Merchant Fees Explained: How They Work & Types

Who Pays Merchant Fees?

The business owner covers merchant fees as part of payment processing costs. To offset these expenses, merchants may adjust pricing or impose surcharges on specific payment methods.

Businesses must also watch for hidden costs such as authorization and assessment charges. Understanding these expenses helps merchants optimize profits and avoid unnecessary overpayments.

Types of Merchant Fees

Understanding the different types of merchant fees is crucial for businesses because they are significant in processing customer transactions efficiently.

Transaction Fees

Charged per transaction, these fees vary based on card type and transaction location. Payment processors like PayPal charge different rates for domestic and international transactions, with additional fees for payouts and refunds.

Interchange Fees

These fees are paid to the customer’s bank for processing card transactions. Card networks like Visa and Mastercard set interchange fees based on transaction risk, card type, and industry category.

Payment Processing Fees

Charged by payment service providers for handling transactions. These fees may include costs for currency conversion, fraud protection, and payment gateway access.

Monthly and Annual Account Fees

Some providers charge businesses for maintaining a merchant account. For example, Payflow Pro has a $25 monthly fee, while Payflow Link offers no monthly charge.

Chargeback and Dispute Fees

When a customer disputes a transaction, merchants incur chargeback fees. These fees vary by region and currency, increasing costs for businesses with high dispute rates.

How Merchant Fees Are Calculated

Calculating merchant fees involves several factors, including the type of transaction and the payment method used. Different pricing models set by payment processors also play a critical role in determining these costs.

Pricing Models for Merchant Fees

Merchant fees are determined based on pricing models and transaction characteristics:

• Flat-rate pricing – A consistent percentage charged per transaction, simplifying cost predictability.
• Interchange-plus pricing – The interchange fee plus a processor markup, often providing cost transparency.
• Tiered pricing – Transactions are categorized into qualified, mid-qualified, and non-qualified, with varying fees.

Factors That Affect Merchant Fees

Several factors influence these costs, including sales volume, transaction method (card-present vs. card-not-present), and whether transactions are domestic or international. Businesses with high sales volumes may negotiate better rates to lower overall expenses.

Understanding Hidden Fees

Hidden fees, like statement fees and unexpected rate hikes, can quietly increase costs. They may include charges for fraud protection, PCI compliance, or early termination. Merchants should review agreements carefully and audit statements to avoid overpaying.

Reducing Merchant Fees & Optimizing Costs

To cut down on merchant fees, merchants actively seek strategies to enhance their profitability while still offering competitive payment options to their customers.

Choosing the Right Payment Processor

Comparing merchant account fees for small businesses helps in selecting cost-effective solutions with favorable pricing structures.

Negotiating Lower Rates

Businesses with high transaction volumes can often secure reduced rates from payment processors, saving significantly over time.

Implementing Surcharges and Minimum Transaction Amounts

Introducing surcharges on card payments and setting minimum transaction limits helps businesses offset processing costs while maintaining customer convenience.

Comparing Merchant Fees Across Different Payment Methods

Comparing merchant fees across different payment methods reveals significant differences in costs between credit cards, debit cards, online transactions, and mobile payments. 

Credit Card vs. Debit Card Processing Fees

Credit card transactions typically incur higher fees (1.5%–3.5%) due to increased fraud risk and rewards programs. Debit card transactions generally have lower costs, making them a more affordable option for businesses.

Online vs. In-Person Transaction Fees

Online transactions often include additional security measures, increasing processing fees. In-person transactions, especially chip-and-PIN payments, tend to have lower fees due to reduced fraud risk.

Mobile Payment Processing Fees

SME payment processors like Paypal Zettle charge different rates based on whether a card is physically present, manually entered, or processed via QR codes. Businesses accepting mobile payments should evaluate these fees when selecting a processor.

Future Trends in Merchant Fees

Payment processing industry trends in merchant fees indicate a transition to using AI for improved fee optimization.

AI in Payment Processing and Fee Optimization

Artificial intelligence tools analyze transaction data to help businesses minimize merchant fees by identifying cost-effective payment processing strategies.

Regulatory Changes and Merchant Fee Transparency

Governments worldwide are implementing stricter regulations on merchant fees to increase transparency and protect small businesses from excessive charges.

Alternative Payment Methods and Lower Processing Costs

Lower-cost payment options, such as ACH transfers, digital wallets, and cryptocurrency payments, are gaining popularity as businesses seek to reduce processing fees and improve profitability.

By understanding what merchant fees on credit cards entail and who pays merchant fees, businesses can take strategic steps to minimize costs. Differentiating between merchant fees vs. bank fees and exploring methods to lower merchant account fees for small businesses enables merchants to optimize their financial management and maintain healthy profit margins.

FAQs – Common Questions About Merchant Fees

What are merchant fees on credit cards?

Charges businesses pay to process credit card transactions, typically 1.5%–3.5% of the transaction amount.

Who pays merchant fees – the business or the customer?

The business pays, but they may pass costs to customers via surcharges or pricing adjustments.

How can I lower my merchant fees?

Choose a cost-effective processor, negotiate rates, encourage debit or cash payments, and set minimum transaction amounts.

What’s the difference between merchant fees and bank fees?

Merchant fees cover payment processing, while bank fees relate to account services like overdrafts and wire transfers.

What are the best payment processors with low merchant fees?

Areto Payment, Square, PayPal Zettle, and Helcim offer competitive rates with transparent pricing.

References

NerdWallet
Credit card processing fees: A 2025 guide for businesses. Retrieved from https://www.nerdwallet.com/article/small-business/credit-card-processing-fees
The Motley Fool
Average credit card processing fees and costs in 2024. Retrieved from https://www.fool.com/money/research/average-credit-card-processing-fees-costs-america/
HighRadius
What is merchant fees and how it works. Retrieved from https://www.highradius.com/resources/Blog/what-is-merchant-fees-and-how-it-works/
SwipeSum
Merchant services fees explained. Retrieved from https://www.swipesum.com/insights/merchant-services-fees-explained