A common question among merchants is what the average fees for credit card processing are? To adequately answer that question, it is first necessary to explain how interchange fees work.
Most major credit card brands, Discover, Mastercard, Visa, publish their rates online. If you have ever seen the number of rates these brands post or have seen a merchant statement, you have a pretty good idea of how many different variables there are to decide the final rate at the transaction time.
These factors can range from which card type is being used (credit card or debit), the category of the card (corporate, fleet, standard, rewards, etc.), is it swiped, or is the card not present (CNP). If it is CNP, then the merchant’s security measures, nature of services purchases (is the customer buying coffee or guns), among many others.
So, what merchants may often refer to as the average fees for credit card processing, is in reality, a permutation of literally hundreds of transaction factors and numerous card networks, such as American Express, Discover, Mastercard, and Visa. We will take a deeper dive into the details of the different cost drivers influencing the price merchants pay.
What makes up the average fees for credit card processing?
Let’s first review the different fees that make up the total cost borne by merchants. Once we get an idea of these fees, we can gauge how the fees can be adjusted and conform to various factors.
The first two fees are the interchange fee and the assessment fee. These fees are fixed, so they must be paid to the payment network and issuing bank for every transaction of their cards.
Interchange fee – the fee charged by the bank issuing the credit card. For example, Citibank will get the interchange fee for a customer credit that Citibank issues for the Mastercard payment network.
Assessment fee – This fee goes to the payment network. Using the above example, Mastercard will get the assessment fee.
Merchant service provider fee – this fee is for the payment processing. This fee is paid to the acquiring bank that accepts the credit card payment and routes the transaction over to payment networks. The costs associated with this fee offer some maneuverability as different acquiring banks set different rates, often negotiated with merchants. These fees can include expenses such as:
- A cost per transaction
- A monthly fee
- Cost for point of sale (POS) terminals used for processing transaction
Card-Not-Present (CNP) business transactions
For merchants who operate businesses dependent on transactions in which the card is not present usually pay a higher interchange fee – in the range of 1.90% plus a $0.10 transaction fee. Such merchants also have higher costs for software and payment gateways, along with additional security check costs. These generally range from $10 – $15 per month, along with a transaction fee in the range of $0.01 – $0.08.
Given the inherent risk of fraud and chargebacks with CNP transactions resulting in more considerable compliance overhead, merchant services processors also charge a higher interchange pass-through markup. All these add up to higher average fees for credit card processing overall.
The Average Ticket Size
The average ticket size is a significant contributor to a business’s average fees for credit card processing. The average ticket size is the amount of a typical credit card or debit card transaction. The higher the average ticket size, the greater the average fees for credit card processing.
As the average ticket size goes down, the transaction fees merchants pay goes up. It’s the law of numbers, and transaction fees rack up for every transaction. A merchant generally processing smaller average ticket size transactions pays a higher overall processing fee.
Looking at an example of two businesses that both process $1,000/ month. Business X has an average ticket size of $10, while Business Y has an average ticket size of $100. This results in Business X with 100 transactions a month, while Business B has ten transactions a month.
Suppose both Business X and Y pay the same rates, including a $0.10 transaction cost. Business X will end up paying $10 in fees per month, while Business Y will be paying $1. That is a 10x difference. As a result, merchants with lower average ticket sizes per transaction impose minimums for credit card usage.
All merchants have a merchant category code (MCC) relating to their industry or business type. Payment networks use the MCC to determine the general risk profile and charge pre-determined interchange fees based on the merchants’ MCC. For example, a restaurant will have a different interchange fee than that of an adult-oriented merchant.
American Express (AMEX) is notaries for being the “pricey” card to accept. However, the company has worked on changing that reputation over the last few years and improved its pricing model. A critical difference between AMEX and other payment networks is that AMEX has the largest market share of corporate cards, which incur higher rates than consumer cards.
Merchants generally pay more if they accept American Express cards as compared to other payment networks. Whether a merchant pays a lot more or just a little is determined by the payment processors your use and the pricing model they offer. Below are the rates Host Merchant Services charges on top of AMEX interchange and assessment fees.
|Swiped retail transaction rate
|Swiped Restaurant transaction rate
|Host Merchant Services
|Interchange + 0.25% + $0.10
|Interchange + 0.20% + $0.09
|Interchange + 0.35% + $0.10
There is a litany of factors that impact the average fees for credit card processing. What merchants pay in processing fees is determined by several factors. This includes the merchant’s industry, type of card, how the merchant accepts cards, and more. Unfortunately, there aren’t any quick and easy answers for a very nuanced subject matter. As spending habits shift towards credit card usage, these fees are increasingly a part of doing business.
Having a clear and transparent depiction of the average fees for credit card processing can help merchants budget and price their products and services appropriately. Of course, businesses should do everything they can to reduce their processing costs, preferably working with merchant services providers using an interchange-plus pricing model.