Credit Card Processing Fees: How Much Do Merchants Pay (2024)

Article by Muhammad Adeel Qayum Shaikh29 Aug, 2024

Studies show that people often spend more when using credit cards rather than cash or checks. After all, swiping a card is far more convenient than finding an ATM. So, it seems natural that businesses, from local shops to global brands, would adopt credit card payments.

But merchants sometimes overlook the associated fees. These costs can accumulate quickly, especially if you’re a small business relying on credit card transactions. Here’s an overview of those fees, and tips to help you manage them effectively.

What are credit card processing fees?

Credit card processing fees are the transaction charges a company pays to credit card companies, payment processors, and banks. Ecommerce merchants pay these fees each time a customer uses a card to make a purchase on their store.

On average, merchants spend between 1.3% to 3.5% of a purchase on these fees. These charges may include monthly payment processor fees, chargeback fees, and other related costs.

There are three types of credit card processing fees:

Percentage-based fees: This is the percentage that a company pays from each sale amount. It’s the most common type of credit card fee.
Per transaction fees: This refers to the flat fee charged to merchants for every customer purchase.
Monthly fees: This is a flat fee for a month of service from a merchant provider like Shopify. Although you can process credit card payments without a merchant account, having one offers added perks like ecommerce tools and web hosting.

Credit card fees cut into the profit on each sale. However, few merchants hesitate to accept them. Customers expect to pay by card, and it makes buying easier. They also spend more with a card than with cash.

Credit card issuers can charge buyers, usually with annual fees or interest on late payments. But buyers don’t pay fees on every transaction—only merchants do.

3 types of credit card processing fees

When a merchant pays credit card processing fees, various financial institutions share the proceeds. These charges are divided into three main categories:

Payment processor fee

Credit card processors—such as Shopify Payments, PayPal, or Stripe—levy this fee. These companies might charge either a monthly fee, per transaction, or both. They may also provide POS equipment like credit card readers to merchants using their services.

Interchange fee

The interchange fee is what the bank receives when it issues the card to the customer. Banks like Chase, Citibank, and credit unions collect this fee for Visa or Mastercard transactions. The largest portion of your credit card transaction fees goes to these financial institutions.

Interestingly, Discover and American Express run their own payment networks, which allows them to collect interchange fees at slightly higher rates than banks. Because of this, merchants who accept Discover and American Express often end up paying more in fees to these companies. That’s why some businesses choose to accept only Visa and Mastercard.

Assessment fee

Assessment fees are collected by credit card networks that facilitate credit card transactions between merchants and banks globally. Major credit card companies like Visa, Mastercard, Discover, and American Express power these networks. A credit card network handles purchase details, such as the merchant category code, which can influence cash back rewards for specific spending categories.

Calculating your credit card processing fees

Any merchant can figure out their credit card processing fees by adding up the following:

Per-transaction costs: These fees usually consist of a fixed amount per transaction along with a percentage of the total sale. Shopify Payments, for example, charges between 2.4% and 2.9% per transaction plus a flat 30¢ fee. PayPal deducts 3.49% of the sale, along with a 49¢ transaction fee. Typically, these fees also cover the interchange costs.
Monthly charges: These are the fees your payment processor requires to enable credit card transactions. Some processors, such as Shopify, have a starting fee of $29 a month following a trial period. Others, like PayPal, don’t have a monthly charge but instead take a percentage from each transaction.
Assessment charges: These are levied by the credit card networks and are usually 0.13% to 0.15% of the transaction amount. For example, if a customer spends $20, you’d pay about 3¢ in assessment fees.

Here’s a breakdown:

Fee type	Example cost
Monthly fees	Shopify: $29 per month; PayPal: No monthly fee
Transaction fees	PayPal: 3.49% + 49¢ per transaction; Shopify: 2.4%–2.9% + 30¢ per transaction
Assessment fees	0.13%–0.15% of the purchase price

This summary provides a clear view of the various fees you’ll encounter when processing credit card payments.

Merchant service providers

Due to the complexity of credit card processing, some ecommerce companies choose to work with merchant service providers who handle the calculation and remittance of processing fees on their behalf.

These intermediaries are basically credit card processing providers who facilitate transactions by maintaining a merchant account that processes payments. They charge merchant account fees from the customer, which are often bundled into the total cost of their services.

3 ways to reduce your credit card processing fees

In recent years, credit card processing fees have gone up, with most providers charging higher rates than before. Fortunately, there are ways to manage these costs and keep more of your profit:

1. Compare the charges of payment processing companies

Based on the number of transactions you handle each month, a provider with a monthly fee might cost you less than one with higher per-transaction fees. However, it could also work the other way around, where the monthly fee pushes your costs higher. Compare providers by evaluating:

Monthly fees. Does the fee match your expected transaction volume?
Flat per-transaction charges. How does this fee affect your overall expenses per sale?
Percentage-based commission. Will this percentage significantly reduce your profit margins?
Total cost structure. How do all the combined fees impact your bottom line?

Evaluating these factors will help you choose the right option for your ecommerce business.

2. Reduce chargeback fees

When a customer challenges a payment, their credit card issuer might issue a refund and charge you a fee, sometimes exceeding $100. To minimize fraud-related disputes, consider using an address verification system (AVS). This system checks the billing address provided by the cardholder against the one on record with their bank. Though AVS involves minor fees (typically a few cents per transaction), it can be cost-effective over time.

Another method is to have customers complete an authorization form before finalizing their payment, which is particularly effective for ongoing payments like subscriptions.

3. Negotiate with banks and processors

Some business owners might not be aware that negotiating lower rates with payment processors and banks is an option. You can handle this on your own or hire someone to do it, but it’s important to ask for a reduction in processing fees or a smaller commission on each transaction. If a bank charges a “convenience fee” that doesn’t seem necessary, you should request its removal.

Certain processors might charge higher rates for online payment gateways than for physical point-of-sale systems. These “card not present” payments are more vulnerable to fraud since they lack physical security measures like EMV chips. As a result, banks might raise fees to cover the increased risk. It’s worth inquiring whether these fees are negotiable.

Take control of your credit card processing fees

You now know all the factors that determine your credit card processing fees. Make sure to review them carefully and take steps to optimize your payment process. With a clear plan and proactive approach, you can minimize costs and keep more of your hard-earned revenue.

Credit card processing fees FAQ

How do payment processing methods affect credit card processing fees?

The fees your credit card processor charges can vary based on the method of payment—whether online, mobile, or in-person. Typically, processors offer the lowest rates for in-person transactions, especially when using their point-of-sale systems.

What compliance regulations should businesses be aware of regarding credit card processing fees?

Businesses must follow the PCI DSS, a global standard set by the Payment Card Industry Security Standards Council. This guideline ensures the protection of cardholder data during transactions.

What are some potential risks of using a payment processor with high fees?

If your business operates with narrow profit margins, high fees from a payment processor could be a significant risk. The profits you make from debit, check, or cash transactions might be completely offset by the extra charges applied to credit card payments.