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Demystifying credit card processor fees

Once you understand how the online payment process works, the next thing to know is what it all costs and how fees are typically structured. That process can seem complicated, but it doesn’t have to be overwhelming. Let’s take a closer look at fees here.

Breaking down the fees

It’s no surprise that everyone who touches the transaction wants to get paid, including the issuing bank, the credit card associations (Visa, MasterCard, etc.), the merchant bank, and the payment processor.

At a basic level, every time you process a transaction, you pay several fees:

  • A percent of the transaction amount: The issuer gets paid by taking a percentage of each sale, called the interchange. This fee varies depending on a bunch of things, such as industry, sale amount, and type of card used. At last check, there were almost 300 different interchange fees!1
  • Another percent of the transaction amount: Your merchant bank takes a cut by charging you a markup fee, the amount here also varies by industry, amount of sale, monthly processing volume, etc.
  • Yet another percent of the transaction amount: Buyer goes to their bank to request a refund.
  • A dollar amount for every transaction processed: The payment processor (who might also be your merchant bank) makes money by charging a fee every time you process a transaction (whether it’s a sale, a decline, or return – no matter). Plus, it can charge fees for setup, monthly usage, and even account cancellation.

Usually, the first three fees (the percentages) are all added together and quoted as a single rate, while the transaction fee is quoted separately (e.g., 2.9% + $0.30).

How processors package the fees

When researching what type of payment processor is best for your needs, you'll likely run into a variety of pricing models for processing credit and debit card transactions. Understanding how these rate structures work can help you choose what's best for your business – without unnecessary costs weighing you down. See below for an outline of three main structures that are common in credit card processing, and take a look at our infographic for an illustrated view of the fees.

Flat-rate pricing

Flat-rate pricing is the easiest pricing model to understand. It involves paying the processor a flat fee for all credit and debit card transactions, which covers all the fees mentioned above. At PayPal, our flat-rate pricing is 2.9 percent plus $0.30 per transaction. (Note that fees for cards manually key-entered into a virtual terminal could be higher.)

Visit our fees page to get the full details on our flat-rate pricing.

Interchange plus pricing

As we mentioned above, every time your customers pay with a credit or debit card, their card issuer may charge you a percentage, called an interchange. In addition, the credit card association (Visa, MasterCard, etc.) adds on a fee, called an assessment. (People usually lump the two together as the “interchange fee.”) In an interchange plus pricing model, your payment processor adds a fixed markup on top of the interchange. For instance: a 2% + $0.103 markup + a 1.8% interchange fee = $3.90 fee on a $100 sale.

While this pricing model gives you a bit more visibility into the breakdown of your rates, the tradeoff is that your statements are more complicated to figure out and reconcile.

Tiered pricing

In a tiered pricing model, the processor takes the 300 or so different interchange rates and lumps them into three buckets (or pricing tiers): qualified, mid-qualified, and non-qualified, usually based on the amount of risk associated with the transaction.

This makes it simpler for you (and them) to understand. However, since the processor defines the tiers however it wants, it can be expensive and lead to a lot of frustration when you get your monthly statement.

In general, there are three tiers:

  • Qualified rate: Transactions swiped into a physical terminal with a standard (non-reward) consumer credit card are usually considered qualified. Since these carry the lowest risk, they are processed at the lowest rates. If a customer uses a reward card at a terminal, however, that bumps it up to the non-qualified rate.
  • Note: This is usually the first rate a processor will quote to you – make sure to dig deeper, since it’s likely your transactions won’t fall into this bucket very often.
  • Mid-qualified rate: Transactions that don’t qualify for the lowest rate fall into a mid-qualified rate. For example, if you key-enter a customer’s credit card number, such as for phone and direct mail orders, you’ll typically pay this higher rate. (Since there’s no physical card present, this process brings more risk of fraud, hence the higher rate.) Some processors place rewards and business card transactions in the mid-qualified bucket.
  • Non-qualified: Transactions that don’t qualify for the above buckets fall into a non-qualified tier, the highest rates you can pay. Many rewards, corporate, and signature card transactions might be considered non-qualified (depending on the processor). Additionally, ecommerce transactions are typically considered non-qualified. That means that even if someone is using a plain old consumer credit card, a payment made online will generate the highest fees for you.

For reference, a qualified card might have a 2.25 percent transaction rate, while a non-qualified card could have a 3.25 percent rate, depending on the credit card processor.4 Here’s how that might look:

Qualified

Mid-qualified

Non-qualified

2.25% + $0.254 = $2.50 fee on a $100 sale

3.00% + $0.254 = $3.25 fee on a $100 sale

3.25% + $0.254 = $3.50 fee on a $100 sale

A note on fees

When comparing different pricing structures, be sure to keep in mind that some processors charge additional fees, and these may be buried in the fine print. For example, a processor may charge a cancellation fee if you decide to terminate a contract, even if you've been unhappy with their services.

You may also get charged a withdrawal fee for moving funds from your payment processing account to your business bank account, even though that's a standard activity for sellers. Before signing any contract, look for such hidden fees, because they could significantly affect your profits.

In general, understanding pricing models and fees can help take the mystery out of choosing a payment processor and help you find a service that's right for your business.

Take a look at our infographic for a visual breakdown of fees