Credit card processors typically charge a processing fee for every credit card payment you accept. Depending on your processor, you may be charged additional fees depending on what pricing model the processor uses.
Processing fees
Transaction fees can be broken down into two primary kinds: wholesale and markup. Wholesale fees, also known as “interchange” fees, are charged by the issuing bank and the card network. Markup fees are charged by the credit card processor and the payment gateway. Unlike wholesale fees, markup fees can be negotiated.
There are three types of credit card processing fees you should be aware of:
Interchange Fee. The interchange fee is the wholesale fee mentioned above. This is a standard, non-negotiable fee that covers the costs of processing the transaction, the risk of payment approval, and the risks of fraud and bad debt. Collected by the consumer (issuing) bank, the interchange fee is a percentage of the purchase total plus a set transaction fee that’s determined by each card network. This fee represents the largest cost of credit card payment processing, and is typically impacted by the type of credit card involved in the transaction. The average interchange rate in the U.S. is approximately 1.8% for credit cards and 0.3% for debit cards, but the actual rate a merchant will pay varies greatly. For example, interchange fees on premium or rewards cards are generally higher.
Assessment or Service Fee. This is another non-negotiable fee, but this time it’s the card network that charges it. This fee is typically a small percentage and can be affected by your transaction volume and your risk level as assessed or calculated by the card networks.
Processing Fee. Each payment processor charges their own fees. This is known as the payment processor markup, and it varies depending on the pricing plan of the processor.
Types of payment processor pricing models
Payment processors leverage a variety of pricing models. These are the four you are likely to come across when selecting a payment processor:
Flat rate. The processor charges a simple fixed fee for all credit and debit card transactions regardless of the card used for payment. Note that card-present transactions often have a lower flat rate than card-not-present transactions, as they carry less risk. This can be structured as a simple base rate (for example, 2.9%), or a base rate plus a small per-transaction amount (for example, 2.9% + $0.30 per transaction). This model merges the wholesale and the markup fees instead of splitting them out.
Tiered. The processor charges a fee based on the card type used in the transaction, how much risk is associated with the transaction, and the overall transaction volume of the business. This model is considered to be the most complex and potentially most confusing to merchants.
Interchange Plus. The Interchange Plus is the most common pricing model, and often considered the most transparent and cost-effective. Here, the merchant is charged a percentage of the transaction plus a fixed per-transaction fee. In this way, the wholesale fee (the “interchange” part) and the markup fee (the “per transaction” part) are distinctly and clearly separated. For example, a $100 payment made with a Visa Rewards credit card might carry a total (effective) rate of 2.13%, which includes the interchange fee, the card network fee, and any other fees charged by the credit card processor.
Subscription. The processor charges a flat monthly service fee, along with a small per-transaction fee. The wholesale fee is charged separately from the markup fee.
No matter which pricing model your business selects, note that not all transactions clear at the same rate. A qualified transaction will process at a lower rate than a non-qualified transaction.
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