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Credit card transactions are processed through a variety of platforms, including brick-and-mortar stores, e-commerce stores, wireless terminals, and phone or mobile devices. The entire process — from the time you slide, tap or otherwise use your card until a receipt is produced — takes place within two to three seconds.
Credit Card Processing Fees & Costs
For the convenience of their customers, many merchants accept credit cards as payment. But you may have wondered why some merchants will accept only cash or require a minimum purchase amount before allowing the use of a credit card. Here’s why: Merchants must pay a price to accept credit card payments. Hence, most will seek the cheapest credit card processing rates or mark up the prices of their products so customers’ payments can absorb the card-processing cost.
Depending on the type of merchant and through which platform a good or service is delivered (e.g., at the retail store, through e-commerce or by phone), credit card processing rates will vary. They usually are charged as flat fees, per-transaction fees or volume-based fees. For the purpose of this guide, only major costs will be explained below:
Merchant Discount Rate: Merchants pay this fee for accepting credit card payments and receiving service from acquiring processors. It’s usually between 2% and 3% (online merchants pay the higher end) — to as much as 5% — of the total purchase price after sales tax is added. Also known as a discount fee, this rate comprises several components:
- Interchange Fee: The acquiring bank and acquiring processor pay this fee to the issuing bank. It is market-based and set by each credit card network (except American Express). Visa and MasterCard, for instance, update their interchange rates twice per year. Most interchange fees are assessed in two parts: a percentage to the issuing bank and a fixed transaction fee to the credit card network. For instance, the per-swipe fee might be 2.35% plus $0.15.Interchange fees vary and are categorized through a process called “interchange qualification,” which determines the rate based on several criteria:
- Physical presence or absence of the card during the transaction
- Processing method used (e.g., swiped, manually entered or e-commerce)
- Credit card company
- Card type (e.g., regular, premium, commercial, rewards or government-issued)
- Merchant’s business type (as determined by merchant category code)
- Assessments: Credit card networks (except American Express) charge this fee for transactions that are made with their branded cards. It usually is based on a percentage of the total transaction volume for the month. The fee usually is fixed, and the merchant’s acquiring bank may not charge a lower rate or negotiate a better deal with the merchant. Assessments generally are charged per transaction but can vary depending on the pricing model the merchant follows. For instance, Visa might charge a 0.11% assessment plus $0.0195 processing or usage fee for each card swipe. Assessment amounts may change periodically. Combined with the interchange fee, assessments constitute between 75% and 80% of total card-processing costs.
- Markups: Acquiring banks and acquiring processors usually will include a markup over interchange fees and assessments partly as profit and partly to cover the cost of facilitating credit card transactions. It constitutes between 20% and 25% of total card-processing costs. Merchants generally can negotiate the markup with the entities that charge them. Markups vary by processor and pricing model. They may also include other types of fees.
Chargebacks: Customers reserve the right to dispute a charge on their credit card billing statement within 60 days of the statement date. When the issuing bank receives a complaint from a customer, it charges the merchant between $10 and $50 as a penalty and for issuing a “retrieval request.” If the merchant doesn’t respond to the retrieval request within a certain timeframe, it could incur additional fees. The merchant may appeal, but the process is long and likely to favor the customer. If the merchant loses, the issuing bank will recover, or charge back, the customer’s payment.