Credit Card Processing Fees Explained

Understanding credit card processing fees is absolutely critical to selecting the best credit card processor for your business. Unfortunately, the industry has not made this task easy. In fact, credit card associations and processors have generally made this about as difficult as you can possibly imagine.

AtSwipingMadeEasy.com, we have tried to break down how credit card processing fees work so that you can make the best, most-informed decision for your business.

Understanding the Interchange

Interchange fees and assessments are set by the credit card associations and the banking industry. These fees and charges are non-negotiable and are not under the control of your credit card processor.

Interchange is the term used to describe when money transfers between banks during a credit/debit transaction. When a credit/debit card is used to make a purchase, the transaction communicates between the issuing bank (the bank that issued the card) and the acquiring bank (the bank that is accepting the payment).

The number of fees and assessments is quite frankly mind-boggling. The credit card industry has broken down every possible transaction into hundreds of variations, each with unique rates and charges.

Interchange fees and assessments make up the bulk of your processing fees (over 80%).

Understanding Types of Credit Card Fees

There are three main types of credit card processing fees:

• Transactional Fees
• Flat Fees
• Incidental Fees

Transactional fees are your interchange fees and assessments set and charged by the credit card industry. These fees make up over 80% of your bill and are non-negotiable. No matter which credit card processor you choose, these transactional fees will remain the same.

Flat fees are static fees charged by your credit card processor. Flat fees are assessed every month and are not directly related to any transaction. For example, you may be leasing a terminal from your credit card processor, and the fee for this lease will be a flat fee every month.

Incidental fees are assessed by both your processor and the credit card associations for only specific events. For example, chargeback fees are incidental, as as Non-Sufficient Funds (NSF) fees.

Understanding Pricing Models

The credit card processing industry offers a wide range of different pricing models. As the industry became more competitive over the years, more and more pricing models were introduced as processors tried to distinguish themselves from the competition.

The main pricing models are:

• Tiered Pricing
• Interchange Plus Pricing
• Flat Rate Subscription Pricing

Many merchants make the mistake of believing that the rate a payment processor is offering is the most important factor in choosing a processor. Nothing could be farther from the truth. In reality, the pricing model your processor uses will have far more impact on how much you pay than the rate they are offering.

Comparing pricing models is not a simple task, but it is a necessary one if you intend to select the best processor for your business.

While not themselves a pricing model, it is also important to understand the role of basis points. Regardless of what pricing model a processor uses, you may hear them discuss your rate in terms of basis points, which is simply a unit of measurement used in the finance industry.