What you need to know about payment processing fees

The number of payments made by card has increased over the past year, thanks to the convenience and safety of online shopping and touchless checkouts. But for business owners, there is a cost to all those extra swipes and clicks: more payment processing fees. “Not only are there many kinds of fees, but it’s often difficult to decipher which ones cover which aspect of a transaction, which makes it hard for merchants to know what they’re paying for,” says Riaz Bhamani, senior vice president with Merchant Services at Bank of America.

The following breakdown can help you understand exactly what fees you’ll likely encounter and how to decide which pricing plan works best for your business.

Typical credit card processing fees

Every time a customer uses their card, you’ll need to pay processing or transaction fees. The largest transaction fee is the interchange fee, which is determined by the payment network (e.g., Visa® or Mastercard®). Other per-transaction fees include a small fee charged by the payment network and the fee charged by your merchant account provider.

While that might seem straightforward, transaction fees can be confusing, since they vary depending on numerous factors, including whether the customer paid with credit or debit, which payment network is involved, what type of business you operate, and whether the purchase is made online or in person, among many other criteria. In addition, they may be calculated as a percentage of the transaction amount, a flat fee (such as 30 cents per transaction) or some combination of the two.

You may also need to pay one-time or ongoing fees that are not tied to the volume of transactions and may not even be related to credit card processing. Examples include startup or annual fees, monthly statement fees, minimum processing fees and a gateway fee if you use an internet merchant account. In addition, if a customer disputes a transaction, you may also be responsible for chargeback fees.

Pricing plans

Many providers allow you to choose how your transaction fees are calculated. Below are common pricing models:

Interchange plus

This model adds the interchange fee, which is set by the payment networks, to the fees charged by the merchant services provider. Hence, interchange plus. This is the most transparent type of pricing plan because you can see how much each party charges to process a transaction. It’s also typically the most cost-effective structure — but it can be unpredictable, complex and hard to understand because there are hundreds of interchange rates, depending on card type, issuer, industry and more.

Flat rate

As the name implies, flat rate pricing allows you to pay a fixed amount for all transactions. For instance, if most of your customers use debit cards or no-reward credit cards in-person, which tend to have the lowest transaction fees, you may not benefit from a flat rate system. On the other hand, if you get a lot of cards or transactions that have high interchange rates, you could significantly benefit. Either way, the flat rate structure is easy to understand and offers predictability for the merchant, so many businesses like to start with flat rate pricing and move to interchange plus later on, when they can better evaluate their transaction history, says Bhamani.

Tiered

This less common model offers a middle ground between flat rate and interchange plus. It takes the hundreds of different interchange-plus rates and organizes them into buckets, or tiers, based on the type of transaction. While the tiered model seems fairly easy to understand because there are limited price points, it is difficult for the merchant to know whether a given transaction is categorized into the correct tier, says Bhamani, which can make it hard to compare pricing.

Tips for choosing a pricing plan

The best pricing structure for your business depends on multiple factors, including the most common types and volume of your transactions. When comparing providers, make sure to review the fee schedule in detail, taking into account one-time and miscellaneous fees, as well as typical monthly costs. Also consider whether the transaction rates are guaranteed for any length of time, and whether there are any termination fees if you decide to go with another provider.

Also keep in mind that many providers offer services that are not core to taking payments but can enhance the efficiency and security of your transactions or help you streamline some of your business operations, such as enhanced fraud management capabilities, automatic recurring billing for subscription-based businesses and business management software. Before you sign up with a provider, consider which, if any, of these services you might want and whether and how it would affect your ongoing costs.

As the shift from cash to electronic payments accelerates, you can expect the amount you pay for processing fees to increase, too. Understanding what goes into the fees and how they’re charged can help you better manage these expenses.