Whether you’re shopping online or in person, credit cards are a convenient, secure, and often rewarding way to make everyday purchases. However, the merchant incurs processing fees with each transaction.
Here’s what you need to know about the different types of credit card processing fees and how they may affect you as a consumer.
Credit card processing fees are charged to a merchant when it accepts credit cards as a payment method. Each time you swipe or tap your card, the merchant incurs a few different fees.
Also called merchant fees or transaction fees, these costs are assessed by the payment processor, the customer’s credit card issuer, and the payment network. Here’s a deeper look at the different fees involved.
An interchange fee is assessed between the banks handling the transaction. When you make a credit card purchase, the business’s bank pays your card issuer an interchange fee to help compensate for the risk of approving the sale, potential fraud, and related costs.
Interchange fees are set by payment networks — think American Express, Discover, Mastercard, and Visa — and they can vary depending on the type of card used, the transaction method, the type of business, the size of the transaction, and other details.
Also called service fees, these charges are assessed by the payment networks for the privilege of using their services to process transactions.
These fees are typically low, and they’re based on total monthly sales rather than individual transactions.
The third fee associated with credit card transactions is the charge assessed by the payment processing company the business works with. Examples include Stripe, Square, and PayPal.
These firms typically provide the hardware and software for managing transactions and help facilitate communication between the other parties involved.
The fees a merchant pays can vary depending on several factors. In general, credit card processing fees range from 1.5% to 3.5% of the purchase amount — and sometimes more.
One of the ways the fees can vary is the pricing model the business chooses. Here are the four main types of pricing models:
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Tiered pricing: This model bases the fees merchants pay on the type of card used. For example, transactions involving debit cards and non-rewards credit cards typically result in lower fees, while premium credit card and corporate card transactions generate higher charges.
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Flat-rate pricing: This is the simplest model and includes a specific percentage of the transaction amount plus a small flat fee — around $0.20 or $0.30 — per transaction.
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Interchange plus pricing: With this model, the business pays a predetermined transaction fee plus their payment network’s interchange fee. The fee amount can vary depending on the payment network, the type of card, and whether the transaction was made in person. In-person transactions typically result in lower fees.
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Membership pricing: As the name suggests, this model involves a membership fee rather than a percentage of your sales. In addition to a monthly or annual fee, the processing company may also charge a per-transaction fee.
For merchants, credit card processing fees are a cost of doing business. However, in many states, it’s legal for merchants to pass those costs on to the customer. Here are a few different ways they may do just that.
A credit card surcharge is an additional fee charged to customers who pay with a credit card. This strategy is illegal in some states — and where it is legal, the state or the payment network may set caps.
Merchants that don’t normally accept credit cards may compensate for credit card processing fees by charging a convenience fee on credit card transactions. For example, you can technically pay your taxes with a credit card, but you’ll incur a convenience fee.
Merchants may also charge convenience fees for credit card transactions through specific channels, such as phone orders.
Instead of a surcharge for credit card users, some businesses may offer a discount to customers who pay with cash instead of a card. Although this dual pricing model is technically the same as a credit card surcharge, it’s legal nationwide, albeit with some rules.
Businesses that commonly use cash discounting include gas stations, convenience stores, restaurants, small grocers, and tobacco stores.
Sometimes, businesses may require a minimum transaction amount for credit card users. For example, if your purchase amount is less than $10, you may be required to use cash or a debit card.
That way, it’s less likely that the merchant will lose money on small transactions.
This article was edited by Alicia Hahn.
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