We know credit card processing fees are as exciting as a root canal, but as a business owner, paying too much can be just as painful. Which of these rate structures are you under? Are you keeping the most revenue possible? Show
At Arrow Payments, we simplify the complicated and advocate for our client’s best interests. Here we explain the hidden nuances between Flat, Tiered and Interchange Plus Rates… What are Interchange Rates?Interchange Rates are the fees paid to the credit card companies for every transaction regardless of who your processor is. These rates are determined by a few factors:
How much does Visa/MC/Amex/Discover charge for each transaction?Twice a year, the credit card brands come out with their schedules of fees and categories that each transaction can fall under. Each credit card company sets their own rules for how transactions are categorized and their associated fees. Currently, there are 500+ categories of Interchange Rates! Here are links to the Interchange Rates for Visa & MasterCard. Like when you are faced with picking from 500 flavors of ice cream, how do you know which one is meant for you? So what fees are you paying?Below are the 2017 fees for debit cards from Visa. Notice how low the processing rates are! Why is that? Because debit cards draw money directly from a person’s bank account, so there is a lower risk of the processing company not getting paid. Makes sense.
A majority of the rates are determined by the CPS, or the Custom Payment Service. The CPS sets custom rates for each transaction and gives you the opportunity to get lower processing fees by ensuring that credit and debit cards are validated and processed as securely as possible. Below are some of Visa’s fees for non-debit cards.
When choosing a credit card processing company to handle your transactions, a few “features” might stand out. Many processing companies like Stripe, Square, Braintree, Authorize.net, Intuit Quickbooks and even PayPal offer Flat Rate pricing that charges 2.9% or more plus $.30 per transaction. This might sound like an easy solution, but it can end up costing you more than you should be charged per transaction. This is especially true if you process a lot of debit cards. With Flat Rate credit card processing, the processor charges the same rate for all transactions which is typically set much higher than the Interchange Rates. The processor then keeps the difference between the flat rate they charge and the Interchange Rate charged by the credit card companies. Does that seem fair? No way, Jose. Do you have Tiered Rate Pricing?Most established businesses are on tiered pricing, which provides a few different transaction rates that are unclear and expensive when compared to interchange pricing. Basically under tiered pricing, the credit card processor decides what tier each transaction will qualify for. These tiers dictate the rate you will be charged for each transaction. The problem with tiered pricing is that the tiers are arbitrarily set by the processor. Many processors advertise a artificially low “Qualified Tier” as a teaser rate to get your attention, but many of your transactions will not “qualify” for that tier. The processors will also add hidden fees on top of the tiered pricing. So you think you are getting a great rate, but it is difficult to figure out which transactions will end up in which tier. This also makes it impossible to avoid paying unnecessary fees. When you receive your statement, the total fees are much higher than the low teaser rate you thought you were getting. The tiers set by the processor are completely unregulated and have nothing to do with what Visa, MasterCard, Amex, or Discover charge for their Interchange Rates. Therefore, Tiered Pricing is not the best option. What’s left, you say? How can you possibly streamline this complexity AND keep the maximum amount of revenue and profits in your business? Simple. Let us introduce you to Arrow Payments preferred pricing system!The solution is Interchange Plus PricingWith Interchange Plus, you pay the same fees that the credit card companies charge plus a small percentage. As an example, Arrow Payments typically charges 0.3% on top of the Interchange Rates depending on the credit card processing services, training and support a client needs. Companies who process higher volumes of revenue can sometimes qualify for lower pricing. We also have automated technology to make sure every transaction is optimized for the lowest interchange rate possible. As a result, your transaction fees are calculated on their actual cost rather than arbitrary rates set by the processor, and with Interchange Plus, you can seriously cut down on fees compared to Flat Rate or Tiered Rate credit card processing. Traditionally, Interchange Plus pricing has only been available to businesses that have larger amounts of credit card sales. However, the market is becoming more competitive, and smaller businesses can now qualify for Interchange Plus pricing. Finally, a credit card processing structure that makes sense AND keeps the most profit in your pocket! Interested in learning more about Arrow Payments Interchange Plus Pricing, have questions or just want to chat about ways to optimize your credit card processing?Shoot an email to [email protected] or Contact Us.
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For the first time in two years, Visa and Mastercard raised their credit card fees for merchants in April 2022. Delayed by the pandemic, the move by the two largest payment networks to raise “swipe fees” was criticized by retailers. Businesses claim that hiking interchange fees, which are paid by merchants on each transaction made with a credit or debit card, could worsen inflation and pinch consumers because businesses could opt to pass the cost of higher interchange fees onto consumers. Both payment networks raised fees on certain types of transactions and reduced fees for transactions in certain categories. Retailers say the reductions are narrow and do not balance out the increases in processing fees. Most merchants need to accept credit card payments, which makes credit card processing fees a cost of doing business. For more on how much those costs can be – and how they vary among credit card companies – we've collected all the latest data. Key findings
Credit card processing fees for merchants equal approximately 1.3% to 3.5% of each credit card transaction. The exact amount depends on the payment network (e.g., Visa, Mastercard, Discover, or American Express), the type of credit card, and the merchant category code (MCC) of the business. Note that debit cards have a different pricing model, and they usually cost less for merchants. This is why you may only see a convenience fee for a credit card, and not a debit card purchase. Here are the average credit card processing fees for the four payment networks (also called "card networks"):
Sources: Visa USA Interchange Reimbursement Fees published on April 23, 2022, Mastercard 2022–2023 U.S. Region Interchange Programs and Rates, Wells Fargo Merchant Services Payment Network Pass-Through Fee Schedule, and Wells Fargo Payment Network Qualification Matrix effective April 22, 2022.
Those ranges include the two types of fees that payment networks charge for each transaction: interchange fees and assessment fees. They don't include payment processing fees, because fee structures vary considerably depending on the credit card processor you choose. Now, let's take a closer look at the fees that get taken out of every credit card transaction. The two fees we looked at above, interchange fees and assessment fees, are non-negotiable credit card fees for merchants. They're often referred to as base costs or the discount rate. The payment network charges these fees on every transaction involving one of their cards. Here are where those fees go: Interchange feesThe bank that issues the credit card receives the interchange fee. For example, if you have a Visa credit card issued by Chase, Chase receives the interchange fees on your transactions. Assessment feesThe payment network receives the assessment fee. In the example above, Visa would receive the assessment fee on every transaction where you used your Chase Visa card. Payment processing feesThis is paid to the company that accepts the credit card payment and sends the transaction to the payment network, either through a physical card reader or an online payment gateway. Depending on the payment processing company, costs for this service could include any of the following:
What makes Discover and American Express differentDiscover and American Express do double duty, because they issue credit cards and operate their own payment networks. Their cards may not be accepted at quite as many businesses as those of Visa and Mastercard, but they do get to keep both the interchange and assessment fees, giving them a much larger cut of each transaction.
Sources: Visa USA Interchange Reimbursement Fees published on April 23, 2022, Mastercard 2022–2023 U.S. Region Interchange Programs and Rates, Wells Fargo Merchant Services Payment Network Pass-Through Fee Schedule, and Wells Fargo Payment Network Qualification Matrix effective April 22, 2022.
Note: These aren't the highest and lowest interchange fees for each payment network. We've removed some of the outliers (like Discover's 0.00% + $0.75 for credit payments on utility bills) to make the table better reflect the average fee range. Visa credit card processing fees are the lowest overall, but Mastercard and Discover aren't far behind, and they fall into similar fee ranges. For many merchants, processing fees will be almost the same whether the customer pays with a Visa, Mastercard, or Discover credit card. American Express has consistently been the most expensive payment network, which is one reason why it's accepted by fewer merchants. In 2018, American Express announced the largest drop in its fees in 20 years. That brought it more in line with other credit card networks, although it still charges the most on average. What determines your interchange fees?With each payment network, there are several factors that affect where your interchange fees fall within the ranges above. Here are the most significant:
American Express also uses transaction amounts to determine its interchange fees, with higher-value transactions costing merchants less. Payment networks generally update their interchange fees on a yearly basis. This doesn't mean they raise rates every year. As mentioned before, American Express lowered its credit card processing fees in 2018. Visa and Mastercard skipped fee changes in 2020 and 2021 due to the COVID-19 pandemic, but updated interchange fees in 2022. Those changes are difficult to parse. Fees depend on what type of merchant is party to the transaction, what type of credit card is being used, and whether the card is present or the transaction is done online. With dozens of merchant categories, multiple card types, and other variables that determine rates, it can be tough to determine the overall effect of interchange fee changes on merchants if fees increase in some categories and decrease in others. One estimate found that the 2022 swipe fee changes from Mastercard and Visa will increase merchant fees by $475 million despite fees being reduced in some categories. Although it may seem like the card networks benefit the most by raising fees, it's actually the banks. Remember that interchange fees go to the bank that issues a credit card. The banks that partner with Visa and Mastercard to issue their credit cards are the ones that will collect those additional fees.
Source: Wells Fargo Merchant Services Payment Network Pass-Through Fee Schedule.
The assessment fee is the payment network's cut, and it's a much smaller portion of each transaction. American Express is once again the most expensive payment network, but this time around, Mastercard has the lowest rates, especially for transactions of $1,000 and over. That being said, the differences in assessment fees between each payment network are generally minuscule. While merchants must pay the interchange and assessment fees set by the payment networks, they have more flexibility with payment processors. Not only are there many credit card processors available, all with their own pricing strategies, but merchants may also be able to negotiate these rates. The following types of payment processing models are available: interchange-plus, flat rate, subscription, and tiered. Here's how each model works and the fees you'd pay with several popular payment processors. Interchange-plus
Sources: Helcim, National Processing, and Payline pricing pages.
The interchange-plus model keeps all your fees separate. The payment processor charges you exactly what the payment network charges on the transaction and adds its own separate markup. This model also requires a flat fee per month. Note that even though this model is called "interchange-plus," the payment network's assessment fee is charged as well. Let's say your retail business chooses Helcim. On each transaction, Helcim would deduct the interchange fee, the assessment fee, and its own fees of 0.30% plus $0.08. This model is a popular choice because it's affordable for all types of businesses and it has a transparent fee structure. On every sale, you'll know exactly how much the card network and your credit card processor charged. Flat rate
Sources: Square and PayPal pricing pages.
The flat-rate model is all about simplicity. You're charged the same rate on every transaction, which makes it easy to predict your payment processing costs. And you can use this model without paying a monthly fee. That simplicity comes at a cost, though. Under the flat-rate model, credit card fees can be much higher. There is one key advantage PayPal and Square offer over some interchange plus competitors, which is that they don't have monthly fees. They could be more affordable if your business has very low sales volume and wouldn't save enough in credit card transaction fees to offset the monthly cost of a monthly interchange-plus processor fee.
Sources: Stax and Payment Depot pricing pages.
With the subscription model, you sign up for a membership with the payment processor and pay a monthly fee. You'll then pay the base costs on each transaction plus a very small payment processor fee. You may be wondering what separates the interchange-plus and subscription models, considering their similar fee structures. In this case, it's a difference of degrees. The subscription model has much more expensive monthly fees in exchange for much cheaper transaction fees. This model is best suited for businesses with high sales (at least $10,000 per month). You'll likely get the lowest credit card processing fees, and that helps justify your payment processor's monthly fee. Tiered
Source: Intuit QuickBooks pricing page.
In the tiered model, each transaction is grouped into one of the payment processor's tiers, and each tier has a set fee amount. The payment processor determines which transactions go into which tiers, and it often bases this on a transaction's interchange fees, which are included in the rate. One popular setup with this type of payment processing has the following tiers: qualified, mid-qualified, and non-qualified. The qualified tier has the lowest transaction fees, followed by the mid-qualified tier, and the non-qualified tier is the most expensive. The tiered model usually isn't a good choice, because it tends to be more expensive than other options. Since many types of transactions are grouped into a limited number of tiers, some transactions will have much higher processing fees than they would under other pricing models. Equipment costsIn addition to the costs above, merchants that accept in-person transactions also need equipment. Costs vary significantly depending on the merchant's needs. Basic mobile readers are available for $20 to $50, although some payment processors (Square included) offer one for free. Terminals and registers are more expensive, as a standard terminal can cost $150 and an advanced register can cost $1,000. When your business processes credit card payments, there will be multiple fees taken out of the total transaction amount (you may also pay a fee when a customer pays with a debit card, but these are usually less). The non-negotiable credit card network fees can vary:
The most important factors in what your business pays will be its MCC and the type of credit card the customer uses. Next, your payment processor will take its cut, unless you've chosen a processor that charges one flat rate to cover all the fees in the transaction. With credit cards growing more and more popular, the typical merchant doesn't have much of a choice but to pay a processing fee to the card issuer and payment processor. By knowing how much you'll pay on each transaction, you can price your products appropriately and ensure you're making enough money on each sale. Some businesses also charge a credit card convenience fee (or offer a cash discount) to cover the cost of the processing fees above. Sources
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