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Understanding Merchant Fees

Since merchant interchange fees on debit and credit card processors can significantly affect your small business, it is important to have a good understanding of how your merchant services provider generates the merchant fees. There are a few different payment models that are based on sales volume. Since the pricing models take into consideration monthly transactions, you want to understand when lower rates are advertised. Merchant service fees are not always a flat rate. Selecting the wrong pricing model can cost your business a lot in merchant fees. 

What is a Merchant Fee? 

Merchant fees are the charges that are associated with processing credit and debit cards. The merchant fee is often a small percentage of the original price of the product. They also charge merchants interchange fees and assessment fees, which allow the issuing bank to authorize a transaction between the merchant and the payee’s credit card accounts. 

Merchant fees are calculated in a few different ways. There are different pricing models that offer a variety of options to small businesses. The most common pricing models include tiered pricing, flat-rate pricing, and interchange-plus pricing.

How Much do Businesses Get Charged for Credit Card Transactions?

The average credit card processing fees range between 1.3% and 3.5% for each transaction. The exact amount will depend on the pricing model for the transaction fees. Each payment network (Visa, Mastercard, American Express, and Discover), type of card, and merchant category code of business will have a different payment processing fee. 

Merchants are charged a combination of monthly fees and transaction fees by the credit card processing company based on the transaction volume and sales volume. There may also be some additional fees depending on the type of business.

Types of Credit Card Processing Fees:

Business owners are charged interchange fees, assessment fees, and payment processing fees in order to use merchant services for their credit card transactions. The interchange fees and assessment fees are known as the base costs, or discount rate, and the credit card network charges these fees on every transaction. 

  • Interchange fees

The interchange fees are a service fee that the merchant’s bank, or the acquiring bank, pays to a customer’s bank, which is also known as the issuing bank, to cover the processing costs for the transaction made with a major credit card. 

Interchange fees are paid to a card issuer each time a cardholder makes a purchase using a credit or debit card. The issuing bank receives the interchange fee when a transaction is made on its network. For example, when a Chase credit card is used in a transaction, Chase will be paid an interchange fee. Chase is part of the Visa payment network, but the interchange fee will go to Chase, which is the issuing bank. 

  • Assessment fees

The assessment fee is related to your monthly transaction volume. Visa, Mastercard, and Discover set a small, flat-rate percentage charged against the monthly sales processed with a debit or credit card within their payment gateway. Assessment fees are paid to the card associations. They are the card association’s main source of operating income. 

All credit card processors are subject to the assessment monthly fee. This monthly fee is passed along to the merchants and may appear as one of your statement fees as a line item listed under “Dues and Assessments.” This fee may also be bundled with other statement fees, such as interchange fees. 

  • Payment processing fees

The payment processing fees are given to the payment processing company accepting the credit card payment and sending the transaction to the payment network. The electronic transaction is sent either through an online payment gateway or a card reader. The payment processing company determines the payment processing fees for their service. 

The payment processing fees include:

    • A per-transaction fee
    • A monthly service fee
    • Cost of the transaction processing equipment
  • Interchange-Plus Pricing

The interchange-plus pricing model is a way to combine the account fees for the merchants. This model comprises the interchange fee and a markup that is set by the credit card processor. 

Many view interchange-plus pricing to be the fairest pricing model because it has transparent pricing. The average interchange-plus pricing model will cost business owners about 2.2% + $0.22. 

  • Flat-Rate Pricing

Flat rate pricing charges a flat fee for all of your transactions regardless of whether the customer uses credit, debit, or premium credit cards. The average credit card payment processors charge 2.75% for all the payments that are swiped. This can make it simple and easy to calculate the payment processing costs.

  • Tiered Pricing

The tiered pricing model is a bit more complex. There are typically three tiers that the processor establishes – qualified, mid-qualified, and non-qualified. The card processor assigns a different rate to each tier. The processor determines which of your transactions it will charge to the different tiers. The majority of the transactions will be at the mid-qualified or non-qualified tiers in most cases. This often results in high costs. 

How does this compare to cash or debit card transactions? 

Merchants should understand there is a difference between the merchant fees of credit cards and debit cards. Credit cards are more expensive for the merchant than debit cards because of the risk that is taken by the payment processor. When the payment processor gives the merchant money, there is a risk that the customer will refuse to pay and there will be chargeback fees. 

Customers who use debit cards with their PIN allow the card to transfer money from the customer’s bank account to the merchant’s account. This is less risky since the money comes directly out of the customer’s bank account. 

The rates can be higher in the USA when a customer needs to sign for their debit transaction. The debit card rates are higher in this scenario because they are using credit card technology. 

Cash transactions are the least expensive for a merchant because they do not require a credit card processing company to transfer the money.

Which credit cards have the lowest merchant fees?

For the lowest overall credit card processing fees, Visa is the winner. But Mastercard and Discover compete with only slightly higher rates. For most merchants, the processors’ charge is almost the same whether the customer uses a Visa, Discover, Mastercard, or another credit card. 

The most expensive payment network over the years has been American Express, which has advertised its card-brand as being exclusive for decades. It is accepted by fewer merchants due to its merchant fees. In 2018, American Express announced a large drop in its fees, which brought it closer in line with the other credit card networks. 


LOLA POS. (LOLA POS) is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, LOLA POS’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or e-commerce, LOLA POS will create the best processing experience for your company. For more information, visit us at our www.lolapos.com or call (866) 509-7199.

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