A credit card processing fee is the percentage of the sale a merchant or business must pay every time it accepts a credit card as payment.
The exact percentage of a credit card processing fee depends on a variety of different factors such as the provider (Visa, Mastercard, etc..,), level of rewards offered to the customer (cash back, airline miles, etc…), and type of business (restaurant, supermarket, e-commerce, etc…).
Because of all the complex factors that go into calculating a fee for a specific card and a specific transaction amount, almost no two credit card processing fees are exactly the same, and these individual fees are always changing.
There are usually two main components that determine the credit processing fee:
- Interchange rates
- merchant account provider fee
An interchange rate is a fee charged by banks that covers the cost of handling and credit risk inherent in a bank credit or debit card transaction. Depending on the type of card a consumer uses, these rates vary and make up the majority of the overall credit card processing fee.
For example, today a VISA Traditional Rewards card carries an interchange rate of 1.65% + $.10 of every swipe, while a VISA Corporate card has an interchange rate of 2.50% + $.10. Interchange rates are fixed, non-negotiable rates set at the beginning of each year.
The other material piece of the puzzle is the merchant account provider fee. These fees are set by merchant account providers and can be negotiated directly between the merchant and the credit card provider (Visa, Mastercard, etc…). There are a variety of factors that determine how large the merchant account provider fee will be, including the size of the business and the risk associated with the business.
Usually, larger businesses like Amazon and Walmart are able to negotiate much lower merchant account provider fees than smaller mom-and-pop stores. Meanwhile, merchants that are considered high-risk, like eCommerce stores, travel arrangement services, ticket vendors and airlines are usually affected by large fees. They are considered high-risk due to an increased number of chargebacks and the card not actually being present at the time of the sale, leading to a greater risk of fraud.
How are credit card processing fees calculated?
The merchant account provider fee is added to the interchange rate along with a few other minuscule fees, and that percentage determines the total credit card processing fee for each individual purchase.
Example: let’s say an online tire parts store has a 1.5% merchant account provider fee. The Interchange Rate for a Discover Premium Credit Card is 1.71% + $0.10. That means if someone purchased an item from the tire parts store using a Discover Premium Credit Card, the total credit card processing fee, combined with other smaller fees and charges, would be a little over 3.21% + $0.10.
In most cases, the credit card processing fee is somewhere between 1.5% and 4% of the total sale. That might not seem like a lot, but for merchants with tight margins, like small businesses, eCommerce stores, supermarkets, restaurants, and travel arrangement services, it can add up to a lot of lost revenue over time. Those processing fees can even make the difference between being profitable or in the red for some merchants. Over the last several years, credit card processing fees have risen higher than most merchants initially planned for which is causing many of them, especially high-risk and online merchants to struggle.
What’s the solution?
With interchange rates continuing to rise, and the number of Americans using credit cards increasing by the day, merchants are eager for a solution to the credit card processing fee problem. One possible solution that has been gaining steam in recent years is applying a credit card transaction fee.
A credit card transaction fee, commonly called a surcharge, is a small fee added on to the cost of a good or service beyond the initially quoted price in order to cover the cost of the credit card processing fee. Merchants can legally apply a surcharge fee of up to 4% of the total sale in 45 states.
By applying a credit card transaction to their customers, merchants can increase their bottom line by thousands or even millions of dollars depending on the size of the business. You can use our calculator to find out how much money applying a transaction fee would increase your profits each year.