Credit card processing fees: How do they work?

Businesses pay credit card processing fees each time they accept credit card payments from customers. They come in three categories: assessment fees, payment processor fees and interchange fees. Card processing fees average 1.5% to 3.5% of the transaction, but the percentage varies.

What you’ll learn:

• Credit card processing fees are paid by the vendor, not by the cardholder.

• Businesses can pay credit card processing fees to the buyer’s credit card issuer, to their credit card network and to the payment processor company.

• On average, credit card processing fees can range between 1.5% and 3.5%.

• Fees can be charged per transaction, per month or per year depending on the credit card network a business works with and the network’s pricing model.

These are fees a merchant or business pays every time it accepts a credit card payment. When a credit card transaction takes place between a business and a consumer, a credit card processing service completes the transaction behind the scenes. Payment processors facilitate the payment and serve as go-betweens for consumers, vendors, card issuers and card networks.

Then, to complete this service, the merchant account or the payment service provider involved in the transaction charges the business small fees.

There are three types of charges for processing fees: assessment fees, payment processor fees and interchange fees. The business pays these fees, but the recipient depends on the fee type.

An assessment fee is charged by the vendor’s credit card network based on the vendor’s total monthly sales. These networks can sometimes differ from the buyer’s credit card issuer. Most businesses work with four main credit card networks in the United States: American Express®, Discover®, Mastercard® and Visa®.

The payment processing company the vendor works with—usually separate from a consumer’s credit card issuer or a vendor’s credit card network—might charge an additional fee for managing transactions. These fees can be charged monthly, annually or up front when the transaction goes through.

An interchange fee is often the largest one a vendor will pay. It goes to the credit card issuer directly. The exact cost of an interchange fee varies by the card type, the business type and how much is being charged. Also known as a swipe fee, this is one way credit card issuers earn money.

The average credit card processing cost to vendors ranges between 1.5% and 3.5%. But these rates can vary depending on the credit card network a business uses and the pricing model the business offers.

Four main types of pricing models are commonly used to determine credit card processing fees: tiered pricing, flat rate pricing, interchange plus pricing and membership-based pricing.

Under this pricing model, credit card processing companies categorize their fees by different transaction types:

• Qualified: This tier includes credit cards without rewards programs and debit cards.

• Mid-qualified: This tier includes cards with certain types of rewards programs.

• Non-qualified: This tier includes corporate cards and cards with high-end rewards programs.

Certain qualified transactions can receive lower rates, while other transactions might receive higher rates.

With flat rate pricing, credit card processors charge businesses a certain percentage of the transaction plus a small per-transaction flat fee—typically $0.20 to $0.30.

Under interchange plus pricing, businesses pay their credit card network’s interchange rate as well as a predetermined transaction fee. Interchange plus pricing can vary based on the credit card network, the type of credit card and whether the card is present. Card-not-present transactions are more expensive than in-person transactions.

Under membership pricing—also known as subscription-based pricing—processors charge a membership fee instead of taking a percentage of what you generate in sales. Processors may charge an annual fee or a monthly fee. They may also ask for a per-transaction fee on top of an interchange fee.

Credit card processing fees are just one part of how the credit card system works. If you’re thinking about getting a new credit card, learning more about them can help you make more informed financial decisions. When you’re ready to add a credit card to your wallet, you can see if you have guaranteed Capital One card offers—without impacting your credit scores.