What are Credit Card Processing Fees and How Are They Calculated?

Base Insights

At a high level, the processing of a credit card purchase seems very straightforward. The merchant’s total price is tallied, the customer swipes or dips their card, and money is transferred from the purchaser’s account to the merchant’s account. Simple.

But, of course, there is much more to it behind the scenes. Data must be moved, security checks must occur, and the transaction must be authorized. And all of the organizations and entities responsible for those actions are, of course, compensated for their part in helping to complete the transfer of funds. Credit card processing fees are driven by the compensation to each entity involved in these behind the scenes processes. In order to accept credit card payments for merchant services, you must agree to paying these fees.

Credit Card Processing Fees Simplified

To describe in detail all the infrastructure and all the entities that have a hand in credit card processing, and that therefore contribute to credit card processing fees, would take volumes. More important for most stakeholders is simply to have a general understanding of what the fees are and how they are determined. Below is an overview.

Platforms and Devices

Before they can process payment transactions, merchants must connect to a payment platform. The four main types of platforms are direct payment platforms, gateway platforms, ecommerce platforms, and PayFac (for payment facilitator) platforms. Which type of platform you should use varies based on factors like your transaction volume and what types of additional functionality you need.

A number of different types of devices can be used to capture customer data and transmit it to the payment platform. These “readers” can range from small terminals that plug into a mobile device to PIN pad-type units to multi-function point of sale (POS) terminals, which often create additional costs to the Merchant.

Fee Components

With the right infrastructure in place, payment processing can begin. When it does, a credit card processing fee is charged for each transaction.

A credit card processing fee is a number that has three primary components:

  • Interchange rate. This rate, which is a percentage of the purchase amount plus a per transaction fee, is set by the card brands. It is non-negotiable and is the same for everyone. The rates are published on the card brand websites.
  • Assessment fees.  These fees are also set by the card brands, and as with the interchange rate, everyone pays the same amount. Assessment fees may include the Visa Network Acquirer Processing Fee (APF), MasterCard’s Network Access and Brand Usage (NABU), Discover’s Data Usage fe, and American Express’s processing fees.
  • Value-added fees or processor’s markup.  These fees are set by the credit card processing company. Unlike the other two components, this one is negotiable.

Interchange rates, though it sounds fairly simple, are actually very complex. There is not just one universal interchange rate. The card brands produce massive tables of rates that are determined using a number of criteria, including:

  • Card type.  The rate for debit cards is lower than that for credit cards since there is lower risk. And cards with reward programs charge higher rates to fund the perks they give to card holders.
  • Business type.  There are different rates for different kinds of companies. For example, grocery stores have higher rates than gas stations.
  • Transaction type.  Transactions that take place at a POS where a card is presented typically have a lower rate than card-not-present transactions, since the latter has more risk.
  • Chargeback and fraud risk.  The more risky a transaction is in the eyes of the card brands, the higher the rate.

Interchange rates are subject to change, and tends to be updated two or more times each year.

Why the Cost is Worth It

For merchants who wonder if arranging and paying for credit card processing is worth it, there are many reasons why the answer is, “Yes.”

  • Consumers tend to spend more when they use their credit cards.
  • Credit card transactions are highly efficient.
  • Credit card transactions are highly secure.
  • Credit card processing is scalable to accommodate business growth.

Learning about credit card processing and the associated fees can give you the tools to find the solution that best meets your needs.

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