Credit card processing seems like it should be so simple. You ring up a sale, your customer swipes or dips a credit card into the card reader and money is magically transferred from the card to your business bank account. However, the magical part of the process where the money is transferred from your customer to you is an extremely complex process comprising data routing, verifications and authorizations, involving multiple players, including card networks, banks and credit card processing companies.
Each player serves an important behind-the-scenes role in transferring the money for each sale, and in return charges a small percentage of every transaction that it helps facilitate. Because of the complexity of the process and the number of players that touch each transaction, credit card processing can be expensive.
In order to get the best possible pricing for your credit card processing service, you need to learn about the different pricing models processors use and how they work so you can determine which one can save your business the most money. You also need to be aware of the various fees that credit card processing companies frequently charge and which fees you should never have to pay. Understanding this information helps you evaluate this essential service as a savvy consumer, and gives you the knowledge you need to negotiate lower rates and fewer fees.
In this guide, we examine the most common rates and fees for credit card processing, including:
- Processing Rates: Find out what type of pricing works best for small businesses like yours. We break down the different types of rates offered by most credit card processing companies and give our recommendations.
- Standard Fees: Learn about the common fees that most major processors charge.
- Fees to Avoid: Discover which fees you shouldn't pay. We list sneaky fees that the best processors don't charge.
- Lease or Buy: Find out how fees make leasing more expensive than purchasing your equipment.
- Negotiation Tips: Get pointers on which fees may be negotiable.
To learn more about merchant accounts, EMV regulations and other payment industry topics, check out our articles on credit card processing. If you're looking for a list of credit card processors to consider, we rate the best credit card processing companies here.
Processing Costs: What's the Difference Between Rates & Fees?
When you contract with a credit card processing company, you typically pay two different sets of costs: rates and fees. Rates are the costs that you pay for each transaction. Fees are the costs that you pay the processor to maintain your account.
What are Discount Rates & Per-Transaction Fees?
Credit card processing rates normally consist of either one or two parts: a discount rate only or a discount rate and a per-transaction fee. The discount rate is the percentage of each transaction and the per-transaction fee is a flat fee you pay each time someone pays with a credit card, regardless of how much the purchase cost.
In order to understand the various pricing models and which rates are negotiable, you need to know what is included in the rates. Both the discount rate and per-transaction fee are comprised of the following costs and markup:
This rate varies depending on which type of card your customer uses. It accounts for the bulk of the discount rate and is paid to the issuing bank. It's a non-negotiable cost set by the card brands, and every processor pays the same amounts for this part of the transaction cost. The card brands publish the rate tables on their websites.
These are additional non-negotiable costs set by the card brands, and, again, every processor pays the same amount. This rate varies depending on the brand of card your customer uses, such as MasterCard or Visa, and is paid to that card brand. Assessment fees may also include MasterCard's Network Access and Brand Usage (NABU), Visa's Network Acquirer Processing Fee (APF) and Discover's Data Usage fee.
This is the only negotiable portion of the discount rate. Instead of being set by the card brands, it's set by the credit card processing company.
Most credit card processing companies offer one or more of the three main pricing models to calculate the transaction rates that you pay: interchange-plus, flat-rate and tiered pricing. The best pricing model for your company depends on the volume of cards you process each month, the average ticket size of your transactions and which type of cards you accept most.
Also called cost-plus (or cost+) pricing, interchange-plus pricing adds a markup of a set percentage above the interchange rate to each transaction. The processor takes that markup as its payment. This pricing model shows you exactly what percentage of your costs are going to the processor, no matter what type of card you accept or how the transaction is processed. Industry experts recommend this pricing model as the most cost-effective option, and it's the best pricing model for most small businesses.
Even though this pricing model is offered by most credit card processing companies, and the best processors offer it to all of their customers, you may have to specifically ask for it when you're calling for quotes as many companies prefer to set you up with tiered pricing. Additionally, some companies require you to meet certain requirements before they allow you to process with this pricing model. For example, you may have to process a certain dollar amount of sales each month or you may have to process with that processor for a certain period of time.
This pricing model is most commonly used by mobile credit card processors and often isn't offered by traditional credit card processors. Just like the name implies, you're charged a flat percentage of each transaction, regardless of the type of card used. This means that while a premium card, such as a rewards credit card, has a smaller markup, other cards, such as regular debit cards, have a higher markup. If you're looking for simplicity, if your sales tickets are small, or if you process a low volume of sales each month, this is a good type of pricing plan to consider when looking for a processor.
Flat Rate Plus Per-Transaction Fee Pricing
Some processors charge a flat rate plus a per-transaction fee. Usually, the percentage rate for these types of plans is lower than the services that charge a flat percentage only. However, before you choose a payment plan, you need to figure out which option is more cost-effective for your business. If you process a high volume of small sales tickets, the pricing model with the per-transaction fee may be more expensive, even if the discount rate is lower.
This pricing model is sometimes called bucket pricing because the credit card processor arranges the rates on the interchange tables into tiers, or buckets, and then sets a price for each tier. Processors may have as few as two tiers or as many as six, often with separate tiers for debit and credit cards.
The most common tier structure has three tiers each for credit and debit cards, and these are usually categorized as “qualified,” “mid-qualified” or “non-qualified.” These terms don't imply that a card is or is not valid for processing, but rather the type of card and how it's processed and verified.
If you're processing already and have a plan with tiered pricing, or if you're considering signing up with a processor that offers tiered pricing, it's important to ask which type of cards the processor assigns to each tier. Here's more information on the types of cards and verification methods commonly included in these tiers:
A transaction is qualified if the customer swipes or dips the card and either signs or enters a PIN to authorize the transaction. Most often, this is a regular credit or debit card with no rewards attached to it.
If you manually key in a transaction and use an address verification service (AVS) to verify the address of the cardholder, it may be considered mid-qualified. This tier is may also include rewards credit or debit cards, although some processors categorize rewards cards as non-qualified transactions, particularly those with premium rewards.
Transactions that you manually key in without using an AVS service are considered non-qualified, as are transactions made using international, corporate and government-issued credit and debit cards. Additionally, some processors categorize rewards credit and debit cards as non-qualified transactions, especially premium rewards cards.
Qualified rates are temptingly low, particularly for debit cards, and if your business accepts a high percentage of regular debit cards, this type of pricing model can be a good choice for your business. However, if your clientele tends to use high-end rewards credit cards or if you key in a lot of sales, such as for phoned-in orders, you may find yourself paying expensive non-qualified rates. For this reason, it's important to understand what kind of cards your customers use and how your processor categorizes them.
In addition to the processing rates you pay for each sales transaction, most companies charge fees for account maintenance. The best processors charge very few fees, and the best mobile credit card processors don't charge any additional fees. Typical fees include a monthly fee, a PCI-compliance fee, and, if you accept credit cards online, a monthly gateway fee.
It's important to review your credit card processing statement each month so you can familiarize yourself with the fees that you regularly pay. You should also watch for notifications or reminders posted on your statement alerting you to upcoming changes to your account. If you find discrepancies or fees that you don't understand, you should call your sales or account rep for clarification. Here are the most common credit card processing fees:
Monthly Fee (Statement Fee)
Sometimes called a statement fee, processors charge this fee for preparing your monthly statements and providing customer service. Some processors include printed statements in this cost, others charge an additional fee if you opt to receive printed, mailed statements.
A payment gateway is the online equivalent of a credit card terminal. Processors may have their own proprietary system or may work with a third-party provider such as Authorize.net. If you sell your products online through your company's website, you require gateway access. Most companies charge a separate monthly fee for this service, though some include it in the monthly fee.
Monthly Minimum Fee
Many standard credit card processing companies expect you to process a certain amount of credit card transactions each month. Some companies use a monthly minimum to ensure your account stays active, and they apply the full dollar amount of your transactions to the monthly minimum. However, most processors use it to guarantee that they generate at least a certain dollar amount of transaction fees from your account each month, and apply only the processing costs to the monthly minimum.
What this means is that a standard $25 monthly minimum can be calculated very differently, and if your business is small or seasonal, it's important to inquire about the dollar amount you have to process in order to meet the minimum. If you fail to meet the monthly minimum, most credit card processors charge you the difference rather than the full fee, but in order to avoid surprises on your bill, it's best to ask your processor in advance about this fee.
The Payment Card Industry has data security regulations that all merchants must adhere to in order to process credit cards. These regulations help prevent fraud and protect you, your customers and the credit card company from costly security breaches.
In order to certify as compliant, you're required to complete a self-assessment questionnaire, though depending on your business, you may need to meet additional compliance requirements. Most traditional credit card processors that set you up with your own merchant account charge this fee to help you establish and maintain your compliance, however not all do. Most aggregators, or mobile credit card processing companies, don't charge PCI-related fees, but take care of PCI compliance on their end so that you don't have to worry about it.
This fee may be charged monthly, quarterly or annually. It isn't always disclosed when you call processors for quotes, so you want to ask how much it is, how often it's charged, and what services the processor provides to help you meet PCI compliance. For example, some companies provide breach insurance and security scans with this fee. However, you want to negotiate this fee since some companies are willing to waive it, particularly if you've already certified as PCI compliant or if you handle PCI compliance in house.
PCI Non-Compliance Fee
When you sign up with a processor, you usually have a few months to establish PCI compliance. However, if you fail to comply or if you don't annually reestablish your compliance, you may incur a monthly fine. The amount of the fine varies by processor and can be quite expensive; for this reason, it's important to check your statements monthly for notices that your compliance renewal is coming due or to catch any new fees that pop up on your statement.
This is a nominal fee charged whenever you post a batch of transactions, which is usually once or twice a day. It's normally the same amount as the per-transaction fee, which is usually between $0.10 and $0.25.
Address Verification Service (AVS) Fee
You're charged this fee when you use AVS to verify the billing address of the cardholder. AVS is a fraud-prevention tool frequently used with eCommerce credit card processing, but you may also use this service if you manually key in a card, because you're taking payment information over the phone or your terminal was unable to read it. This fee varies between processors but is typically lower if you use the automated touchtone service and more expensive if you require operator assistance.
Voice Authorization Fee
As a fraud-prevention measure, your terminal may instruct you to call the voice authorization center to provide the cardholder's bank with additional information before it authorizes a transaction. Although voice authorization is rarely required, you're charged for each occurrence. This fee varies by processor and may be charged as either a flat fee or a percentage of the transaction.
Retrieval Fee (Retrieval Request Fee)
If a customer questions a charge, his or her bank may ask for a copy of the sales draft so they can verify the authenticity of a purchase. This request may escalate to a chargeback, or may prevent one if the issuing bank or your customer is satisfied by the sales documentation you provide. This request may also be made if a customer needs a copy of a sales draft for his or her records or if purchase documentation is needed for legal proceedings such as bankruptcies or divorce settlements. The cost of this fee varies by processor.
Every business aspires for 100 percent customer satisfaction, but there are times when customers want their money back and ask their bank to cancel the transaction and return the funds. When this happens, you pay a fee to cover the processing costs involved in crediting the customer's account with the amount of the purchase. Ecommerce businesses typically experience more chargebacks than companies that accept credit cards in person, since common reasons for chargebacks include delivery failures, technical errors, customer dissatisfaction and fraud. It can also happen if your merchant name differs from your store name and your customer doesn't recognize the charge on his or her credit card statement. The amount of this fee varies by processor.
Non-Sufficient Funds (NSF) Fee
This may also be called a return draft fee. If you don't have enough money in your business bank account to pay the fees you owe your processing company, you are charged a fee.
Various Card Network Fees
In addition to the card brand assessment fees that are normally rolled into processing costs, the card networks charge a variety of non-negotiable fees, which are passed on to you through your processor. Be aware that some processors may overcharge you for network fees by adding a markup rather than passing them straight through to you. You should look on the credit card companies' websites for the standard rates and compare them to the rates listed on your contract or charged on your statement.
APF/NABU/Data Usage Fees:
These are fees for using the card brands' networks. Visa charges a Network Acquirer Processing Fee (APF), MasterCard charges a Network Access and Brand Usage (NABU) and Discover charges a Data Usage fee.
Visa's Fixed Acquirer Network Fee (FANF):
Since 2012, Visa has charged this non-negotiable, monthly fee in order to make up for revenue lost due to regulations implemented with the Durbin Amendment. It applies to all businesses that accept Visa-branded cards. The rate varies depending on your processing volume, the number of locations your business operates and how your business accepts payments. It's usually more expensive for businesses that process online than those that accept credit cards in person.
MasterCard's Merchant Location Fee
This is an annual fee that MasterCard implemented mid-2016 and increased to $15 per location for 2017. Your credit card processor may pass it on to you as a single annual fee or may prorate it on your monthly statement to spread out the cost.
If you're a U.S.-based merchant and accept an international card, the card networks charge a fee (or two) to offset currency exchange costs.
- American Express charges an International Assessment fee.
- Discover charges an International Processing Fee and an International Service Fee.
- MasterCard charges a Cross-Border Assessment Fee and an Acquirer Program Support Fee.
- Visa charges an International Acquirer Fee and an International Service Assessment Fee.
In addition to the standard fees listed above, some processors charge a variety of miscellaneous fees. Most are charged monthly or annually, others are charged quarterly or semi-annually, and some are triggered by specific incidents.
When you're evaluating a credit card processing company, it's important to read through the full contract, including the terms and conditions as well as the program guide, since there may be fees included in the paperwork that weren't verbally disclosed and that aren't listed on the application. As you read the contract, it may be helpful to make a list of the fees included so you can ask your sales rep about them before you sign up with the service.
You want to ask what each fee costs, how frequently it is charged, what it is for and if it can be waived. If the sales rep offers a waiver, be sure to get it in writing, either noted on the contract or as an addendum.
Credit card processors aren't tightly regulated when it comes to fee structure. Although this allows them freedom to compete, it also makes it easier to add extra charges that might not be necessary. Don't assume that all charges are set in stone or that all fees are common industry-wide. If your credit card processor charges the following fees, you should negotiate to have them reduced or removed from your bill. If you're shopping for a processor, you should look for a service that doesn't charge these fees.
Cancellation fees can be extremely expensive, often costing several hundred dollars. There are two types of cancellation fees you need to watch for when you sign up with a credit card processing companies. The first is for the credit card processing service, and the second is for the credit card processing equipment if you choose to lease or accept "free" equipment. The best way to avoid paying expensive cancellation fees is to sign up with a company that offers month-to-month service and purchase your equipment outright.
The problem with signing up with a credit card processing company that requires a lengthy contract is that if the service no longer meets your needs or you find a better deal elsewhere, it's extremely frustrating to be stuck waiting out the term or choosing to pay an expensive penalty. Plus, since most contracts automatically renew for additional terms and require you to follow specific cancellation procedures within a short window, it can be tricky to cancel your account without triggering cancellation fees.
Most account reps aren't going to tell you about cancellation policies unless you specifically ask, and information about how to close your account and what cancellation penalties you may incur if you exit early can be difficult to find in your paperwork. It usually isn't disclosed on the application section of the contract; rather, it may be nested in the fine print of the terms and conditions, or it may be tucked away in the ample pages of the program guide. Additionally, cancellation fees may be referred to by the following names:
- Early Termination Fees (ETF)
- Early Deconversion Fees (EDF)
- Exit Fee
- Lost Profit Fee
Some sales representatives may use these alternate terms to assert they don't charge an early cancellation fee, so be sure to ask carefully and check all three parts of your contract: the application, the terms and conditions, and the program guide.
Some cancellation policies have a liquidated damages clause that allows the processor to charge you for the revenue it expected to earn during the life of your contract; in some cases, this amount could add up to thousands of dollars.
The best credit card processing companies provide service on a month-to-month basis with no lengthy contract and no cancellation fees. We place a high value on this quality, because it encourages credit card processing companies to stay competitive with their pricing and customer service in order to keep their customers.
Application or Setup Fees
Although some services charge a fee to review your application and set up your merchant account, the best don't. Those that do charge this fee may be willing to waive it.
This is a fee that you pay each year for maintenance on your merchant account. Like the application fee, the best processors don't charge it. Sometimes credit card processors offer to waive the first year of annual fee, but it's better to choose a processor that doesn't charge it at all.
Customer Service Fee
If you're charged a customer service fee in addition to your monthly fee, you should ask your processor to waive the charge. Most credit card processing companies don't charge this fee.
EBT Network Access Fee
If your business accepts electronic benefit transfer cards, some processing companies charge you a fee either annually or monthly. The cost of this fee varies by processor, but the best don't charge it; you should ask to have it removed from your bill.
IRS Reporting Fee
In 2008, the IRS mandated that credit card processors report income passing through credit cards. What this means for you is that if you process more 200 transactions per year totaling more than $20,000, you should receive an IRS 1099-K form from your processor.
Some credit card processing companies charge a fee for preparing and supplying this form, although, again, the best processors don't charge this fee. Those that do charge this fee may call it an "IRS Fee," a "Reporting Fee," "Regulatory Fee," "Regulatory Comp Fee" or "IRS 1099-K Fee."
If a company charges for this service, the cost should be minimal; however, this charge can be excessive, so you should consider either requesting a waiver or selecting a processor that doesn't charge this fee.
Next-Day Funding Fee
If a processor offers next-day funding, it should be complementary. If you're charged this fee, ask to have it waived.
Club or Membership Fee
Although some processors roll all of the standard fees (including monthly, gateway and PCI compliance) into a single membership fee in order to simplify their fee structure, others charge it in addition to these standard fees. You need to contact the processor to find out what you get for your membership; often, it's rolls of paper for your terminals. If you don't opt out or cancel your club membership, you're charged membership fees on a monthly or annual basis.
If your contract includes an "Additional Services" clause, the company automatically signs you up for various unnamed services (fees undisclosed), unless you opt out within a set timeframe, usually 30 days after you sign up with the company. You may be able to find information in the Program Guide about what the additional services are and what they cost, but you'll most likely have to contact your sales rep for this information.
Semi-Annual Postage & Handling Fee
If you're already paying a statement fee or if you receive your statements and other correspondence electronically, ask to have this fee removed.
If you're charged an access fee in addition to APF/NABU/Data usage and FANF fees, you should call your processing company and ask what it is for and if it can be removed from your bill.
Foreign Handling Fee
Although the card networks charge non-negotiable fees if you accept foreign credit cards, some processors tack on a markup or a fee of their own. If you're charged more than two fees for a single foreign transaction, such as an International Acquirer Fee, International Service Access Fee and a Foreign Handling Fee, you should ask your credit card processor which fees are charged by the card network and which is their markup or surcharge, and if they can waive it for you.
Online Reporting (Online Transaction Reporting) Fee
This is a fee that may be charged if you opt for online rather than paper statements. The best processors don't charge this fee but provide online statements at no cost.
Monthly (or Quarterly) Regulatory Compliance Fee
This fee may replace, or be charged in addition to, the PCI compliance fee or the IRS reporting fee. This is a fee that you should question if you find it on your contract.
Other Nonstandard Fees
Below is a sampling of nonstandard fees to look for as you review a contract before signing up with a credit card processing company. Like the other nonstandard fees on our list, the best processors don't charge the following:
- Audit Fee
- Bill Back Fee
- Conversion Fee
- Excessive Transaction Fee
- File Fee
- Interchange-compliance adjustment fee
- Liquidated damages fee
- Over-Limit Fee
- Quarterly technology fee
- Security Fee
Should I Lease or Buy a Credit Card Terminal or Point-of-Sale System?
Purchasing your processing equipment is always the best, most cost efficient option. Although leasing a credit card terminal or point-of-sale (POS) system may seem inexpensive in the short run since it reduces upfront costs, especially if you have multiple stations, leasing fees can quickly exceed what you would have paid if you purchased your terminals outright. In addition, many leasing contracts are disadvantageous due to the following common provisions:
- Non-Cancellable Contract: Nearly all equipment lease contracts are unbreakable, which means that if you go out of business during the first year of the contract and return the equipment, you're still personally responsible to pay all fees in full for the remaining time on your lease. You may be able to buy out the remainder of your term, but this may cost as much or nearly as much as riding out your lease.
- Four-Year Term: This is the average duration of a terminal lease contract. You'll notice that this is a year longer than average processing contracts (and 47 months longer than the month-to-month contracts provided by the best processors). This means that if you want to switch services at the end of your processing contract, you should make sure your new processor is able to reprogram your leased equipment so you can continue to use it; otherwise, you may have to delay your plans for an additional year or return the equipment and pay off the fees in full for the remaining time on your contract in advance.
- No Lease to Own Option: Most leasing contracts require you to return the equipment at the end of the term, unless you choose to purchase the equipment for fair market value after the lease expires, which may be more than the equipment is actually worth.
- Automatically Renewing Term: At the end of your term, you may be required to send the leasing company a written cancellation notice within a certain period of time to prevent the contract from automatically renewing. Otherwise, the company may continue withdrawing the lease payment from your account, even if you've returned the equipment.
If you choose to lease your equipment, you make a monthly payment that is automatically withdrawn from your bank account. In addition to the lease payment, you may also be charged various fees, such as the following:
Equipment Protection Program (Loss & Destruction Insurance)
Leasing companies require you to insure the credit card processing equipment. You may be required to purchase the insurance from them and pay a monthly fee, or you may have the option of insuring your equipment elsewhere, but be required to provide the leasing company with proof of insurance. This may also be called a replacement or warranty fee.
Property Tax Fee
This is an annual handling fee the leasing company charges to process taxes for the equipment that you're leasing.
You may have to pay sales tax on your monthly lease payment, depending on your state tax laws.
Is Purchasing Processing Equipment Really My Best Option?
It's less expensive to purchase your equipment than to lease it, though the cost is upfront. To get the best price on processing equipment, be sure to shop around, since the price quoted to you by your processor may be more expensive than it would cost elsewhere. You can also ask if the processor has used equipment available for purchase. If you need a POS system, opt for a tablet-based version that works with iPads or Android tablets that you already own or can purchase yourself.
Avoid proprietary or "locked" equipment that prevent you from using it with other processors. If you own processing equipment and switch companies, there's only one equipment-based fee you may need to pay:
If you already own your processing equipment and switch processors, some companies charge a one-time fee to reprogram your terminals to work with their system. Others don't charge for this service.
What About Free Equipment Offers?
It's important to read the contract and verify that the equipment is actually free. If this is the case, there may still be strings attached. For example, you may be required to sign a lengthy, automatically-renewing contract instead of receiving month-to-month service; if you cancel your contract early, you may be charged for the full price of the terminal plus early termination fees. Some processors have different pricing plans with higher rates if you accept free equipment.
Alternatively, processing companies may offer free placement programs, but these may come with additional monthly fees for maintenance or insurance, or may require you to meet higher monthly minimum processing requirements. These types of programs require you to return the equipment and some have very strict return policies, charging you for any damage or wear on the terminal.
Be very cautious about accepting free equipment; online forums for small business owners give several accounts of individuals who thought they were signing up for free equipment only to discover they had signed an expensive lease.
Before you sign up with a credit card processing company, bear in mind that most rates and many fees are negotiable, especially if you have stellar credit and a solid business history. Don't hesitate to ask for discounts and waivers, especially for the nonstandard fees listed above. Also be sure to shop around for the best deal; competition is fierce among credit card processors and many are willing to waive or reduce fees in order to win your business.
The only fees that are non-negotiable are the card network fees; everything else may be flexible. Here are some tips you can use to help you in the negotiation process:
1. Give yourself plenty of time to call for pricing quotes so you can get the best deal.
Doing so allows you to gather all of the information you need, read the contracts and ask questions. It's easier to make a hasty decision if you're in a hurry.
o Plan to call several weeks before you need to start processing so that you have time to contact several companies.
o Plan to spend 20 to 30 minutes on the phone with each sales rep.
o Plan to call multiple companies so you can find the best pricing and best terms.
2. Don't provide your Social Security number, give any bank account information or sign the application until you're ready to sign up with a processor. If you provide this information and sign the application, you've signed the contract – and signed up with the service.
o Use your information and your signature as leverage; let the rep know that you're not going to provide these until you're convinced that this processor is the best fit for your company. In order to make this decision, you need a complete pricing quote and a full contract to review (the application, the terms and conditions, and the program guide).
3. Ask detailed questions about pricing models, rates, fees and terms. Sales reps are usually forthcoming with information you specifically request, but most don't volunteer information that doesn't help them make the sale. They generally don't tell you about fees you don't ask about.
o Download our negotiation guide, "How to Negotiate with Credit Card Processing Companies: The 4-Step Plan of Attack" that you can use when you call for quotes.
There are good credit card processing companies out there that charge reasonable rates and minimal fees; choosing the right one for your business can save you money and frustration. By understanding how the different pricing models work and which fees you should expect and avoid, you can confidently navigate the market and choose the processor that will be the best fit for your business.