Credit Card Processing Fees Explained: What Every Business Owner Should Know

Credit card processing fees are yet another cost that can eat into already tight profit margins for your business. Most business owners choose to accept card payments as a courtesy to their customers. But is accepting card payments worth all the extra fees? 🤔 

This guide will break down everything that you need to know about credit card processing fees, including how much they cost and how you can minimize them.

Looking for a credit card with the lowest fees? MoneyLion can help you find it.

What are credit card processing fees?

Credit card processing fees are small charges that merchants pay to let customers make payments with debit or credit cards. 

Credit and debit cards have become so common that it’s hard to imagine a world without them, with roughly 70% of consumers preferring to use a card. But swiping that card isn’t free. It comes with a small cost that’s usually paid by the business owner (more on that in the next section).

Despite the fees, accepting card payments can still be a win for businesses:

• 76% of consumers say they prefer businesses that accept cards.

• 58% said they’re likely to spend more money when using a card. 

So, how much does each swipe cost? Let’s explore…

How much do credit card processing fees cost?

Credit card processing fees range from 1.5% to 3% depending on the provider. Here’s a breakdown of the costs you can expect to pay…

How to calculate credit card processing fees

You can calculate credit card processing fees by taking your provider’s fee and applying it to each sale. For example, if you sell a $100 item and your payment processor charges a fee of 2.7% plus 5 cents, then you’ll end up paying $2.75 in total processing fees:

$100 x 2.7% + $0.05 = $2.75

Want to determine how much you’ll pay in processing fees over any given month? Just use this formula:

(Monthly Sales × Processing Rate) + (Number of Transactions × Per-Transaction Fee) = Credit Card Fees 

For example, let’s say:

• Monthly sales = $5,000

• Processing rate = 2.7% (or 0.027)

• Per-transaction fee = $0.05

• Number of transactions = 60

Here’s how that math breaks down…

($5,000 x 2.7%) + (60 x 0.05) = $138

$135 + 3 = $138

💡 MoneyLion Tip: The more you sell, the better negotiating power you have to secure a cheaper processing fee. If you have a high-volume business, then consider asking your provider for a reduced rate.

Types of processing fees (And what they actually mean)

There are a few different ways that payment processors structure their fees. It’s usually best to choose a structure that best aligns with your business model. Let’s break down the 4 different types of processing fees:

1. Flat rate fees: You pay a fixed percentage (e.g., 2.9%) for every transaction, no matter the card type or network. This creates fixed payments, which are usually best for newer businesses.

• Tiered fees: You pay a slightly different fee depending on how risky each transaction is. The provider groups transactions into 3 tiers:

  • Qualified: The safest transactions with the lowest fees. Think: A popular credit card swiped in person in a major city.

  • Mid-qualified: Transactions at risk of fraud that come with medium fees. Think: credit card numbers keyed in over the phone from a different country. 

  • Non-qualified: Transactions that don’t meet the processor’s requirements. Think: gift or reward cards.  

• Interchange-plus fees: You pay the exact interchange fee set by the card network plus a small, fixed markup. This model tends to be the most transparent and cost-effective.

• Subscription-based fees: You pay a flat monthly fee for access to wholesale interchange rates, which can potentially save high-volume merchants money by avoiding markups on each transaction.

Who really pays these fees? (Spoiler: it’s complicated)

Getting a bit confused about where your fee money is going? It gets complicated because multiple companies want to take a piece of each swipe. 

There are three different types of fees involved in a standard credit card swipe:

1. Interchange fee: A fee paid from your bank to your customer’s bank (or vice versa). 

2. Assessment fee: A fee paid to the card network (Visa or Mastercard).

3. Processor fee: A fee paid to the payment processor (Square, Stripe, or PayPal).

Now that we’ve got a better idea of how these fees work, let’s move on to the most important part…how do you pay the lowest credit card processing fees possible?

How to offset credit card processing fees

There are a few ways that you can minimize or offset the cost of these fees:

1. Go cash-only: This is the only way to truly eliminate credit card processing fees. If you don’t accept card payments, then you won’t have to worry about their fees. But doing this could alienate some of your customers, so it’s not always ideal.

2. Offer cash discounts: This is usually the best of both worlds: customers who want to pay cash can get a discount, helping you avoid a fee.

3. Passing on credit card fees to customers**:** You can offset your costs by increasing your prices by the same amount as your processing fee. If you pay 3% in processing fees, then consider just charging 3% more for your product or service. It’s nothing personal, it’s just business. 

4. Set minimum purchase amounts: Set a minimum requirement for card payments at a level that makes financial sense for your business. This way, you’re not stuck paying a processing fee every time someone buys a stick of gum.

5. Shop for lower rates: Consider shopping around once a year or so to make sure you’re paying a fair rate. This also helps you take advantage of welcome offers or similar discounts.

6. Require debit or ACH transfer for large purchases: Debit cards and ACH payments tend to have lower fees than credit cards. Encouraging customers to use these payment methods for large items can help cut down your fees all at once.

Swipe Smarter: Reducing Credit Card Processing Fees

Credit card processing fees are a bit of a necessary evil: accepting card payments will likely bring in more business, but it also comes at an extra cost. Fortunately, it’s fairly easy to offset these fees using the strategies discussed above.

Now that you have a better understanding of where these fees come from and how much they cost, the power is back in your hands to either offset these fees, negotiate lower rates, or even eliminate them altogether.

FAQs

Are credit card processing fees legal?

Yes, they’re 100% legal. Banks, payment providers, and card networks provide the infrastructure to facilitate payments. Taking a slice of your sale is just the payment for their services.

Are credit card processing fees subject to sales tax?

It depends on your state. Some states tax processing fees while others don’t. Be sure to check with your local laws before you accidentally pay an unnecessary tax.

Why are credit card processing fees so high?

Fees are high because everyone (banks, card networks, processors) wants a slice of your transaction. It’s a buffet of middlemen feasting on your profits.

Who has the cheapest credit card processing fees?

This depends on your sales volume and how you accept payments. Stripe, Square, and Shopify are all affordable options for small businesses that primarily accept in-person payments.

How much does Visa charge merchants?

Visa typically takes around 1.6% to 2.5% per transaction, but that’s before your processor adds their own markup. It’s like ordering a burger at a restaurant that requires you to tip.