All You Need to Know About Average Credit Card Processing Fees

November 9, 2020/ Posted in Fees and Rates

Are you familiar with average credit card processing fees or processing fees in general? Do you know how they work and why are they charged? Time to refresh your memory or to learn something new. Every business owner should know these things in order to understand how cashless payments work and to be more in control of their monthly expenses.

As an owner of a small or medium store today, you certainly realize that accepting a cashless payment will not only keep you on the market but also attract even more customers. More and more Americans pay with plastic these days, so knowing how credit card processing works, what are credit card transaction fees, and how to get the best merchant service rates will be very helpful. But reading about all of that can only confuse you, so let’s start with the basics of this seemingly complicated process.

What Are and How Are Credit Card Processing Fees Calculated?

Tracking and memorizing each fee can create a labyrinth for those facing them for the first time, so we wanted to help a bit. In short, credit card fees are what you need to pay as an entrepreneur if you choose to accept plastic. When you get familiar with what are merchant services, and once you give your merchant statement a good read, you will see that these costs are charged monthly, but you won’t see who is involved in this process. They can also be called “discount rates,” so don’t be confused if you hear that. They are set by the pricing of your merchant service provider, and how they will be calculated will depend on many factors: what industry you work in, what cards you accept, and others.

Every employer must know where their money goes each month

There Are Three Types of These Fees

These are the main types of credit card processing fees: transactional, flat, and incidental. Once they combine, you will receive the full amount that you have to pay for accepting credit or debit cards. They also fall in one of the two following categories – wholesale and markup. Wholesale fees aren’t negotiable, and one part of transactional fees belongs to them. The other part, as well as incidental and flat fees, belongs to markups, which are negotiable.

Transactional Fees Include Interchange and Assessment Fees, and Payment Markup

These three are typically involved. They will show up each time you have a transaction in your store, and they are also the biggest expense of having a merchant account. Transactional fees involve the issuing bank or entity, credit card network, receiving bank, and credit card processor, and each of them makes a profit. There are two main types of transactions – CP and CNP, or card present and card-not-present. Fees are higher when using the CNP method, because the risk of fraud is higher. That is used mainly when shopping online. Now let’s take a look at others:

  • Interchange fees or “wholesale fees” are the same for everyone, and their ideal cost varies depending on the type of transaction.They are charged by the issuing bank and are based on several factors like the brand and type of card, how the business accepted the payment, and are you having a high-risk merchant account.
  • Assessment fees are charged to cover operating expenses by card brands like Visa, Discovery, or Mastercard. They are fixed, but they’re also small. For example, the charge for Visa is only 0.14%.
  • Payment processor markup is the only part where you can have some control because it depends on the provider you chose. If you know how to find a company that will work transparently with you and show you each month everything you’re paying to them, there will be no chance of overpaying. On the other hand, there are some companies whose plans aren’t that honest. There are three types of packages that processors can sell you: tiered plans, interchange-plus, and flat-rate credit card processing.

The Flat Rate Is Predictable and Comes Monthly

Flats can be standard, add-on service, and junk. Standard ones are pretty predictable and come on a monthly basis, add-ons are paid for when needed, and junk are just for taking money and not providing any benefit. Their ideal cost is obviously $0, while the other two can be up to $350, depending on the fee. There are many types of flats, but they can be divided into two categories: recurring and one time fees.

Incidental Ones Might or Might Not Appear

They come from the payment processor and only happen if something causes them. For example, if you have a chargeback, you will be charged a chargeback fee. They can also be caused by voice authorisation, address verification service, or retrieval request.

Don't let many types of costs confuse you - it's not hard to understand them

What Are Average Credit Card Processing Fees?

So, now that you know what fees are out there, we can start talking about our main topic – average credit card processing fees. First you need to take in account that you might not have some of the expenses listed above. What you will pay with each transaction or per month will depend on many factors like:

  • What industry you work in
  • How is the transaction made
  • What kind of card is used

Having that in mind, you will realize that an average fee can only be explained in rough numbers, while the actual cost can be higher or lower. Keep in mind that we are now only talking about transactional charges – flat and incidental ones can but don’t need to be involved. Why should you know all of this? Because as a small business owner, you should pay attention to how much you spend monthly, and how much money goes to waste, especially in times like these when the whole economy is suffering.

How High Are the Average Credit Card Processing Fees?

What will you as a business owner pay when a transaction is made at your store? Here is the rough fee: if a person uses Visa, Mastercard, or Discover brands, the cost for you will be from 1.95% to 2%. In case you’re the owner of an online shop and you’re using the card-not-present transactions, the rates are roughly from 2.30% to 2.50%. However, if a customer used American Express, handling that brand will cost you more, and the exact percent will depend on the processor you chose. Because this brand is known as an expensive one, they tried to change it by launching Amex Optblue. If a person uses that type, the cost will be similar to the other three brands.

The amount of this fee will depend on several factors

Read the Reviews and Compare Processing Providers You Have in Mind

Having a good provider will mean a lot because, as we mentioned, some don’t work transparently. Gathering several quotes from processors and comparing them can help you get a better idea of what you should accept, and what isn’t a good deal. If you have a good processor, you will see what pricing offer is the best one for your business and what will be the exact averages of your costs.

Do your homework and research the market before signing the statement

What Is a Good Effective Rate for Credit Card Processing?

Here’s another possibly unfamiliar term – effective rate. We’re now talking about the amount of money that a business must pay in fees that is relative to the calculated gross volume. This is not a set fee, but a percentage that shows what would be your best averages of processing expenses. Basically, it’s just what you paid for the merchant services. It’s better not to lean on averages now, but to calculate the best one for you. For that, you should know the following:

  • What method are you using, CP or CNP – CP has a less expensive charge
  • How high is your average ticket size – it’s the amount of sale of credit or debit cards; the higher the ticket, the higher the cost
  • Charge for debit and credit cards – they don’t have the same expenses.

To find your current effective rate, add every fee on your statement and total sales volume. Then just divide total sales by total fees.

Good effective rates are around 3-4%, but that number can be higher for the number of reasons, so don’t panic if your rates are higher. Fist, check all of the following things:

  • Did you notice any junk fees?
  • Do you belong to the high-risk merchants category? These are some of the potentially problematic industries – firearms sellers, travel and advanced booking, online dating websites, digital currency exchanges, tobacco and e-cigarettes shops, and adult-themed websites
  • Do you have small average transactions?
  • Are you paying a high markup?
  • Are your transactions bumping into higher-rate tiers?
  • Is there anything else raising your costs?

If the answer to any of these questions is yes, then your effective rate should be higher than 3 or 4%. But if it’s not, give your pricing statement a good read and consider changing your processor if you realize that you’re overpaying credit card processing services.

Learn what percentage is a good rate for your industry

Why Are Credit Card Processing Fees So High?

After seeing all of these different costs that accumulate with each transaction, you might wonder why this is so expensive. If you own a shop that doesn’t have that big of a revenue, any kind of expense can impact your budget. Some might even avoid accepting cards because of the unwanted costs that will affect the profit. There are a couple of reasons why these expenses are so high:

  • The first one is that each party that is involved in card transactions is taking a small part for themselves. All of them have their staff that have to be paid. It is good that there are plenty of people that can be of help, but all of them need salaries as well.
  • Transactions are done with a lot of softwares and equipment that need to be made, paid for, and maintained as well.
  • There is a risk of fraud and scams, and credit card fraud prevention is something that asks for investments.
There are important reasons behind the pricing and costs you pay when you choose to accept plastic money

Every Merchant Should Know Which Credit Card Processing Is Cheapest for Small Business?

The problem of high costs because of the numerous fees can be solved by choosing a processor that fits your needs. Cheaper processors don’t have to be less good than expensive ones. If you want to know how to pick the credit card processing company that is the best for your small business ideas, you should first dedicate some time to understand what a merchant processing company is, how setting up a merchant account is done, and how their pricing works. After that, you’ll find it easy to find the best credit card processing for a small business. Get one that doesn’t bind you for longer than a month, ask how much their equipment costs, and how much they charge in your industry. After gathering several quotes, you’ll easily choose the cheapest one for you.