Credit card processing fees: How do they work?

Credit card processing fees are paid by merchants during credit card transactions. The fees are generally paid to the credit card network, credit card issuer and payment processing company and often range from 1.5% to 3.5% of the transaction. When you use your credit card to pay for something at the store, you, as the consumer, don’t usually directly pay credit card processing fees.

Sometimes referred to as credit card transaction fees or credit card merchant fees, credit card processing fees are often inevitable for any merchants or business owners who accept credit card payments and are the merchants’ cost for the use and benefits of the electronic payments system. Learn more about the different types of fees and processing costs associated with credit cards.

Key takeaways

• Credit card processing fees are paid by the merchant, not by the consumer.
• Businesses and their acquiring banks pay credit card processing fees to the consumer’s credit card issuer, credit card network and payment processor.
• On average, credit card processing fees can range between 1.5% and 3.5% of the transaction. They can provide the merchant with guaranteed payment and ease of customer transactions, including the facilitation of online payments.

When a credit card transaction takes place between a business and a consumer, a credit card payment processor completes the transaction behind the scenes. Payment processors generally facilitate payment and serve as the middleman between consumers, businesses, card issuers and card networks.

Then, for completing this service, the business is charged small fees by the merchant account, which is a business bank account that gives merchants the ability to process card transactions. Or the fees are charged by the payment service provider—like Square or PayPal®—involved in the transaction.

Merchants are likely to encounter three main types of processing fees as part of credit card transactions: interchange fees, assessment fees and payment processor fees. 

Keep in mind, credit card processing fees shouldn’t be confused with other credit card fees that may be associated with a cardholder’s account and can be avoided, like late fees.

An interchange fee is set by the credit card network to help cover the costs of processing and authorizing the transaction. Card issuers typically use the money from interchange fees to fund important things like fraud protection, increasing access to credit, and rewards and benefits for cardholders. 

Interchange fees may vary based on factors like the credit card network, the amount of the transaction, the type of credit card and whether the transaction was made online or in person. For example, in-person point-of-sale transactions can be less expensive than card-not-present or online transactions since there are additional factors in place that lower the likelihood of a fraudulent transaction. Merchants also have the opportunity for lower rates when additional fraud prevention measures are in place—for example, on online transactions.

An assessment fee is charged by the merchant’s credit card network based on the merchant’s total monthly sales. Most businesses work with four main credit card networks in the U.S.: American Express®, Discover®, Mastercard® and Visa®. Other businesses may work with a processor such as Square or Paypal that often charges flat rates versus potential variance in the underlying rate.

American Express and Discover issue their own credit cards. To get a Mastercard or Visa, consumers must apply through separate issuing banks or financial institutions.

The payment processing company the merchant works with might charge an additional fee for managing transactions. These fees can be charged monthly, annually or upfront when the transaction goes through.

Chargeback fees are charged to the merchant when a consumer disputes a credit or debit card charge and is successful. Rather than the merchant issuing a refund, the credit card issuer returns the funds and charges the merchant a fee. This is not a credit card processing fee, but a chargeback fee can affect merchants.

The average cost of credit card processing fees generally ranges between 1.5% and 3.5% of the transaction. However, these rates can vary depending on the credit card network and the type of pricing model the merchant uses. And the credit card processing fees can be lower than the fees for other payment options.

Three main types of pricing models are commonly used to determine credit card processing fees: tiered pricing, flat-rate pricing and interchange plus pricing. Take a closer look at each:

Under this pricing model, credit card processing companies categorize their fees by different transaction types. There are three major tiers:

• Qualified tier models include debit cards and credit cards without rewards programs. 
• Midqualified tier models include certain cards with rewards programs.
• Nonqualified tier models include corporate cards and cards with high-level rewards programs. 

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

Under this pricing model, businesses pay the interchange fee and a predetermined transaction fee.

Credit card processing fees are a common component of business transactions that are critical to the card payment system. And if you’re a consumer who makes credit card payments, it can help to understand how the fees that merchants pay work. They allow customers to safely and securely make purchases with credit or debit cards. And the ability to accept credit and debit cards can benefit retailers and consumers everywhere.

Still interested in learning more about credit cards? Read about how credit cards work and how to understand your credit card terms. And if you’re looking for a new credit card, you can compare cards to find the right one for you.