The Ultimate Guide to Credit Card Merchant Fees (2024)

Merchants are charged a fee every time a customer pays for something using a credit or debit card. These fees add up quickly—costing US merchants more than $137.83 billion in processing fees per year. 

But merchant fees are often a source of confusion for businesses worldwide. Business owners and decision-makers across all industries and business sizes struggle to understand how these rates are being changed and why the fees seem to fluctuate every month and seemingly every transaction. 

If you need help making sense of merchant fees for credit card processing, you’ve come to the right place. We’ll break down everything you need to know about merchant fees, including why they exist, how they’re calculated, and which fees can be avoided. 

What Are Merchant Fees?

Merchant fees are the charges that a business pays whenever customers purchase goods or services using a credit card or debit card. The fees are paid to credit card processors and card-issuing banks to cover the costs associated with handling the transaction. 

Merchant fees exist because credit card processing is a service. Like any other service, the entities involved must be compensated for their role in the process.

With credit card processing, there are multiple players involved with every transaction. That’s why there are so many different merchant fees to keep track of. There are interchange fees imposed at the card network level, markup costs charged by the processor, and additional monthly or ongoing fees to maintain software, hardware, security, and other components within the payments infrastructure. 

Types of Merchant Fees

Here are some examples of different merchant fees you might see on your monthly credit card processing statements. 

• Interchange Fees — Imposed at the card level by the credit card networks. 
• Authorization Fees — Charged whenever a card is swiped, dipped, tapped, or entered, even if the transaction gets declined. 
• Transaction Fees — Vary based on your processing agreement structure, and are paid per transaction.
• Assessment Fees — Imposed by the cardmember associations to cover different expenses like network operations and fraud protection. 
• Monthly or Annual Fees — Some processors charge a fixed monthly or annual fee for their services.
• Monthly Minimum Fees — Fees charged if a merchant does not meet a processing volume that was agreed upon in the contract.
• Statement Fees — Fixed fee for printing and mailing statements to the merchant.
• Payment Gateway Fees — Charged by the merchant service processor or third-party gateway for access to a payment gateway. 
• PIN Debit Transaction Fees — For transactions that require a PIN verification to process the card. 
• AVS Fees — Fees that cover an address verification service to verify the cardholder’s identity and reduce the risk of fraud. 
• Chargeback Fees — Fees associated with transactions disputed by cardholders. 
• Batch Fees — A flat fee charged each time a lot of transactions gets settled, typically at the end of each day. 
• Retrieval Request Fees — Charged when a cardholder doesn’t recognize a transaction and the issuing bank needs to collect evidence or receipts to verify it.
• PCI Compliance Fees — For software and hardware used to keep merchants PCI compliant. 
• Setup Fees — Some merchant account providers charge one-time fees to set up accounts and equipment. 
• Voice Authorization Fees — Charged when merchants have to make a call over the phone to authorize a transaction. 
• Termination Fees — Some MSPs charge merchants for canceling a contract early.

Not all of these fees are necessary, and many can be avoided by negotiating them with your merchant account provider. 

How Are Merchant Fees Calculated?

Merchant fees are calculated by a wide range of variables. 

It starts with the credit card companies. They impose non-negotiable interchange rates at the card level. From there, other players in the industry add different fees and charges for each transaction, as well as fees for ongoing services. 

Every business pays different credit card processing rates and interchange fees. The following key factors play a role in how merchant fees are calculated:

• Merchant account processor and contract terms
• Business size and industry
• Card type
• Transaction environment
• Effective rate

We’ll cover each of these factors in greater detail below so you can see how they each impact your merchant fees.

Merchant Account Processor and Pricing Model

Processing agreements with merchant account providers have a significant impact on merchant fees. Rates vary from processor to processor, but the rates also vary based on how your contract is set up. Three common types of merchant account processing models include:

• Flat-Rate Processing — Merchants pay a fixed fee for every transaction, regardless of the card type or other factors. This is one of the simplest structures to understand, but it’s not necessarily the most cost-effective.
• Interchange Plus — Merchants pay the interchange rate imposed at the card level plus a markup imposed by the processor. Interchange Plus pricing is the best structure for keeping credit card processing rates low.
• Tiered Pricing — These types of contracts are structured so merchants pay different rates that are dependent on a wide range of factors that influence which tier the transaction goes through. It’s complicated, not transparent, and often expensive. 

Business Size and Industry

Large businesses that process a high volume of credit card transactions may have access to lower processing rates than smaller businesses. Some industries also have lower rates. This is determined by merchant category codes (MCC). 

For example, gas stations and government organizations typically pay lower rates than travel agencies or pawn shops. Supermarkets that process billions per year will pay less than ecommerce sites that process $20,000 per month. 

Card Type

Visa, Mastercard, American Express, and Discover all impose different interchange rates. In addition to the card network, the card itself will also impact merchant fees and credit card processing rates.

Debit cards and prepaid cards have lower fees than credit cards. Rewards credit cards have different rates than business credit cards. Throughout any given day, a business might pay dozens of different interchange rates based on the different types of cards their customers are using.

Transaction Environment

Higher-risk transaction environments are more expensive than low-risk environments. Card present transactions have lower fees than card not present (CNP) transactions. 

An in-person transaction at a POS system where the cardholder can tap or dip a chip-enabled card would be less expensive than transactions processed online or over the phone. 

Effective Rate

In addition to the per-transaction fees associated with the card type, transaction environment, and interchange rate, you’ll also need to calculate your effective rate to truly understand the total scope of your merchant fees.

The effective rate includes other, non-transactional fees that you’re paying each month to give you a more accurate representation of how much it costs your business to accept credit cards. For example, you may determine that the average cost to accept a card payment at your business is 2.80% + $0.15 per transaction. But after including other fees, the true cost (or effective rate) might actually be closer to 3% per transaction.

Is There a Way to Avoid Merchant Fees?

Yes, you can avoid some merchant fees. Avoiding merchant fees starts with understanding your contract and pricing structure with your merchant services provider. 

If you carefully review your merchant statements each month, you can identify charges that can be avoided. Lots of processors add extra fees and additional costs to merchant statements in the hopes that merchants don’t understand what they’re looking at.

That’s why it’s helpful to have a professional merchant consultant review those statements on your behalf. Here at Merchant Cost Consulting, we’ll provide you with a free audit and analysis to identify hidden fees and opportunities for saving money on credit card processing—without switching processors. 

Why Are Merchant Fees So High?

Merchant fees are so high because credit card processing companies often inflate their charges. Processors also charge extra fees and unnecessary fees, adding to the total cost of a merchant’s monthly statement. 

For example, let’s say a customer buys food at a restaurant using a Visa rewards card. The Visa interchange rate on that transaction might be 2.10%. But the credit card process might charge the restaurant 3.10% + $0.10 for the transaction. 

This is an additional 1% + $0.10 over interchange—and that’s just the transactional cost.

The same merchant might be paying a monthly PCI compliance fee, statement fee, gateway fee, equipment fee, and other miscellaneous charges just for the privilege of accepting credit cards.

While credit card processors deserve to be compensated for their role in the transaction, many merchant account providers overcharge merchants for their services.

Are Merchant Fees Legal?

In an effort to fight against merchant fees, some businesses try to pass these charges along to the customer in the form of a surcharge or convenience fee for paying with a credit card. 

Credit card surcharging is legal in the United States, except in some states that prohibit surcharging. Some states with strict rules against surcharges and convenience fees include Texas, Connecticut, California, New York, Oklahoma, Florida, Kansas, Maine, Massachusetts, New York, and Colorado. 

Laws vary by state, and regulations are constantly changing. So it’s in your best interest to check your state’s local guidelines before you attempt to impose any extra charges to your customers. 

Each credit card network also has their own rules for charging convenience fees to customers. For example, some cards allow businesses to charge convenience fees if they offer customers the ability to pay using an alternative method. Others only allow convenience fees for businesses in certain industries, like government, education, and utilities. 

The maximum surcharge allowed for credit cards is 4% of the transaction. Surcharges are not allowed on debit cards or prepaid cards. 

Can I Negotiate Merchant Fees?

Yes, merchant fees can be negotiated with your merchant services provider and credit card processor. The only fees that are non-negotiable are the interchange fees and assessment fees imposed by the card networks. 

All of the other processor markups, transaction fees, monthly fees, and statement fees can be negotiated, and some can even be completely removed from your statements. 

In some cases, you may even be entitled to reimbursement for fees that were improperly charged to your account. 

Negotiating with credit card processing companies can be tough on your own. But here at MMC, it’s what we do every day to help our clients save money on credit card processing. We’d be happy to negotiate your rates directly with your MSP on your behalf. 

Final Thoughts on Merchant Fees

Merchant fees are a cost of doing business. But not all merchant fees are necessary, and many can be negotiated to lower rates or removed from your statements altogether. 

Negotiating merchant fees is much easier when you have a team of professionals monitoring your statements and speaking to your processor on your behalf.

Find out how much you can save on merchant fees with a free audit from MCC. We’ll help you save money on credit card processing without switching processors.