Credit Card Processing & Average Transaction Fees Explained

Cody Cromwell
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Credit Card Processing Fee Breakdown

The merchant services industry has undergone significant change over the past few years. In the mid-2000s, virtually every merchant purchased a terminal, printed their own swipe cards and conducted transactions manually. That all changed with the advent of online transactions.

Today, processing transactions with a card reader is the most common payment method for ecommerce merchants, and credit card providers have responded accordingly. The result is a broken-down fee structure that now includes discount fees, credit card fees and bank fee.

Today’s credit card processing fee structure can be a little difficult to understand, but as we go through the explanations below, you should have a much better understanding of how credit card processing fees work for your business.

Interchange Fees

The average interchange fee is a fee which a merchant pays to its financial institution whenever it process a transaction for which it has received a credit card payment. In other words, interchange fees (also known as "merchant service fees") cover the cost to the issuing banks or card processors for running credit card networks and processing credit card transactions.

An interchange fee is paid when a business processes a credit card transaction for a customer and then passes on a percentage of the value of the transaction to their acquiring bank or card-issuing bank.

A merchant service fee is typically charged based on the amount of the transaction, and are expressed in terms of a percentage to help accurately describe the fee.

Assessment fees

these are the fees charged by credit card processors that have to pay back the bank. Most often time, this is the fee associated with the terminal.

Application fees- these are the fees charged by the credit card processor in the invitation process.

Annual fees- these are the fees companies charge you annually in order to belong under their program.

Branded cards- Companies like Mastercard, Visa, and American Express get paid by the consumers who voluntarily offer up their personal information to the company.

Merchant Services Markups

The merchant services markup is the fee charged by the credit card processors for each transaction. Basically, it’s a fee that is applied to the transaction fee prior to applying any discounts. The merchant services markup consists of several payments for each transaction.

What Are Average Credit Card Processing Fees?

A credit card processing fee covers several things, including the costs of running the credit card system, fraud detection rates, cardholder and merchant account setup fees, transaction costs, and other things that don’t have a set per transaction cost.

That said, the one thing buffered card processors are trying to suppress or understate in cost is the transaction fees charged to merchants. In other words, because of the nature of their business, the goal is to hit a square number in the fee that is charged per transaction.

Because of the nature of the business, issuing institutions (the banks) are guaranteed an across the board 1.55% of the transaction amount. They also receive a charge for what is known as an interchange rate. This rate is a specific fee on top of the main processing fee that is based on a hierarchical pricing system. For example, the big four banking institutions in the United States (MasterCard, Visa, American Express, and Discover) are each charged a specific amount to process credit cards.

All of this opportunity for fraud means that a lot of guess work and paperwork goes into making sure merchant transactions are actually the ones approved and approved for amount. Typically, there are many merchants that may be approved and charged for two transactions, even if the amount is the same. This is a system riddled with fraud as a result.

How Do Debit Card Transaction Fees Compare?

There is a strong possibility that you pay close attention to debit card fees, especially if you are a merchant.

If you are unsure of your merchant processing or settlement fees, this insightful post will clear up your confusion.

Why Are American Express Fees Higher?

Other Factors Than Impact Credit Card Processing Fees

Bottom Line

When you decide to go the route of accepting credit cards in your business, you’re making an important business decision that will make a major impact on your bottom line.

Your expenses aren’t going to change dramatically because you’re adding credit card processing to your current business, but your profits (net income) are going to increase.

When calculating the value you’re getting in return for your processing costs, you need to consider two factors – your average transaction fees and the total cost of accepting credit cards.

It’s safe to say that this review is going to be a quick one.

When it comes to your average transaction fees, you have three basic options:

Printing your own merchant receipts. You may be able to find a balance that works out in your favor here by printing your own receipts, gathering the charge back from the merchant, and deducting it from your credit card processing fees.

Using a third-party processor. As an added benefit, some processors have a business card balance or buy-back clause that may mean you can take back your merchant credit and deduct it from your fees – something most credit card processors would not agree to for you.

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