Credit Card Processing Fees: A Guide for Businesses

Understanding these fees is crucial for any business, especially for small business owners trying to stay competitive. From flat rates to batch settlements, here’s what you need to know to take control of your processing costs.

What Are Credit Card Processing Fees?

Credit card processing fees are the charges a business pays each time a customer uses a credit card to make a purchase. These fees cover the infrastructure that makes card payments possible, from the technology used at checkout to the institutions involved in verifying and transferring funds.

Let’s break down the key players:

• Merchant: That’s you, the business owner.
• Acquirer bank and issuer bank: The acquiring bank processes payments for the merchant, while the issuing bank provides the credit card to the customer.
• Card networks: Visa, Mastercard, American Express, etc., which facilitate the transaction and set certain fee structures.
• Payment processors: The companies that handle communication between all parties and ensure the payment flows smoothly.

These parties all take a small cut of each transaction, which collectively makes up your credit card processing fee.

Types of Credit Card Processing Fees

Not all fees are created equal. Here are the main categories you’ll encounter:

Interchange Fees

These are paid directly to the issuer bank. They vary depending on the type of card (e.g., rewards, corporate), transaction risk, and method (e.g., chip vs. swipe). Interchange fees are typically the largest portion of the total cost.

Assessment Fees

Charged by the card networks (like Visa or Mastercard), these fees help fund the payment infrastructure and services. They’re generally fixed and based on transaction volume.

Processor Markup Fees

These are added by your payment processing provider for facilitating the transaction. The markup can vary significantly, so this is where negotiation and plan selection become key.

Incidental Fees (Optional)

Depending on your processor, you might also face:

• Chargeback fees
• Retrieval request fees
• PCI non-compliance penalties

These aren’t per-transaction fees, but they can sneak up on you if you’re not prepared.

Common Pricing Models for Businesses

Now that you know the types of fees, let’s look at the different ways they’re structured:

Flat Rate

You pay the same percentage on every transaction (e.g., 2.75%). This model is simple and predictable, making it popular for small businesses. But it may cost more over time, especially if you process high volumes or accept lower-cost cards.

Pros: Easy to understand
Cons: Less transparent, potentially higher fees

Interchange-Plus

You pay the interchange fee plus a fixed processor markup. This model is more transparent and often cheaper for businesses with high volume or larger transactions.

Pros: Transparent, negotiable
Cons: More complex to read and manage

Tiered Pricing

Transactions are categorized into “qualified,” “mid-qualified,” or “non-qualified” based on factors like card type and method of entry.

Pros: Common among traditional processors
Cons: Less transparent, harder to predict costs

For small businesses, understanding which model fits best can be a game-changer when managing credit card processing fees and small business budgets.

What Affects Your Credit Card Processing Fee?

Several factors influence how much you pay in fees. These include:

• Card Type: Debit cards usually have lower fees than credit or rewards cards.
• Transaction Method: Swiped or chip-read cards are seen as lower risk than manual entry or online payments, which may carry higher fees.
• Business Type: High-risk industries like travel or CBD sales often face higher rates.
• Monthly Volume & Average Ticket Size: Businesses with higher sales volumes or large-ticket items may qualify for better rates.

How to Reduce Credit Card Processing Fees

Reducing fees starts with understanding your current setup and negotiating wisely. Here’s how to take control:

1. Negotiate with Your Processor – If your volume justifies it, negotiate for better processor markup rates.
2. Choose the Right Pricing Model – Analyze your transaction history. A flat rate might work for you now, but as you grow, interchange-plus might be more cost-effective.
3. Maintain PCI Compliance – Non-compliance can result in hefty monthly fines. Staying compliant protects both your business and your wallet.
4. Use Level 2/3 Processing – If you handle B2B or government transactions, ask about Level 2/3 data processing. Providing more transaction details can lower interchange fees.

Understanding Batch Processing and Settlement Timing

Let’s talk about what happens after you close shop for the day.

Batch processing payments refers to grouping all card transactions from the day and submitting them for settlement in one go, usually overnight. This system is crucial for managing fees and ensuring timely deposits.

If you delay batching or forget to submit, it can:

• Delay your funds being deposited
• Result in downgraded transactions with higher fees
• Create accounting headaches

Regular and timely batching ensures your payment processor gets all the data they need while keeping your costs low and processes smooth.

Credit card processing fees are an unavoidable part of doing business. Understanding who charges what, why those fees exist, and how you can manage them is key to staying profitable. This includes knowing the distinction between acquirer bank and issuer bank, which handle the merchant and cardholder sides of a transaction, both contributing to the fees you pay.

Whether you’re a startup or a growing business, take time to review your fees and understand how they fit into your payment ecosystem. Doing so will help you to build a more efficient, sustainable, and scalable payment strategy for the long haul.

Frequently Asked Questions (FAQs)

Why do businesses pay credit card processing fees?

To enable secure, fast electronic transactions and cover network and bank costs.

Are credit card processing fees tax-deductible?

Yes, typically classified as a business expense for tax purposes.

Can I charge customers a credit card processing fee?

Depends on local regulations; in some regions, surcharging is permitted with disclosure.

What is the average credit card processing fee for small businesses?

Ranges from 1.5% to 3.5% per transaction depending on multiple factors.

How often are processing fees charged?

Usually deducted per transaction, with monthly and incidental fees billed separately.

References

Visa. (2024). Explaining card processing fees: Interchange, assessments, and merchant markup. Retrieved from https://usa.visa.com/dam/VCOM/download/retro/visa-card-processing-fees-guide.pdf 

U.S. Small Business Administration. (2023). How much do small businesses pay in credit card processing fees? Retrieved from https://www.sba.gov/business-guide/manage-your-business/finances/credit-card-fees Federal Reserve Bank of Kansas City. (2022). Role of acquirer and issuer banks in payment processing. Retrieved from https://www.kansascityfed.org/publications/prime-quarterly/role-of-acquirer-and-issuer-banks