-plus credit card processing costs.