Credit card processing fees can be complicated and overwhelming to understand. Nevertheless, they must be paid if you want your business to have the ability to accept credits cards. Understanding how the fees are formulated will keep you from being taken advantage of by processing companies, as well as help you accurately calculate your overhead costs.
The Middle Men
When it comes to credit card processing, there are a few parties involved between the consumer and the merchant. They include:
- Merchant Account Providers: manage credit card processing including sales and support. They could be independent organizations or part of a financial institution.
- Credit Card Associations: these are the financial services corporations that create the credit cards and set the rules. The biggest ones are Mastercard, Visa, American Express, and Discover.
- Issuing Banks: the financial institutions that issue the credit cards of the credit card associations.
- Acquiring Banks: these are the processors that act like messengers between credit card associations and merchants. They pass information and data across so that transactions can be completed.
Base and Markup
There are two types of fees: base and markup. Markup fees are negotiable while base fees are not.
Base Fees
This fee is determined by the credit card associations and issuing banks. The base fee is published and is non-negotiable.
Markup Fees
Markup fees are how credit card processors make their money. This is the fee you want to pay close attention to when shopping around. However, some processors use confusing pricing models that make it difficult to understand how much their markup really is.
Pricing Models
There are two ways processors charge merchant accounts for base and markup fees:
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Interchange Plus
This is the most understandable pricing model and is very transparent. This plan clearly itemizes and lists its fees on your monthly statement. You pay a percentage fee plus a flat amount in addition to the percentage. For example, 2.9 percent plus $0.20 per transaction.
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Tiered
These plans categorize transactions into three different categories:
- Qualified
- Mid-Qualified
- Non-Qualified
Qualified transaction rates are the lowest while non-qualified transactions cost the most.
Terminal Fees
If you have a physical storefront, you will be charged to lease a credit card terminal for customers to swipe their cards, however, you could opt to purchase your terminal instead.
Payment Gateway Fees
This is the terminal fee for online storefronts who need merchant accounts.
Early Termination Fees
If you cancel your contract early, you could be obligated to pay a hefty fee.
Monthly Fees
This fee is usually charged to cover the costs of operating the call center that handles your customer’s questions and concerns.
IRS Reporting Fees
Merchant account providers charge this fee for reporting your transaction information to the IRS.