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What Are Credit Card Merchant Fees?
When you accept credit cards as payment, you are always charged a fee for processing. This fee is what we generally mean when we say “credit card merchant fee.”
What Are The Average Credit Card Processing Fees For A Small Business?
We all know that having an average number in mind is very useful when comparing rates. From a very general standpoint, credit card processing range from:
- 1.5% to 2.9% for swiped/dipped cards, and
- 3.5% for keyed-in transactions.
Here is a breakdown of average costs for the four major card networks looks like:
- Visa: 1.43% – 2.4%
- Mastercard: 1.55% – 2.6%
- American Express: 2.5% – 3.5%
- Discover: 1.56% – 3.5%
Please keep in mind that this is a rough number. Your actual fees depend on a lot of factors, including the type of transaction you process most often (in-person vs. online), your specific type of business (average risk vs. high risk), and the size of your average transaction. To understand how these factors can affect your rates, keep reading below.
Everything You Need To Know About Merchant Account Fees
The credit card industry is somewhat antiquated and lacks competition. As such, everyone upstream tries to pass their costs downstream, and typically (because of the lack of competition), they’re able to do just that. The best way to see where these upstream costs are being added is to understand how a payment card transaction works, so you can see where a charge might be tacked on to a particular transaction.
When you’re quoted a price by a credit card processor, you’ll usually see a percentage and a flat fee. Let’s start with why you’re being charged this way.
Why Merchants Pay A Percentage & A Flat Fee
When you sign up to take credit card payments, the first thing you might notice is that you are being charged in a somewhat unusual way: your cost for processing a payment card is a combined percentage plus a flat fee. There’s a reason for this, and it has to do with the upstream providers’ fixed business (e.g. equipment) costs and financing risk.
In order to process a transaction, the modern credit card industry uses a lot of computer technology, all connected to form a private computer network. Each player in the industry has costs to maintain their part of this network, including paying for hardware, software, and network connection. This maintenance cost is steady, so the upstream providers pass it down to you as a flat access/usage fee.
In addition to the computer network, there’s a financing aspect to every payment card charge. A credit card is really a mini loan a bank makes to the credit card holder, so there’s always a risk that the bank won’t be paid back. Even a debit card involves a bit of financing risk in the form of an overdrawn bank account. It’s not hard to understand that a bank would lose more money if someone failed to repay the loan on a $1,000 new TV than on a $10 lunch. The banks, therefore, want more money for taking the risk of a greater loss. To do that, you express that risk as a percentage of the total purchase.
So, for every payment card transaction, the merchant pays:
Processing charge = financing risk charge + fixed business (e.g. computer network) costs
The formula makes sense because it takes into account both the fixed costs and the variable costs involved in using a payment card. (Note that there are some payment processing business models that are only percentage-based. The percentage is usually nearer the higher end of normal, and the technology-related charges are typically consolidated into the percent charge.)