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Average credit card merchant fees range from 0.5% to 1.5% of each transaction’s total. For a sale of $100, that means you could pay $0.50 to $1.50 in credit card merchant fees. These fees can add up to a significant expense for a small business.
Whether you’re an independent retailer or you’re just starting your own business, here’s how credit card processing fees work and how you can reduce the costs.
What are credit card merchant fees?
Credit card merchant fees, sometimes called credit card processing fees, are fees merchants (businesses that accept credit cards) pay credit card companies and financial service providers to authorise and complete card transactions.
The cost of merchant fees is not standardised and varies depending on various factors, including how the card is processed, the type of card used, and the network involved. Most financial institutions and payment platforms include a comprehensive breakdown of the merchant fees they charge on their websites, which can be helpful if you want to estimate expenses.
Merchant fees vs. surcharges
Merchants can pass on these fees to customers as a surcharge on each card purchase. Some merchants charged excessive surcharges in the past, but the Australian Competition and Consumer Commission banned this practice. Now, businesses can’t apply surcharges higher than the merchant fees on customer’s transactions.
» MORE: Common credit card fees and charges (and how to avoid them)
Types of credit card fees for merchants
The credit card merchant fees paid on each transaction are split among the financial institutions enabling credit card processing. These include the following fees:
Interchange fees
Interchange fees go to the issuing bank — the financial institution that manages the credit card used by the customer to make the payment. This is the largest portion of merchant fees that go to the issuing bank.
In Australia, interchange fees are set by card networks and schemes, like Mastercard, Visa and eftpos, and are regulated by the Reserve Bank of Australia.
The cost of interchange fees is usually a flat rate or fixed percentage of the purchase. Several factors go into calculating the fee levied on a specific transaction. These include:
- The network responsible for setting the fee
- The type of merchant
- The size of the merchant’s business
- The transaction’s value
- Where the transaction occurred (in-store or online)
- Whether the customer used a debit or credit card
- The type of credit card. Rewards cards — including exclusive black cards — typically have the highest fees.
Interchange fees fund the rewards and points programs some cardholders use, but they affect retail prices by making it more expensive for merchants to process credit cards.
Scheme fees
Acquirers (merchant banks) and card issuers pay scheme fees to card networks to cover the costs of payment processing services. Merchants usually have to pay scheme fees on a transaction-by-transaction basis.
Acquirer margin
An acquirer margin is charged by the acquirer and paid by the merchant to cover the business costs of accepting credit cards. The amount can vary depending on:
- The type of business receiving the payment
- The card network involved (Visa, Mastercard, or American Express)
- The kind of credit card.
For instance, a Visa credit card transaction to pay for a taxi will incur a different amount than a payment at a supermarket. A similar structure applies to Mastercard, which bumps the rate for contactless payments.
Other credit card processing fees
The merchant incurs additional costs in credit card processing beyond what the banks and card issuers charge at the point of sale. These might include:
- Sales fees
- Return/refund fees
- Participation fees
- Fraud-related chargeback fees when a customer disputes a transaction
- Gateway costs paid to a payment services provider
- Costs associated with insuring forward delivery risk
- Terminal fees paid to a provider other than the merchant’s acquirer.
These expenses range from a percentage of the transaction amount to $2 per month for participation to a $27.50 terminal fee.
On top of those fees, businesses that want to process credit card payments must become PCI compliant to prove they follow Payment Card Industry Data Security Standards. There are fees involved in this process, but PCI compliance intends to protect banks and consumers from costly data breaches.
How to reduce credit card merchant fees
According to the Reserve Bank of Australia, the average cost of credit card merchant fees has decreased over the years. Still, with more and more people using credit cards in-store and online, the total cost of processing a credit card payment adds up. Fortunately, there are ways to minimise the impact of merchant fees.
- Whenever possible, accept cards in person. Higher processing fees apply to online, virtual cards or contactless transactions because they are more susceptible to card scams and fraud.
- Reduce the incidence of chargebacks, where the customer disputes a transaction, to reduce the number of times you incur a chargeback fee.
- Set a minimum charge for credit card use. $10, for instance, to reduce the number of credit card transactions that need processing, thereby reducing the amount of processing charges.
- Only accept credit cards that incur lower processing fees. For example, processing fees are usually lower for Mastercard and Visa than American Express cards.
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