Credit Card Processing Fees and Rates

Square Guide

Credit Card Processing Fees and Rates Explained

In this guide, we explain what a credit card processing fee is, what goes into it, how fees affect your rate, and how you can reduce your transaction fees.

Table of Contents

1. Who decides on credit card processing fees?
2. What goes into credit card processing fees?
3. Three types of credit card fees that affect your rate
4. Processing American Express and other non-bank cards
5. Can you reduce your transaction fees?
6. Credit cards with the lowest processing fees
7. FAQ about Square’s competitive flat fees

Intro

Credit card processing fees, also known as qualified discount rates, or just “discount rates”, are the processing fees a merchant pays for each credit or debit card sale. This fee is predetermined by your merchant services provider and usually involves three components: interchange fees, assessment fees, and the payment processor’s markup.

Deep Dive

Who decides on credit card processing fees?

Generally, there are two parties involved in credit card processing — the card issuer and the payments processor.

The card issuer is the bank or financial institution that provides a “card association” for debit and credit cards, and issues them directly to consumers. Visa, Mastercard, American Express, Chase, Capital One, and Discover are examples of card issuers (though Visa and Mastercard make up the lion’s share of the market). The card issuer can also partner with banks or brands on credit and debit cards such as Wells Fargo-Visa, Citibank Mastercard, or United Airlines Mileage Plus cards.

For each card transaction, the card issuer charges a merchant a commission for the ability to accept the card — typically, a percentage of the transaction amount plus a flat fee.

The payments processor is the financial institution that works in the background to securely process and complete a credit or debit card transaction. To facilitate all of this, payments processors usually have partnerships with other companies or brands that work directly with consumers and merchants. Like card issuers, payments processors typically charge a percentage of the transaction amount plus a flat fee for each credit or debit card purchase.

When it’s all said and done, the average cost of processing payments for U.S. businesses that do between $10,000 and $250,000 in annual payments volume is between 2.87 percent and 4.35 percent per transaction.

Many factors determine how much you may ultimately pay, including PCI-compliance fees, annual account fees, and chargeback fees (which we go into below). In fact, for U.S. businesses processing between $10,000 and $250,000 in sales per year, additional fees are on average 28 percent to 60 percent higher than the initial quoted rate (not to mention the cost of hardware leases and software subscriptions). So it’s important to educate yourself before you decide how you’re going to process card payments at your business.

Square has competitive, transparent pricing so you know exactly how much you’re paying to process credit and debit cards. It’s just 2.75% per swipe, dip, or tap, 3.5% + 15 cents for each keyed-in transaction, and 2.9% + 30 cents for each online transaction. There are no monthly or hidden fees, and PCI compliance and Chargeback Protection are included in the rate.

Another benefit of using Square is that we charge the same rate for all major credit cards, including American Express. That way you can accept any payment method your customers prefer. With other POS solutions, credit card processing fees can vary from card to card.

Average Credit Card Processing Fees

• Mastercard1.55% – 2.6%
• Visa1.43% – 2.4%
• Discover1.56% – 2.3%
• American Express2.5% – 3.5%

The three types of credit card fees that affect your rate:

• • Interchange

Per a recent analysis by ValuePenguin, the overwhelming majority (78 percent) of credit card processing fees comes from interchange fees — the money that’s paid from the acquiring bank (merchant account) to the issuing bank (customer account) every time you ring someone up.

Interchange fees are in place so banks can cover fraud, handling costs, and the risk of approving the sale. The banks involved in the transaction set the interchange rate. While both Mastercard and Visa make their interchange rates publicly available, Discover currently does not. Interchange fees change twice a year, in April and October.

Banks take a number of factors into account when setting the interchange rate for a business’s card processing fees. These include:

• • The type of card used

Debit cards with PINs are lower risk than credit cards, so they typically have a lower interchange rate. Rewards cards (travel, triple points, etc.) and business cards have some of the highest interchange rates.

• • The riskiness of the transaction

In-person transactions at a point of sale (POS) are far less risky than card-not-present (CNP) transactions (online, over the phone, or mail order). That’s because a POS transaction requires a chip to be scanned, and oftentimes a PIN number or signature, to securely complete the sale. As a result, POS transactions have a lower interchange rate than CNP transactions.

• • The amount being charged

Merchants with small ticket sizes and a large amount of sales can qualify for lower interchange rates to help reduce their costs.

• • The type of business

Every business that accepts credit card payments has a merchant category code (or MCC), a four-digit number that’s assigned to them by the acquiring bank or institution. The MCC is used to classify businesses into market segments that simplify IRS reporting.

The MCC also influences how much a bank or institution charges in interchange fees. Business types that are considered “higher risk” (like financial services, travel, gambling, and hospitality) often have to pay higher interchange fees.

• • Payments processor’s fee

A payment processing fee is what you pay your credit card processor for use of the product. Typically, this fee is charged per transaction. Square’s rate is just 2.75% per swipe, dip, or tap, 3.5% + 15 cents for each keyed-in transaction, and 2.9% + 30 cents for each invoice or e-commerce transaction.

There are no monthly or hidden fees since our flat payment processing fee includes any fees incurred by interchange, as well as additional dues and assessments or other fees that come from processing American Express cards.

• • Dues and assessments

Payments processors have to collect something called dues and assessments for Visa, Mastercard, and Discover Card associations. These are fees that are paid directly to the card associations for the use of their card brand, as well as the ability to process transactions on their payments networks.

Assessment fees are different from interchange fees in that they’re charged based on total monthly sales as opposed to each transaction. They’re also a lot lower than interchange fees — they make up just four percent of the overall credit card processing fee.

How much you pay in assessment fees depends on a variety of factors. Some card associations charge more for credit cards than debit cards, while others charge more when the transaction amount is greater. If a transaction is unique (for example, a foreign transaction), that could result in a higher fee as well.

Similar to interchange fees, credit card associations review their assessment fees twice a year. So make sure to check your monthly credit card statement for any increases and decreases to your assessment fee. Below are the most current (at the time of writing) assessment fees for Mastercard, Discover, and Visa.MastercardDiscoverVisa0.12% (Transactions $1,000)?0.11% (Debit)Other miscellaneous credit card fees and costs you might be paying

Types of Fees

What Is It?

Square’s Fee Payment Gateway

The conduit that passes money between your merchant account and your payments processor

Free PCI Compliance

The security standard all businesses that accept credit cards must comply with

FreeChargeback

The fee incurred when a customer issues a chargeback for a payment

FreePOS software (monthly SaaS fees)

The amount you pay monthly to use your POS software

Free POS hardware rental

The monthly costs to rent your POS terminal hardware and other accessories associated with your POS hardware

N/A Batch fees

Charges for the settlement/closing out of your deposits each day (also called batch header fees)

Free Hosting fees

Fees charged for traditional server-based POS systems

N/A Wireless access fee

A fee that can be charged for using a cloud-based POS terminal vs. a traditional phone line

Free AVS

The Address Verification System is for keyed-in transactions and matches a customer’s billing information to the card on file, incurred on a per-transaction basis

Free Monthly statement / support / service fee

Some payment processors charge a flat monthly fee for support-related services, including the preparation and mailing of your monthly statement, as well as general customer support

Free Monthly minimum fee

The fee between your monthly GPV (credit card dollars processed) and the agreed-upon monthly minimum

Free Processing American Express and other non-bank cards

American Express

American Express does not participate in the interchange system — only Visa, Mastercard, and Discover do. That’s because American Express (as well as Diners, Discover, and JCB) is considered a non-bank card.

American Express has its own network in a “closed loop” payment model — it’s both the network and the payments processor or bank. This means American Express owns all the profit and assumes the credit risk in the transaction. That’s why processing American Express cards is more expensive — particularly when it comes to return.

Rewards and travel cards

Rewards and travel cards are generally more expensive to process than regular credit or debit cards. That’s because they can incur what’s called a “mid-qualified surcharge”, which is significantly higher than the qualified rate, resulting in heftier interchange fees. Rewards cards also help pay for the perks they pass along to customers by marking up the interchange fees.

How can you reduce credit card transaction fees?

There are number of ways to reduce your credit card transaction fees. Here are a few:

1. When possible, accept cards in person.
2. Online, keyed-in, or mail-order transactions (also known as CNP or card-not-present transactions) have higher processing fees than in-person (POS) transactions because they’re more susceptible to fraud. They can also fall into the “mid-qualified surcharge” bucket, which bumps up the interchange fee for those transactions.
3. Try to accept cards in person whenever possible if it makes sense for your business. After a customer pays in person with Square, the customer can authorize you to save that card on file. Then, if that customer later wants to purchase something online or over the phone, you have the payment information ready to go.
4. Reduce your risks of chargebacks.If your business incurs a lot of chargebacks (when a customer disputes a charge from your business and asks the card issuer to reverse it), banks consider you a higher risk and may hike up processing fees. So it’s important to take steps to reduce your chargeback risk. There are a number of simple ways to minimize chargebacks, but one of the most effective is to use a credit card authorization form. This is a document the customer signs, giving you permission to charge the card on an ongoing basis. With this document in place, your chances of winning a chargeback case with the card issuer are much more likely (not to mention less complicated). Download a credit card authorization form.
5. Require a minimum amount for credit card sales. To offset processing fees, many businesses (especially those that tend to handle smaller transactions) choose to require a certain dollar threshold before they accept credit cards.
6. Accept payments with Square. Square’s credit card processing fees are simple and transparent. There’s just one low rate for every type of card and dollar amount. We never charge any monthly fees, PCI-compliance fees, cancellation fees, or POS software fees. It’s all included in our rate.

There’s a large range of card processing fees. Fees are dependent on card functionality (debit, credit) as well as the card distributor (American Express, Visa, Mastercard).A debit card with a PIN tends to be less expensive to process because its funds are available and verified right away, so there’s lower risk. Many banks charge a flat fee to process debit card transactions, regardless of the amount charged. Alternatively, a debit card that requires a signature to authorize is processed like a credit card.

Credit cards are more expensive to process than debit cards. Credit card companies often rely on accrued interest to generate revenue. Of all credit cards, American Express tends to be one of the most expensive cards to process because it relies on credit card fees instead of interest.

Charging a customer to use a credit card, also known as a convenience fee, is illegal in some states. Currently eleven states have a law that prohibits merchants from charging a convenience fee to customers.

In California, for example, it is illegal for a retailer to “impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer may, however, offer discounts for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card”. You can determine if your state prohibits charging a convenience fee here.

FAQ About Our Rates:

How does Square offer credit card processing with no monthly fees?

We believe credit card processing should be as easy and affordable as possible. That’s why we offer simple, clear pricing that includes everything you need to securely process credit cards at your business. Learn more about Square’s merchant services here.

If you sell above $250,000 per year and have an average ticket size of $15 or more, your business may qualify for a competitive custom rate. Contact our sales department to learn more.

If you sell above $250,000 per year and have an average ticket size of $15 or more, your business may qualify for a competitive custom rate. Contact our sales department to learn more.