Calculating Costs of Credit Card Processing

Business.com / Financial Solutions / Last Modified: February 22, 2017

Here is a break down of some of the items credit card processors charge for.

Credit card processing companies charge a bewildering number of fees to merchants who use their services. Complaints about credit card processing charges can be found all over the Internet, leading to legislation in the United States, Canada, and other countries requiring more transparency on pricing by credit card processors. Following are some of the items credit card processors charge for.

First, there's the account setup charge to open a merchant account, and there's usually a monthly account charge to maintain the account. You often have to buy or leaseequipment from the credit card processor, and there are fees for doing so.

Then there's a transaction fee that is a percentage of the amount charged. This is sometimes called the "discount rate," which is even more confusing, since you aren't actually receiving a discount-you're being charged. Generally, discount rates for small businesses range from 2.25% to 3% for Visa and MasterCard, and are slightly higher for American Express and Discover.

And those are just some of the fees merchants are charged. Let's take a closer look.

  • Paying the piper. Actually, several pipers. One fee can turn into multiple fees before you know it. For example, the merchant pays a fee to the bank that issued the credit card and a fee to the brand that's on the credit card (e.g., Visa) for the use of their network, and another fee to the credit card processing company. The fee the credit card processing company is charging you is a combination of all those fees that are deducted as part of an overall transaction fee. As if all those fees aren't bad enough, the fee your business is charged will vary considerably based on factors such as:
      -How long you've been in business.
      -Percentage of telephone sales.
      -Percentage of Internet sales.
      -Your personal credit rating.
      -Average amount of daily sales.
      -Total sales per month.

       If you have an established business with a high volume of sales and a good credit rating, you  can usually negotiate a lower service fee. Often, you have to ask for it.

  • Paying the piper, part II. Ask for a breakdown of all the fees you'll be charged, because there are more than just transaction fees. Non-transaction fees may include such things as service fees from other third-party providers the processor uses, statement fees, compliance fees, and more. The brand of credit cards you accept will also determine your fees. American Express and Discover usually charge merchants more than MasterCard and Visa, so some merchants refuse to accept them.
  • Are you qualified? Most credit card processing companies set rates according to tiers, with three-tier pricing being the most common. The tiers are qualified, mid-qualified, and non-qualified. Basically, a qualified rate is when the sale is made in person and you swipe the customer's actual card. This is the lowest fee. A mid-qualified rate is charged when data from the card is manually entered instead of a swipe. It also applies to most phone and online sales. The non-qualified rate is the highest and goes into effect if you don't settle your daily batch of transactions within 48 hours, if you manually key in card information but fail to enter all the required fields, or if you don't perform address verification for the card.
  • What's your tier? What's more confusing than a three-tier pricing system? How about a six-tier pricing system? Debit cards with a Personal Identification Number (PIN) can be processed outside of the Visa and MasterCard networks. To get that business back, Visa and MasterCard lowered their interchange rates for debit cards significantly below that of credit cards. So, if you process a PIN-based debit card on a Visa or MasterCard network, there's a separate qualified rate, mid-qualified rate, and non-qualified rate that is lower than the same rates for credit cards. You need a checklist to keep track of all these charges. We suggest you use the one below.
  • Interchange. Twice a year, the major credit card companies publish an Interchange Reimbursement Fee Schedule. This is what the credit card company (Visa, MasterCard, Discover, etc.) charges credit card processors to use their cards. Your credit card processing company deducts this charge before crediting funds to the merchant. The exact charge depends on the particular tier of the transaction-whether it's qualified or non-qualified, using a credit or debit card.
  • Interchange Plus. When you start talking about applying interchange rates to tiers, and all the various permutations that can affect both rates and tiers, it gets pretty confusing. Interchange Plus is a more transparent, and less costly, alternative to tiered pricing. The merchant pays the exact fees published in the Interchange schedule plus a flat markup. That's it. Up until recently, Interchange Plus was available only to businesses with large volumes, but is now available to businesses with lower volumes, and even new enterprises with no volume history.
  • Enhanced Recover Reduced (ERR). A combination of tiered and Interchange Plus pricing. The credit card processing company quotes two standard tier rates for qualified transactions (qualified debit and qualified credit). Those transactions that fall outside of these two rates are charged an unqualified rate plus the difference between the fixed qualified rate and the Interchange rate. The system supposedly reduces and simplifies rate calculations for small businesses.

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