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When it comes to processing credit card payments, you have to spend money to make money. Every player in the payments value chain, including the issuer, acquirer or processor and card network, deducts a small percentage from every card transaction in order to cover the cost of providing processing services.
As a merchant, the contribution you make in the form of these fees helps to guarantee the security and success of the entire payments system, both now and in the future. Nevertheless, processing fees do have an impact on your bottom line, so it’s vital to understand how they affect your overall cost of doing business.
In this article, we explain what credit card processing fees are, the different types of fees that merchants pay, how much they cost, hidden fees, and whether or not you’re allowed to pass on fees to your customers.
» MORE: How to take card payments
What are credit card processing fees?
As a merchant, you must pay credit card processing fees to credit card networks, payment service providers and other financial institutions in order to accept card transactions.
These fees are charged as a percentage of the payment amount, typically in the range of 1.5% to 3.5%. They help to cover the costs incurred by processing, authorisation and fraud prevention, as well as to fund innovation in the payment system.
The amount you’ll be charged per transaction depends on a number of factors, including the location of your business, the location of the customer and the type of transaction.
What are the different types of credit card processing
There are a few different types of credit card processing fees, each charged by a different party in the payments chain.
Here are the main processing fees:
Interchange fees
The interchange fee makes up the lion’s share of the overall processing fee. It’s charged by the issuing bank (the customer’s bank), the moment it sends the payment to the acquiring bank (your bank).
The interchange fee is the issuing bank’s cut for its role in maintaining the integrity and transparency of the payments ecosystem. It also helps to fund the future development of global payments, making them faster, more convenient and more secure. If banks didn’t charge this fee to merchants, they would be passed on to customers.
Interchange rates vary considerably by region and transaction type, and are publicly available. Although the card networks (such as Visa or Mastercard) set the rates, they don’t receive any of the fee.
Assessment fees
Assessment, or card scheme, fees are charged by all credit card networks on top of every transaction that involves a card with their branding on. They account for a much smaller percentage of the transaction amount and help to pay for the infrastructure that facilitates card payments, as well as managing and maintaining scheme rules, marketing, and research and development. The assessment fee is charged to the acquirer and passed onto you via the merchant service charge.
Merchant service charge
When your bank, the acquiring bank, sends the payment on to you, it also deducts a small percentage of the transaction amount to cover its own costs. This is known as the merchant service charge, which pays for processing, technology and other services provided by the merchant bank or third party payment processor. It is sometimes called a payment processing fee.
This charge is essentially a combination of interchange fees, as well as the processing and card scheme fees that the acquirer pays to the likes of Mastercard and Visa. The merchant service charge is, in fact, the only type of card processing fee that you’re able to negotiate with your bank.
» MORE: What is a merchant account?
How much are credit card processing fees?
Credit card processing fees are deducted as a percentage of the overall transaction amount and, in some cases, include a small flat fee. This typically works out to somewhere between 1.5% to 3.5% of the total payment amount, depending on which card the customer uses.
However, there are a range of factors that affect how much you’ll pay, such as whether the transaction is online (card-not-present, CNP) or in store (card present), the location of both the customer and the merchant, and different pricing models.
Are there any hidden credit card processing fees?
There are no hidden credit card processing fees as such, in the sense that there’s usually a way to spot them on your statement, but some are certainly harder to identify than others.
For example, if you’re hit with a chargeback, where the bank returns the customer’s money after a dispute, you could be charged a fee of between £10 and £20 on top of the lost payment and original processing fees. Likewise, if you voluntarily refund the customer’s money you’ll have to pay a fee, albeit a smaller one of between 30p to £1.
Foreign card processing also comes at an additional price, with an additional percentage point added onto your standard processing fee.
Can I pass on the credit card fees to the customer?
No, in the UK, EU, and EEA, credit card surcharging, where you pass on credit and debit card fees to customers has been banned since 2018. Before then, it was not uncommon for retailers to add surcharges that, in some cases, were far above their processing costs, adding up to millions of pounds per year in hidden charges. The ban on surcharging, which is enforced by Trading Standards, also covers PayPal payments.
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