American businesses paid an estimated $126 billion in credit card processing fees in 2022, according to the Merchants Payments Coalition. For many merchants, these fees represent a significant expense that eats into profits. But with customers increasingly relying on cards for payments, accepting plastic has become non-negotiable for most companies.

As a business owner, navigating the complex web of processing fees can be challenging. You're likely all too familiar with the pain of seeing a percentage of each hard-earned sale gobbled up by an array of interchange fees, assessment fees, and processor charges. The true cost of each credit card swipe averages out to somewhere between 1.5% and 3.5% of the transaction amount.

To effectively manage your costs and protect your bottom line, it's crucial to understand how these credit card transaction fees work and what your business is actually paying each time it accepts a credit card. In this guide, we'll break down the key components of credit card processing fees, exploring the average costs charged by all the types of credit card issuers like Visa, Mastercard, and American Express.

We'll also examine the different pricing models credit card processors use and offer actionable tips for reducing your processing costs. By the end, you'll be armed with the knowledge you need to take control of your fees and make more informed decisions about your payment processing strategy. Let's dive in!

Breaking Down Credit Card Processing Fees

Every time a customer uses a credit card to make a purchase, a complex series of transactions occurs behind the scenes to get money from the customer's bank or financial institution account to the merchant's bank. Along the way, several different parties take a cut of the payment in the form of various processing fees.

You can think of credit card processing fees as a pie that gets divided up and distributed to everyone who plays a role in making the transaction happen. The three main "slices" of that pie are:

Interchange Fees

Interchange fees are the largest component of credit card processing fees, typically accounting for 70% to 90% of the total fee. These fees are set by and paid to the customer's bank (known as the issuing bank) to cover the costs and risks associated with approving and processing the transaction.

Interchange fees are generally a percentage of the total transaction amount plus a flat per-transaction fee (e.g. 1.75% + $0.10). The exact percentage and fee vary depending on several factors, including:

• The type of credit card used (credit vs. debit, rewards vs. non-rewards, etc.)
• How the transaction is processed (swiped, dipped, keyed, etc.)
• The merchant category code (MCC) of the business

Assessment Fees

Assessment fees are charged by credit card companies (like Visa, Mastercard, American Express, and Discover) as the cost of using their payment networks. These fees are smaller than interchange fees, typically ranging from 0.13% to 0.17% of the transaction amount.

The assessment fee is non-negotiable and helps cover the operational costs of maintaining the credit card network, including things like network maintenance, fraud monitoring, and marketing.

Payment Processor Fees

In addition to interchange and assessment fees, merchants pay fees to their payment processors. The payment processor is the company that handles the communication and data transfer between the merchant, issuing banks, and credit card networks to facilitate the transaction.

Credit card processing companies make money by charging merchants a fee on top of the interchange and assessment fees. These processor fees can be charged as a percentage markup, a flat per transaction fee, a monthly subscription fee, or a combination of these. The processor's pricing model ultimately determines how much the merchant pays in processor fees on top of the other fees.

So, in summary, when a customer swipes, dips, or taps their card, the merchant pays three distinct sets of fees to make that transaction possible: interchange fees that go to the issuing bank, assessment fees that go to the card networks, and processor fees that go to their payment processor. The exact cost of each type of fee depends on various factors. We'll explore some real-world numbers next.

Average Credit Card Processing Fees by Network

As discussed above, every time a merchant accepts a credit card payment, they pay interchange fees to the issuing bank and assessment fees to the card networks. So, what can a business expect to pay in fees when they process a transaction through Visa versus Mastercard or American Express? Here's a breakdown of the average credit card processing costs charged by each major network:

Visa and Mastercard

• Interchange fees: 1.15% to 3.15% + $0.05 to $0.10 per transaction
• Assessment fees: 0.14% to 0.15% per transaction

American Express

• Interchange fees: 1.43% to 3.3% + $0.10 per transaction
• Assessment fees: 0.17% per transaction

Discover

• Interchange fees: 1.40% to 2.40% + $0.05 to $0.10 per transaction
• Assessment fees: 0.13% per transaction

As you can see, American Express tends to charge higher interchange fees than the other major networks. This is because Amex operates on a slightly different business model than the other major credit card networks.

While the other networks simply process transactions between issuing banks and merchants, American Express is both a credit card network and a credit card issuer. This means that Amex can set its own interchange fees and keep a larger portion of the fee revenue.

Factors That Affect Interchange Rates

It's important to note that the interchange fee ranges above are averages, and the actual rate a merchant pays can vary quite a bit depending on several key factors:

• Card Type: Rewards credit cards tend to have higher interchange rates than no-frills cards, while debit cards generally have lower rates than credit. Corporate cards and high-end travel cards usually have the highest rates.
• Transaction Method: Card-present transactions (where the card is physically swiped, dipped, or tapped) typically have lower rates than card-not-present transactions (online or over the phone). This is because card-present transactions are considered more secure and less prone to fraud.
• Merchant Category Code (MCC): Interchange rates also vary based on the merchant's MCC, which is a code that identifies the merchant's type of business. Some MCCs, like grocery stores and utilities, tend to have lower rates, while others, like direct marketing and gambling, tend to have higher rates.

So, while the ranges above provide a general sense of what businesses can expect to pay in network fees, the actual costs will depend on the unique mix of cards, transaction types, and the merchant's specific industry.

Of course, network fees are just one part of the processing cost equation. Merchants also have to pay fees to their payment processors, and those fees can vary quite a bit depending on the processor's pricing model. Let's take a closer look at those models next.

Payment Processor Pricing Models

In addition to the interchange and assessment fees charged by the card networks and card issuers, merchants also have to pay fees to their payment processors for facilitating transactions. The exact amount a merchant pays in processor fees depends on the pricing model their processor uses.

Here's a breakdown of the four main pricing models and how they impact total processing costs:

Interchange Plus

Interchange plus pricing is the most transparent model. With this model, the processor passes on the interchange and assessment fees to the merchant at cost and then adds a fixed markup percentage and/or per-transaction fee on top. For example, a processor might charge interchange + 0.15% + $0.07 per transaction. So if the interchange and assessment fees for a transaction total 2.0%, the merchant would pay a total of 2.15% + $0.07 for that transaction. Pros:

• Highly transparent - merchants can see exactly how much they're paying in network fees vs. processor markups
• Tends to be more cost-effective for merchants with higher average tickets and/or B2B merchants Cons:
• More complex than flat rate pricing
• Less predictable month-to-month since interchange rates can vary

Flat Rate

With flat rate pricing, the processor charges a single, fixed percentage and per-transaction fee for all card types and transaction methods. For example, a processor might charge 2.6% + $0.10 per transaction, regardless of whether it's a rewards credit card or a basic debit card.

Pros:

• Simple and predictable - merchants pay the same rate for every transaction
• Easier to budget for since fees are more consistent month-to-month
• It can be more cost-effective for smaller-ticket merchants

Cons:

• Less transparent - network fees and processor markups are blended together
• It can be more expensive overall, especially for merchants with higher average tickets

Tiered

Tiered pricing, also known as bundled pricing, sorts transactions into 2-3 tiers (typically qualified, mid-qualified, and non-qualified) based on criteria set by the processor. Each tier has its own rate in tiered pricing, with qualified transactions getting the lowest rate and non-qualified transactions getting the highest.

Pros:

• Can offer lower rates for debit cards and non-rewards credit cards

Cons:

• Least transparent model - processors set the tier criteria and decide which transactions fall into each tier
• Most expensive model overall since a majority of transactions end up at higher mid- and non-qualified rates

Subscription/Membership

With this model, rather than paying a percentage markup on interchange fees, merchants pay a flat monthly membership fee and then a small per-transaction fee on top of interchange. For example, $99/month + interchange + $0.15 per transaction.

Pros:

• It can be most cost-effective for very high-volume merchants since interchange markups are eliminated

Cons:

• Not cost-effective for low-volume merchants since the membership fee is paid regardless of processing volume
• Less predictable since interchange rates can vary month-to-month

Calculating the Effective Rate

To truly compare pricing models and understand what a merchant is paying to process credit cards, it's important to calculate the effective rate. The effective rate is the total fees paid divided by total processing volume.

Here's the formula: (Total Network Fees + Total Processor Fees) / Total Processing Volume = Effective Rate

For example, if a merchant processes $10,000 in a month and pays $200 in interchange fees, $30 in assessment fees, and $120 in processor markups, their effective rate would be: ($200 + $30 + $120) / $10,000 = 0.035 or 3.5% So, while the processor may quote low rates or markups, the true cost of processing is reflected in the effective rate.

Understanding these pricing models is key to controlling processing costs and picking the right processor for your business. However, merchants can also use other strategies to reduce their fees. We'll explore those in the next section.

5 Strategies to Reduce Your Credit Card Processing Fees

While some credit card processing fees, like interchange rates, are non-negotiable, there are still several ways that merchants can lower their overall cost of accepting credit cards. Here are five strategies to consider:

1. Negotiate with Your Payment Processor

Many merchants don't realize that payment processing fees are often negotiable, especially if you have a high monthly processing volume. For the best rates, shop around and get quotes from multiple processors. Use those quotes as leverage to negotiate a better deal with your current processor. And don't be afraid to ask for things like waived monthly fees, lower per-transaction fees, or even cash signing bonuses.

2. Minimize Chargebacks and Fraud

Chargebacks and fraudulent transactions can result in hefty chargeback fees and penalties from your processor. To minimize your risk:

• Use an Address Verification System (AVS) to confirm the cardholder's billing address for online transactions
• Require the CVV code for all card-not-present transactions
• Train your staff to spot suspicious behaviors and card irregularities
• Maintain detailed transaction records and respond promptly to all chargeback requests

3. Encourage Debit Card Payments

Debit card transactions, especially those with a PIN, tend to have lower interchange rates than credit card transactions. Whenever possible, encourage customers to pay with a debit card or offer incentives like cash back or loyalty points for doing so.

4. Use an Address Verification Service (AVS)

Using an AVS to verify the cardholder's billing address for online and phone orders can help you qualify for lower interchange rates. Most payment gateways and virtual terminals have built-in AVS functionality.

5. Consider Cash Discounts or Surcharges

To offset the cost of processing fees, some merchants offer a discount for customers who pay with cash or charge a small service fee (typically 3-4%) for those who use a credit card. While these strategies can be effective, it's important to make sure you follow all relevant laws and card network rules. Currently, 10 states prohibit credit card surcharges, and all the major card networks have specific requirements around how surcharges and cash discounts can be implemented.

Take Control of Your Credit Card Processing Fees

Credit card processing fees are a complex and often opaque part of running a business. Between interchange fees, assessment fees, and processor markups, it's easy for merchants to feel they have little control over how much they pay to accept credit cards.

But the truth is, by understanding the different components of processing fees and how pricing models impact your costs, you can take steps to negotiate better rates and reduce your fees over time. Keep a close watch on your credit card processing statements!

Remember, every percentage point counts. Shaving just half a point off your effective rate can translate into thousands of dollars in savings each year - money that goes straight to your bottom line.

So don't just accept high processing fees as a "cost of doing business." Take a proactive approach to managing your merchant account and look for ways to optimize your pricing and minimize extra fees and chargebacks.

By implementing the strategies outlined above and partnering with a transparent, reputable merchant services provider like Zen Payments, you can take control of your processing fees - and keep more of your hard-earned revenue in your pocket.

Because at the end of the day, the more money you save on credit card processing, the more you can invest back into growing your business and serving your customers. And that's a win-win for everyone.