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Credit card processing fees will typically cost a business 1.5% to 3.5% of each transaction’s total. For a sale of $100, that means you could pay anywhere from $1.50 to $3.50 in credit card processing fees. For a small business, these fees can be a significant expense. Here's how they work and how to lower your rates.
What credit card processing fees include
The credit card processing fees paid on each card transaction — also known as your merchant discount rate — are split among the financial institutions that enable these payments. They include the following fees:
Interchange. This is the largest portion of the merchant discount rate that goes to the issuing bank, the bank that manages the credit card used to make the payment. Examples of credit card issuers include Chase, Citi and Bank of America.
Assessment fee. This fee goes to the card networks, such as Visa, Mastercard, Discover and American Express.
Payment processor fee. This goes to the processor, the company that manages the logistics of getting card payments processed for your business. Processors include companies such as Square, Stax and Helcim.
Your payment processor will either draft your credit card processing fees from your bank account in one lump sum at the end of each month or reduce the amount of each deposit by the amount of the fees due.
Payment processors generally offer one of the following pricing structures:
Flat-rate, or blended, pricing
This is the pricing structure used by Square, Stripe and PayPal. Under this pricing structure, you will pay a percentage of the transaction total plus a flat fee. For instance, the rate might be 2.6% plus 10 cents for in-person transactions.
Blended pricing is straightforward and predictable; however, it can also be more expensive overall than the other pricing structures.
This is based on three tiers: qualified (debit cards and cards without rewards programs); mid-qualified (cards with certain rewards programs); and non-qualified (corporate cards and cards with generous rewards programs). Rates are lowest for qualified cards and highest for non-qualified cards.
Like flat-rate pricing, tiered pricing is represented as a percentage plus a flat fee. With this pricing structure, your processing fees will vary based on the kind of card you accept. It's usually a little less expensive than flat-rate pricing, but it is higher than interchange-plus pricing.
This is often the least expensive pricing option. However, interchange-plus pricing has the greatest amount of variability of these pricing options since interchange rates vary based on several factors, including:
Card network. Visa's rates are different from Mastercard's.
Type of card used. Rewards credit cards cost more to process than non-rewards credit cards, for instance.
How the card is processed. In-person transactions are less expensive than card-not-present transactions.
This pricing structure consists of the interchange rate charged by the credit card network plus a defined markup, or transaction fee, which goes to the processing company. Like flat-rate and tiered pricing, you will pay a percentage plus a fee per transaction.
Some providers also offer membership-based pricing, which could be the least expensive processing option in some cases. Under the membership-based pricing model, processors do not take a percentage of your sales. Instead, they earn the bulk of their revenue by charging monthly or annual membership fees, sometimes with fixed per-transaction fees. Stax, for example, charges fees starting at $99 per month plus 8 cents per in-person transaction plus the interchange fee.
How to lower your rates
Here's how you can reduce credit card processing fees.
Sidestep avoidable fees
It's best to work with a processor that doesn't charge statement fees, minimum monthly processing fees, PCI compliance fees or terminal lease fees. But if that's not an option, and you see these fees on your statement, pick up the phone and ask if any of those charges can be waived or avoided in the future.
Keep your chargeback rate low
Your chargeback rate is the percentage of transactions disputed by customers — for instance, because of unauthorized card use, billing errors or unresolved disputes about the quality of the items purchased. Chargeback fees can be costly, often $20 to $50 per dispute on top of refunding the complete transaction, and high rates of chargebacks can cause providers to increase your transaction fees.
Minimize chargebacks by using contactless and chip card readers to reduce your liability in case of fraud, and by offering return policies, good customer service and quick responses to any customer complaints.
Skip flat-rate pricing
Many businesses — especially new businesses — process credit card payments through processors like PayPal, Square or Stripe. These are often the fastest to set up when your business is young. But generally, this means you will be on a flat-rate pricing structure, usually the most expensive option. A processor that offers interchange-plus pricing or membership-based pricing could save you money.
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Collect quotes from multiple processors. If you find more favorable pricing elsewhere, take the quote to your current processor. The company might match the offer or provide lower rates. If that doesn't happen, the quotes can help you decide whether the savings are substantial enough to justify moving to a different processor.
Switching payment processors can be a hassle. However, an increase in your business’s profitability can make the hassle worthwhile. If all attempts to negotiate with your current payment processor fail, switch processors. With a high-volume business, for instance, membership-based pricing might be the most cost-effective option.