Keep Your Chargeback Rate Low
Your chargeback rate is the percentage of transactions disputed by customers for instance, because of unauthorized card use, billing errors or unresolved disputes about the quality of the items purchased. Chargeback fees can be costly, often $20 to $50 per dispute on top of refunding the complete transaction, and high rates of chargebacks can cause providers to increase your transaction fees.
Minimize chargebacks by using contactless and chip card readers to reduce your liability in case of fraud, and by offering return policies, good customer service and quick responses to any customer complaints.
What Are Credit Card Merchant Fees The Different Types Explained
If youve decided to accept credit card payments for your business, youll quickly realize there are many merchant providers out there and they all charge differently. Unlike other overhead expenses, such as rent or business supplies, credit card processing fees are more complicated to predict and understand. This is because the pricing models that determine credit card merchant fees vary among merchant service providers and can include hidden costs.
In this post well explain more about the different types of credit card merchant fees, the pros and cons of each, and help you determine which is best for you.
What Credit Card Processing Fees Include
The credit card processing fees paid on each card transaction also known as your merchant discount rate are split among the financial institutions that enable these payments. They include the following fees:
Interchange. This is the largest portion of the merchant discount rate that goes to the issuing bank, the bank that manages the credit card used to make the payment. Examples of credit card issuers include Chase, Citi and Bank of America.
Assessment fee. This fee goes to the card networks, such as Visa, Mastercard, Discover and American Express.
Payment processor fee. This goes to the processor, the company that manages the logistics of getting card payments processed for your business. Processors include companies such as Square, Stax and Helcim.
Your payment processor will either draft your credit card processing fees from your bank account in one lump sum at the end of each month or reduce the amount of each deposit by the amount of the fees due.
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How Do I Calculate The Non
Non-qualified fees can be much more complicated to calculate than you may expect.
If you have a qualified rate of 1.50%, and a non-qualified fee of 0.50%, shouldn’t that mean that your total rate when processing a non-qualified transaction is 2%? If this logic makes sense to you THEN STOP IMMEDIATELY BECAUSE YOU ARE WRONG. Your logical assumption makes total and perfect common sense. Sensible and logical assumptions can get you into a lot of hot water in the payments industry.
First, you must be aware that interchange costs are usually passed through on top of the non-qualified fee. If your qualified rate is based on card-present transactions, the processor will likely ding you for the difference in interchange between a card present transaction and a cared not present transaction in addition to the non-qualified fee. Let me clarify with the following example:
- Merchant has a qualified rate of 1. 50%
- Non-qualified rate of 0.50%
- Qualified rate is based on card-present transactions.
- Merchant processes all their transactions in a card-not-present setting.
- In this example, we’ll pretend the merchant processes an airmiles card.
This is the result :
- Merchant pays the difference in interchange cost between a card present and a card-not-present transaction.
- Merchant pays the interchange cost increase for the rewards card
- Merchant pays the non-qualified fee of 0.50%
- The merchant ends up paying 1.50% + 0.11% + 0.19% + 0.50%
- Total rate = 2.3%.
Who Sets The Credit Card Processing Fees
Contrary to popular belief, its not just the credit card companies setting the credit card processing fees. There are three parties that influence what makes up the average you pay every month:
- Companies, such as Visa, Mastercard, American Express, and others, that partner with the banks
- Banks Financial institutions that issue the above cards to consumers, such as Capital One, Chase, Bank of America, and others
- Payment Processors Companies responsible for securing the payments and processing the .
To make fee predictability extra tricky, each of these parties determines their own credit card processing fees independently. Understanding how they each function helps to figure out the math behind the final fee.
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Minimum Purchase Requirements For Credit Card Transactions
Because of the fees associated with credit card transactions, another option for businesses is requiring a minimum purchase amount for credit card transactions. This option avoids upsetting customers with an additional fee but allows the business to not accept credit cards on smaller transactions. This is because businesses may see it as not worth it to pay the fee for accepting credit cards on smaller transactions.
If a business sets a minimum purchase amount for using a credit card, there is no requirement to disclose this minimum in advance. However, state regulatory agencies and credit card processing networks encourage businesses to do so.
Moreover, the minimum transaction amount must be under $10, and most businesses are not allowed to set a maximum transaction amount. The exceptions are federal agencies and higher education institutions, which are permitted to establish transaction maximums.
This applies only in the U.S. and U.S. territories, however. In other countries, setting minimum purchase amounts is not permitted.
The Case Before The Competition Tribunal
The Competition Tribunal “is a strictly adjudicative body that operates independently of any government department” that hears cases dealing with economic and business matters such as mergers, misleading advertising and restrictive trade practices .
The argument before the Competition Tribunal was that Visa and MasterCard were engaging in anti-competitive behavior and their restrictive contracts allowed the two credit card companies to essentially dictate terms to merchants .
These terms allowed Visa and MasterCard to charge transaction fees of over three percent in some cases, fees that, according to the Competition Bureau, were among the highest in the world and rake in $5 billion for the credit card industry each year.
Wile the Competition Tribunal doesnt have the power to levy a monetary judgment against the two credit card giants it could force them to change their operating methods. The Competition Bureau wanted retailers to be able to do two things they were not allowed to do:
- refuse to accept high-cost credit cards but still accept others from the same brand name.
- add surcharges to counteract the higher transaction fees charged for premium credit cards.
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Types Of Credit Card Merchant Fees
When looking for the best merchant services provider, consider the pricing model they use to determine their credit card merchant fees. The most common types of credit card merchant fees are:
- Flat rate
One of these models isnt necessarily better than the other: they just offer different benefits that may work better for some businesses and less so for others. Lets look at each of these credit card merchant fees in more detail.
What Is An Effective Rate
Before we compare types of credit card merchant fees, we need to talk for a moment about determining the effective rate of your credit card processing. This can help you determine the competitiveness of the rate quotes you receive from each provider.
In short, the effective rate is calculated by dividing your total processing fees by your total credit card sales volume. The best way to do this is to calculate it based on your yearly numbers as there can be large variations if you calculate it on a month-to-month basis.
For example, you sell items at a farmers market every weekend and have a gross credit card revenue of $100,000. You are charged $7,000 for credit card processing throughout the year. In this scenario, your effective rate would be $7,000/$100,000 or 7%.
Now that we understand effective rate, lets look at the different pricing options to see which option is ideal for your business.
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How Much Are Credit Card Processing Fees
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Disaggregated Data On Merchant Payment Costs
While the aggregate data allow us to compare average merchant fees across different schemes, they do notallow us to look at the distribution of payment costs across different merchants. Accordingly, in late2019, the Bank asked eight large acquirers to provide anonymised merchant-level data on the costs totheir merchants of accepting different types of cards. For each merchant, the data included the total valueof card payments processed through each of the four-party card schemes in the 2018/19 financial year, as well as the corresponding value of merchant feescharged by the acquirer. These data matched the information that acquirers are required to provide theirmerchants each year under the surcharging framework of the Bank and the Australian Competition andConsumer Commission.
After some initial cleaning of the dataset to remove outliers, we were left with adatabase of card acceptance costs for almost 672,000 merchant accounts, with a total of$502 billion of transactions processed through the four-party card schemes in 2018/19. The sample accounts for around 85 per cent of the total value offour-party credit and debit card transactions reported in the Retail Payments Statistics.
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Average Credit Card Processing Fees: 13% To 35%
Note that debit cards have a different pricing model, and they usually cost less for merchants. This is why you may only see a convenience fee for a credit card and not a debit card purchase.
Here are the average credit card processing fees for the four payment networks :
|Payment network||Average credit card processing fees|
|Visa||1.29% + $0.05 to 2.54% + $0.10|
|Mastercard||1.29% + $0.05 to 2.64% + $0.10|
|Discover||1.48% + $0.05 to 2.53% + $0.10|
|American Express||1.58% + $0.10 to 3.45% + $0.10|
Those ranges include the two types of fees that payment networks charge for each transaction: interchange fees and assessment fees. They don’t include payment processing fees, because fee structures vary considerably depending on the credit card processor you choose.
Now, let’s take a closer look at the fees that get taken out of every credit card transaction.
Different Types Of Fee Pricing
There are three different types of pricing models that influence what fee you will be charged. A flat-rate pricing model is when the merchant account provider charges you either a flat rate fee for each transaction, a fixed percentage on each transaction, or a mixture of the two each time a card is swiped. The fixed percentage is usually between 1.75% – 3% and includes a per transaction fee. This pricing model is the best for small businesses because itâs very transparent.
An Interchange pricing model is when companies like Visa and MasterCard charge a processing fee for each transaction, called the rate of interchange. Some merchant account providers will mark this up a little and charge you extra, but luckily SwipeSum can help decrease these unnecessary fees for you.
Finally, Tiered pricing has a more diverse array of cost structures, and itâs the least transparent. Tiered pricing depends on the type of card being used- whether itâs credit, debit, or prepaid- and includes a bunch of different costs that, while they can be beneficial, might not even show up on your statements. It can also depend on how you accepted the card- like if it was present or not, and if it was keyed in or swiped. Overall, this pricing model is the most complicated and the least worth your time, especially if you run a small business.
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What Are Credit Card Processing Fees
Any business owner that accepts credit cards can expect to pay certain fees. These charges can seem complicated, though the more you understand how credit card merchant fees work, the better positioned you are to negotiate better rates or dispute unnecessary charges.
The following is a breakdown of the most common credit card processing fees in the industry:
Which Types Of Fees And Costs Are Associated With Credit Cards
Fees for accepting credit cards can differ from business to business based on industry, location, type of card and number of transactions.
When accepting credit cards, you should be aware of fees from your payment processor , card network and card issuer . Other mandatory fees include the Acquirer Processing Fee, Fixed Acquirer Network Fee, Kilobyte Access Fee, and Network Access and Brand Usage Fee.
For small businesses with $10,000 to $250,000 in annual credit card transactions, the average cost of processing these payments is currently 2.87% to 4.35%. However, additional fees could make your rates higher than average.
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Payment Costs Across Merchants
Graph 4 shows how the cost of accepting card payments varies based on the size of the merchant. It is apparent from the darker areas in the heat map thatmerchants with a higher value of card transactions tend to pay less for accepting card payments thansmaller ones. Almost all of the merchants in the sample with more than $10 million of annual cardtransactions had average card acceptance costs of less than 1 per cent. In contrast, averagepayment costs for smaller merchants were typically higher and more widely dispersed. For example, half ofthe merchants with annual card turnover below $100,000 faced average payment costs in excess of1.5 per cent of their transaction values.
The analysis of payment costs across the deciles confirms that, for the different four-party cardschemes, average payment costs generally decline as merchant size increases .
There are several possible explanations for why smaller businesses tend to have higher average paymentcosts:
Since mid 2017, acquirers have also been required to provide merchants with easy-to-understandinformation about their costs of accepting payments through each of the card schemes regulated by theBank. This information is primarily designed to assist businesses in their surcharging decisions,although greater transparency about payment costs may also help them in negotiating a better deal withacquirers.
Expandapril 2022 Rate Changes
Mastercard Enhancements to Interregional Interchange Programs
Effective April 21, 2022, Mastercard is making changes to its international consumer credit interchange rates. If applicable, these changes will appear on your April 2022 statement . See details below.
Current Rates International Consumer Interchange Rates
|Interchange Program Type|
|Non-Canadian Secure Code Merchant*â and Cardholder||1.54%|
Rates effective April 21, 2022International Consumer Interchange Rates
|Interchange Program Type|
Please note, with these changes:
Mastercard Card-Not-Present Decline Fee
Effective April 1, 2022, Mastercard is introducing a fee of $0.03 per declined Card-Not-Present transaction. This fee will be applied for every declined CNP transaction with certain reason codes . If applicable, these charges will appear as “MASTERCARD CNP DECLINE FEE ” on your April statement . For further details on decline codes, rules and fees, visit the TD Merchant Solutions notices page.
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Expandjuly 7 2021 Rate Changes
Effective July 7, 2021, with the January 8 increase to the per transaction Interac Flash limit, the Interac Direct Payment Flash Interchange Rate will be applied to transactions up to $250. Note that your Interac Direct Payment Flash Interchange Rate is not changing but will be applicable to all transactions up to the new limit of $250.
Merchant Account Vs Payment Service Provider
First, you need to decide what kind of credit card processor you want for your business. There are two types of payment processors:
Typically, merchant accounts require underwriting to approve you as a client. So it’s best for larger, established businesses with high processing volume.
Stax, Payline Data and Payment Depot are examples of merchant account providers.
This is a good, cheaper option for micro businesses. PSPs don’t require underwriting, so you can get started accepting credit card payments almost right away.
Square and Stripe are examples of payment service providers.
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Other Fees To Be Aware Of
Note that there are plenty of other credit card processing fees to be aware of. For example, you may face initial fees when you sign up for a credit card processing company that will provide you with terminals that help you process your transactions.
Other fees you could face are all over the place but may include fees from your credit card processor each time a customer disputes a charge, fees for chargebacks, fees for non-sufficient funds to pay your credit card payment processor and more.