How to Save Money on Merchant Credit Card Processing Fees

If you run a business that accepts credit cards, you know how important it is to offer this convenient payment option to your customers. However, you also know how expensive it can be to process credit card transactions. Merchant credit card processing fees can eat into your profits and make it hard to grow your business.

But what are merchant credit card processing fees, and how can you save money on them? In this article, we will explain what these fees are, how they vary by card brand and pricing model, and how to lower them for your business. By the end of this article, you will have a better understanding of how to optimize your credit card processing costs and increase your bottom line.

What Are Merchant Credit Card Processing Fees?

Merchant credit card processing fees are the fees that a business pays every time it accepts a credit card payment. These fees are composed of three main components: interchange fees, assessment fees, and payment processor fees.

Interchange Fees

The interchange fee is a fee paid directly to the card issuer (the bank that issued the credit card to the customer) for the swiped transaction. This fee covers the cost of transferring funds from the card issuer to the merchant’s bank account, as well as the risk of fraud and chargebacks. The interchange fee varies depending on the type of card, the amount of the transaction, and the industry the merchant is in. For example, credit cards with rewards or perks tend to have higher interchange fees than debit cards or basic credit cards. Similarly, online transactions tend to have higher interchange fees than in-person transactions, because they are more prone to fraud.

The interchange fee is usually expressed as a percentage of the transaction amount plus a fixed fee. For example, a typical interchange fee for a Visa credit card might be 1.81% + $0.10. This means that for a $100 transaction, the merchant would pay $1.91 in interchange fees. The interchange fee is the largest component of the merchant credit card processing fee, and it is non-negotiable. The card issuers set the interchange fees and update them twice a year, in April and October. You can find the current interchange fees for Visa, Mastercard, American Express, and Discover on their respective websites.

Assessment Fees

The assessment fee is a fee paid directly to the card network (the company that operates the payment system, such as Visa, Mastercard, American Express, or Discover) for the use of their network. This fee covers the cost of maintaining and improving the network, as well as marketing and promotion. The assessment fee is based on the monthly sales volume, not the per-transaction amount. For example, Visa charges an assessment fee of 0.14% of the monthly sales volume for transactions under $1,000, and 0.13% for transactions over $1,000. This means that if a merchant processed $10,000 in Visa transactions in a month, they would pay $14 in assessment fees. The assessment fee is also non-negotiable, and it is set by the card networks. You can find the current assessment fees for Visa, Mastercard, American Express, and Discover on their respective websites.

Payment Processor Fees

The payment processor fee is a fee paid to the payment processor (the company that provides the service of processing credit card transactions for the merchant) for their service. This fee covers the cost of setting up and maintaining the merchant account, providing customer service, and offering additional features and benefits. The payment processor fee varies depending on the payment processor and the pricing model they use. Unlike the interchange fee and the assessment fee, the payment processor fee is negotiable, and it is the only component of the merchant credit card processing fee that the merchant can control.

How Merchant Credit Card Processing Fees Vary by Card Brand

As we mentioned above, the interchange fee and the assessment fee vary by card brand, depending on the type of card and the transaction. Here are some examples of how the fees differ for the four major card brands: Visa, Mastercard, American Express, and Discover.

Visa

Visa is the largest and most widely accepted card network in the world, with over 3.5 billion cards in circulation and over 61 million merchant locations. Visa offers a variety of cards, including debit cards, credit cards, prepaid cards, and business cards. Visa also offers different programs and benefits, such as Visa Signature, Visa Infinite, Visa Checkout, and Visa SavingsEdge.

Visa’s interchange fees vary depending on the type of card, the type of transaction, and the industry the merchant is in. For example, the interchange fee for a Visa debit card is usually lower than the interchange fee for a Visa credit card, because debit cards have lower risk and lower rewards. Similarly, the interchange fee for a Visa card-present transaction (where the card is physically swiped, dipped, or tapped at the point of sale) is usually lower than the interchange fee for a Visa card-not-present transaction (where the card information is entered online, over the phone, or by mail), because card-present transactions have lower fraud risk. Additionally, the interchange fee for a Visa transaction in a regulated industry (such as gas stations, supermarkets, or pharmacies) is lower than the interchange fee for a Visa transaction in a non-regulated industry (such as restaurants, hotels, or e-commerce), because regulated industries have lower profit margins and lower interchange caps.

Visa’s assessment fees are based on the monthly sales volume, and they are the same for all types of transactions. Visa charges an assessment fee of 0.14% of the monthly sales volume for transactions under $1,000, and 0.13% for transactions over $1,000. Visa also charges a fixed fee of $0.0195 per transaction, regardless of the amount.

Mastercard

Mastercard is the second-largest card network in the world, with over 2.8 billion cards in circulation and over 50 million merchant locations. Mastercard offers a variety of cards, including debit cards, credit cards, prepaid cards, and business cards. Mastercard also offers different programs and benefits, such as Mastercard World, Mastercard World Elite, Masterpass, and Mastercard Easy Savings.

Mastercard’s interchange fees vary depending on the type of card, the type of transaction, and the industry the merchant is in. For example, the interchange fee for a Mastercard debit card is usually lower than the interchange fee for a Mastercard credit card, because debit cards have lower risk and lower rewards. Similarly, the interchange fee for a Mastercard card-present transaction is usually lower than the interchange fee for a Mastercard card-not-present transaction, because card-present transactions have lower fraud risk. Additionally, the interchange fee for a Mastercard transaction in a regulated industry is lower than the interchange fee for a Mastercard transaction in a non-regulated industry, because regulated industries have lower profit margins and lower interchange caps.

Mastercard’s assessment fees are based on the monthly sales volume, and they are the same for all types of transactions. Mastercard charges an assessment fee of 0.13% of the monthly sales volume for transactions under $1,000, and 0.12% for transactions over $1,000. Mastercard also charges a fixed fee of $0.0195 per transaction, regardless of the amount.

American Express

American Express is the third-largest card network in the world, with over 1.1 billion cards in circulation and over 30 million merchant locations. American Express offers a variety of cards, including charge cards, credit cards, prepaid cards, and business cards. American Express also offers different programs and benefits, such as American Express Platinum, American Express Gold, American Express Rewards, and American Express Offers.

American Express operates differently from Visa and Mastercard, because it acts as both the card issuer and the card network. This means that American Express sets its own fees and does not use interchange fees or assessment fees. Instead, American Express charges a single fee called the discount rate, which is a percentage of the transaction amount. The discount rate varies depending on the type of card, the type of transaction, and the industry the merchant is in. For example, the discount rate for an American Express charge card is usually higher than the discount rate for an American Express credit card, because charge cards have higher rewards and higher spending limits. Similarly, the discount rate for an American Express card-present transaction is usually lower than the discount rate for an American Express card-not-present transaction, because card-present transactions have lower fraud risk. Additionally, the discount rate for an American Express transaction in a regulated industry is lower than the discount rate for an American Express transaction in a non-regulated industry, because regulated industries have lower profit margins and lower interchange caps.

American Express’s discount rates range from 2.5% to 3.5% of the transaction amount, depending on the factors mentioned above. American Express does not charge any fixed fees per transaction, unlike Visa and Mastercard.

Discover

Discover is the fourth-largest card network in the world, with over 100 million cards in circulation and over 10 million merchant locations. Discover offers a variety of cards, including debit cards, credit cards, prepaid cards, and business cards. Discover also offers different programs and benefits, such as Discover Cashback, Discover Miles, Discover Deals, and Discover Secure.

Discover operates similarly to American Express because it acts as both the card issuer and the card network. This means that Discover sets its fees and does not use interchange fees or assessment fees. Instead, Discover charges a single fee called the merchant service charge, which is a percentage of the transaction amount. The merchant service charge varies depending on the type of card, the type of transaction, and the industry the merchant is in. For example, the merchant service charge for a Discover debit card is usually lower than the merchant service charge for a Discover credit card, because debit cards have lower risk and lower rewards. Similarly, the merchant service charge for a Discover card-present transaction is usually lower than the merchant service charge for a Discover card-not-present transaction, because card-present transactions have lower fraud risk. Additionally, the merchant service charge for a Discover transaction in a regulated industry is lower than the merchant service charge for a Discover transaction in a non-regulated industry, because regulated industries have lower profit margins and lower interchange caps.

Discover’s merchant service charges range from 1.56% to 2.3% of the transaction amount, depending on the factors mentioned above. Discover also charges a fixed fee of $0.10 per transaction, regardless of the amount.

How Merchant Credit Card Processing Fees Vary by Pricing Model

As we mentioned above, the payment processor fee varies depending on the payment processor and the pricing model they use. There are four main pricing models that payment processors use to charge merchants for their service: flat-rate pricing, interchange-plus pricing, tiered pricing, and subscription pricing. Here are the pros and cons of each pricing model:

Flat-Rate Pricing

Flat-rate pricing is the simplest and most transparent pricing model, where the payment processor charges a fixed percentage of the transaction amount, regardless of the card type, transaction type, or industry. For example, a payment processor might charge 2.9% + $0.30 per transaction, no matter what. This means that the merchant pays the same fee for every transaction, and they don’t have to worry about the interchange fee, the assessment fee, or the payment processor fee. The payment processor covers all these costs and makes a profit from the difference.

The advantage of flat-rate pricing is that it is easy to understand and predictable. The merchant knows exactly how much they will pay for each transaction, and they don’t have to deal with any hidden fees or complicated statements. The disadvantage of flat-rate pricing is that it can be expensive, especially for merchants who process large transactions, low-risk transactions, or transactions with low interchange fees. The merchant might end up paying more than they need to, and they don’t have any room to negotiate or lower their fees.

Flat-rate pricing is best suited for merchants who process small transactions, high-risk transactions, or transactions with high interchange fees. It is also best suited for merchants who have low or irregular sales volume, or who value simplicity and convenience over cost savings. Some examples of payment processors that use flat-rate pricing are PayPal, Stripe, and Square.

Interchange-Plus Pricing

Interchange-plus pricing is the most transparent and fair pricing model, where the payment processor charges the interchange fee plus a fixed markup. For example, a payment processor might charge the interchange fee + 0.25% + $0.10 per transaction. This means that the merchant pays the exact interchange fee that the card issuer charges, plus a small fee to the payment processor for their service. The payment processor does not cover the assessment fee, which is passed through to the merchant as a separate charge.

The advantage of interchange-plus pricing is that it is the most cost-effective and flexible pricing model. The merchant pays the lowest possible fee for each transaction, and they can benefit from the variations in the interchange fees. The merchant can also negotiate the markup with the payment processor and lower their fees even more. The disadvantage of interchange-plus pricing is that it can be complex and unpredictable. The merchant has to deal with different fees for different transactions, and they have to understand the interchange fees and the assessment fees. The payment processor statements can be confusing and hard to read.

Interchange-plus pricing is best suited for merchants who process large transactions, low-risk transactions, or transactions with low interchange fees. It is also best suited for merchants who have high or consistent sales volume, or who value cost savings over simplicity and convenience. Some examples of payment processors that use interchange-plus pricing are Dharma Merchant Services, Helcim, and Payment Depot.

Tiered Pricing

Tiered pricing is the most common and most opaque pricing model, where the payment processor charges different fees for different types of transactions, based on their criteria. For example, a payment processor might charge 1.59% + $0.10 for qualified transactions, 2.19% + $0.10 for mid-qualified transactions, and 2.99% + $0.10 for non-qualified transactions. The payment processor decides which transactions fall into which category, based on factors such as card type, transaction type, industry, and other variables. The payment processor covers the interchange fee and the assessment fee, and makes a profit from the difference.

The advantage of tiered pricing is that it can be appealing and competitive, especially for qualified transactions. The merchant might think that they are getting a good deal, and they don’t have to worry about the interchange fee or the assessment fee. The disadvantage of tiered pricing is that it can be misleading and expensive, especially for mid-qualified and non-qualified transactions. The merchant might end up paying more than they need to, and they don’t have any transparency or control over their fees. The payment processor can also change the criteria and the rates at any time, without notifying the merchant.

Tiered pricing is best suited for merchants who process mostly qualified transactions, or who don’t care about the

Subscription Pricing

Subscription pricing is the newest and most innovative pricing model, where the payment processor charges a fixed monthly fee for unlimited transactions, regardless of the card type, transaction type, or industry. For example, a payment processor might charge $99 per month for up to $20,000 in monthly sales volume, and $0.05 per transaction for any additional sales. This means that the merchant pays the same fee every month, and they only pay a small fee for each transaction. The payment processor passes through the interchange fee and the assessment fee to the merchant as separate charges.

The advantage of subscription pricing is that it can be very cost-effective and predictable, especially for merchants who process large transactions, low-risk transactions, or transactions with low interchange fees. The merchant pays the lowest possible fee for each transaction, and they can benefit from the variations in the interchange fees. The merchant can also budget their fees more easily, and they don’t have to worry about any hidden fees or complicated statements. The disadvantage of subscription pricing is that it can be expensive, especially for merchants who process small transactions, high-risk transactions, or transactions with high interchange fees. The merchant might end up paying more than they need to, and they have to pay a monthly fee regardless of their sales volume.

Subscription pricing is best suited for merchants who process large transactions, low-risk transactions, or transactions with low interchange fees. It is also best suited for merchants who have high or consistent sales volume, or who value cost savings and predictability over simplicity and convenience. Some examples of payment processors that use subscription pricing are Fattmerchant, Payment Depot, and National Processing.

How to Reduce Your Merchant Credit Card Processing Fees

Now that you know what merchant credit card processing fees are, how they vary by card brand and pricing model, and how to compare them, you might be wondering how to reduce them for your business. Here are some tips and strategies that can help you lower your credit card processing costs and increase your profits:

Negotiate With Your Processor

One of the easiest and most effective ways to reduce your merchant credit card processing fees is to negotiate with your payment processor. As we mentioned above, the payment processor fee is the only component of the merchant’s credit card processing fee that the merchant can control, and it is negotiable. You can ask your payment processor to lower their markup, waive some of their fees, or match a competitor’s offer. You can also leverage your sales volume, transaction size, industry, and customer loyalty to get a better deal. However, before you negotiate, you need to do your homework and understand your current fees, your average effective rate, and your industry benchmarks. You also need to shop around and compare different payment processors and pricing models, and be ready to switch if you find a better option.

Shop Around For A Better Deal

Another way to reduce your merchant credit card processing fees is to shop around for a better deal. As we mentioned above, there are many payment processors and pricing models in the market, and they can vary significantly in terms of fees, features, and benefits. You can use online tools and resources, such as comparison websites, reviews, and forums, to find and compare different payment processors and pricing models. You can also ask for referrals and recommendations from other merchants in your industry or network. You should look for a payment processor that offers transparent, fair, and competitive fees, as well as reliable, secure, and user-friendly service. You should also look for a payment processor that suits your business needs, such as your sales volume, transaction size, industry, and customer preferences. You should review your payment processor and pricing model at least once a year, and switch if you find a better option.

Use A Payment Service Provider

A payment service provider (PSP) is a type of payment processor that does not require a merchant account, but instead aggregates multiple merchants under one account. A PSP is also known as a third-party processor, a payment aggregator, or a payment facilitator. Some examples of PSPs are PayPal, Stripe, and Square. A PSP can help you reduce your merchant credit card processing fees by simplifying and streamlining the payment process. A PSP usually charges a flat-rate fee for every transaction, regardless of the card type, transaction type, or industry. A PSP also covers the interchange fee, the assessment fee, and the payment processor fee, and does not charge any monthly fees, setup fees, or cancellation fees. A PSP also offers easy and fast setup, online and mobile payment options, and integrated features and benefits, such as invoicing, reporting, and fraud prevention.

The advantage of using a PSP is that it is easy, convenient, and affordable, especially for small or new businesses that have low or irregular sales volume, or that value simplicity and convenience over cost savings. The disadvantage of using a PSP is that it can be expensive, especially for large or established businesses that have high or consistent sales volume, or that value cost savings and flexibility over simplicity and convenience. A PSP also has less control and security over the payment process, and may have a higher risk of account holds, freezes, or terminations.

Avoid Chargebacks & Fraud

Chargebacks and fraud are two of the biggest threats to your merchant credit card processing fees, as they can result in additional fees, penalties, and losses. A chargeback is a reversal of a credit card transaction, initiated by the cardholder or the card issuer, due to a dispute, error, or fraud. A fraud is a fraudulent or unauthorized credit card transaction, initiated by a criminal or a hacker, using stolen or fake card information. Both chargebacks and fraud can cost you money, as you have to pay the interchange fee, the assessment fee, the payment processor fee, and a chargeback fee or a fraud fee for each transaction. You also have to refund the transaction amount, and you may lose the product or service that you sold. Moreover, chargebacks and fraud can damage your reputation, as they can lower your customer satisfaction, increase your chargeback ratio, and affect your merchant account status.

The best way to avoid chargebacks and fraud is to prevent them from happening in the first place. You can do this by following the best practices and guidelines for credit card processing, such as:

  • Using a secure and compliant payment system, such as EMV, NFC, or PCI-DSS.
  • Verifying the cardholder’s identity and authorization, such as by checking the card security code, the billing address, the signature, or the PIN.
  • Providing clear and accurate information and communication, such as by displaying your business name, contact details, refund policy, and terms and conditions.
  • Delivering quality products and services, such as by meeting or exceeding your customer’s expectations, providing tracking and confirmation, and offering customer support and resolution.
  • Monitoring and reviewing your transactions, such as by checking for unusual or suspicious activity, flagging or declining high-risk transactions, and reconciling your statements and reports.

If you do encounter a chargeback or fraud, you should act quickly and professionally, such as by:

  • Responding to the chargeback or fraud notification, such as by providing evidence, documentation, and explanation to support your case, and disputing the chargeback or fraud if you have a valid reason.
  • Resolving the issue with the cardholder or the card issuer, such as by offering a refund, a replacement, an apology, or compensation, and reaching an agreement or a settlement.
  • Learning from the experience, such as by identifying the cause, the source, and the solution of the chargeback or fraud, and implementing the necessary changes, improvements, or precautions to prevent it from happening again.

Use ACH Transfers Or Other Payment Methods

Another way to reduce your merchant credit card processing fees is to use ACH transfers or other payment methods, instead of or in addition to credit cards. ACH transfers are electronic transfers of funds from one bank account to another, using the Automated Clearing House (ACH) network. ACH transfers are also known as e-checks, direct deposits, or direct debits. ACH transfers can help you reduce your merchant credit card processing fees by eliminating or minimizing the interchange fee, the assessment fee, and the payment processor fee. ACH transfers usually charge a flat fee per transaction, which is much lower than the percentage fee charged by credit cards. For example, a payment processor might charge $0.25 per ACH transfer, compared to 2.9% + $0.30 per credit card transaction. ACH transfers also offer fast and secure processing, low risk of chargebacks and fraud, and high customer satisfaction and retention.

The advantage of using ACH transfers is that they are cheap, reliable, and convenient, especially for recurring or large transactions, such as subscriptions, memberships, invoices, or rent. The disadvantage of using ACH transfers is that they are not as widely accepted or preferred as credit cards, especially for one-time or small transactions, such as online purchases, donations, or tips. ACH transfers also require the customer to provide their bank account information, which can be a hassle or a concern for some customers.

Other payment methods that can help you reduce your merchant credit card processing fees include cash, checks, money orders, gift cards, or cryptocurrencies. These payment methods can have different benefits and drawbacks, depending on the cost, convenience, security, and popularity of each method. You should consider your business needs, your customer preferences, and your payment processor options, when choosing the best payment methods for your business.

Frequently Asked Questions About Merchant Credit Card Processing Fees

Here are some of the most common questions that merchants have about merchant credit card processing fees, and their answers:

What is the average merchant credit card processing fee?

The average merchant credit card processing fee depends on many factors, such as the card brand, the card type, the transaction type, the industry, the pricing model, and the payment processor. However, according to a 2020 report by ValuePenguin, the average merchant credit card processing fee for a credit card transaction is 2.87%, which includes 1.55% for the interchange fee, 0.13% for the assessment fee, and 1.19% for the payment processor fee.

How can I calculate my effective rate?

Your effective rate is the percentage of your total sales that goes to pay for your merchant credit card processing fees. You can calculate your effective rate by dividing your total fees by your total sales, and multiplying by 100. For example, if you processed $10,000 in sales and paid $287 in fees, your effective rate would be 2.87%.

How can I compare different payment processors and pricing models?

To compare different payment processors and pricing models, you need to consider several factors, such as:

  • The fees and rates they charge, including the interchange fee, the assessment fee, the payment processor fee, and any other fees, such as monthly fees, setup fees, cancellation fees, or chargeback fees.
  • The features and benefits they offer, such as online and mobile payment options, customer service, security, fraud prevention, reporting, and integration.
  • The suitability and compatibility they have with your business needs, such as your sales volume, transaction size, industry, and customer preferences.

You can use online tools and resources, such as comparison websites, reviews, and forums, to find and compare different payment processors and pricing models. You can also ask for quotes and proposals from different payment processors, and analyze them based on your effective rate, your total cost, and your return on investment.

How can I optimize my credit card processing costs and increase my profits?

To optimize your credit card processing costs and increase your profits, you need to follow these steps:

  • Understand your current fees, your average effective rate, and your industry benchmarks.
  • Shop around and compare different payment processors and pricing models, and look for a transparent, fair, and competitive deal.
  • Negotiate with your payment processor and lower your markup, waive some of your fees, or match a competitor’s offer.
  • Use a payment service provider, a payment aggregator, or a payment facilitator, if it suits your business needs and preferences.
  • Avoid chargebacks and fraud, by following the best practices and guidelines for credit card processing, and by resolving any issues quickly and professionally.
  • Use ACH transfers or other payment methods, instead of or in addition to credit cards, if it suits your business needs and preferences.

Conclusion

Merchant credit card processing fees are the fees that a business pays every time it accepts a credit card payment. These fees are composed of three main components: interchange fees, assessment fees, and payment processor fees. These fees vary depending on the card brand, the card type, the transaction type, the industry, and the pricing model. The average merchant credit card processing fee for a credit card transaction is 2.87%.

To reduce your merchant credit card processing fees, you need to understand your current fees, compare different payment processors and pricing models, negotiate with your payment processor, use a payment service provider, avoid chargebacks and fraud, and use ACH transfers or other payment methods. By doing so, you can optimize your credit card processing costs and increase your profits. We hope this article has helped you learn more about merchant credit card processing fees, and how to save money on them. If you have any questions or comments, please feel free to contact us.

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