Everything You Need to Know About Merchant Service Fees and How They Work

Credit card payments are still the preferred payment option for consumers even though card usage has been slowly declining. A 2021 Federal Reserve Bank of Atlanta study found that 79% of consumers had at least one credit card last year. That’s the highest percentage since they began conducting surveys in 2008.

If you’re a small business owner, know that payment processing fees can add up quickly. So you need to understand and know how to mitigate merchant service fees on credit card transactions. The payment processor you choose will depend on the type of business you own and your sales volume.

So, let’s take a closer look at merchant service fees. We’ll learn what they mean, how they work, and the different types of fees and processor charges you might encounter. We’ll also review the organizations involved in payment processing and how you can find the right merchant services provider.

Types of Credit Card Processing Fees

In a previous article about merchant account fees, we talked about the three primary types of fees you’ll see on your merchant credit card statement. Here we will go into more detail on each of the three fee types: 

1) Transaction fees

2) Account fees 

3) One-time incidental fees

Note that these are slightly different from merchant account fees. Merchant account fees (#2 on this list) go directly to your payment services provider. 

Merchant service fees, on the other hand, refer to all three types of fees you’ll pay when processing customer transactions. Let’s review these three types of fees you’ll encounter when processing credit and debit card payments.

1. Transaction Fees

You’ll encounter transaction fees every time a customer swipes a card at your store. These fees are determined by your customer’s card issuing bank. 

Your interchange fee is your transaction fee on wholesale transactions. Interchange rates depend on a few different factors. You’ll see the flat fee for interchange, then the percentage markup for each transaction.

Pricing factors include your customer’s card issuer, the type of card, the way the transaction is processed, and the merchant category code (MCC). The MCC depends on whether the transaction was keyed-in or card-present, the type of business, and the product itself.

2. Account Fees

These are also called assessment fees. Like transaction fees, account fees aren’t determined by your merchant services solution provider. Account fees are determined by your customer’s card issuer –– Mastercard, Visa, Discover, American Express, etc. 

They don’t go to your credit card processor; they go to the card company itself. Account fees are expressed as a percentage of each transaction, usually falling around 12% to 15%.

3. One-time Incidental Fees

This is where things can get a little shady. One-time incidental fees and surcharges can be completely legitimate fees such as a POS software fee that pays for software. They can also be valid chargeback fees that cover the cost the bank incurs when a customer disputes your transaction. 

However, they can also include administrative costs and other additional fees that payment processors charge on top of interchange. Processing costs can be authentic but other merchant fees are less legitimate. 

“Monthly minimum” fees and other markups that payment processors can tack onto credit card transactions can add up quickly. If you pay a monthly fee, an annual fee shouldn’t be on your statement. Nor should a statement fee (which refers to the cost of printing your bill) or online reporting fees (which refer to the negligible cost of billing you online).

While often legitimate, PCI compliance fees are added to the cost of doing business with most payment processors. Many payment processors will loan you a payment gateway (such as Square) or card reader. Setup fees and service fees are included with many service providers, so make sure you take them all into account. 

Before you partner with a solution provider, ask them about all of the one-time incidental fees you may be billed.

A Brief Note on Pricing 

There are also a variety of pricing models, which we delved into in a previous article. We took a look at tiered pricing (including qualified, mid-qualified, and non-qualified transactions), flat-rate, interchange, and interchange-plus pricing. 

Where Do Credit Card Processing Fees Go?

Want to know where your money goes when your merchant account provider deducts charges? As a small business owner, merchant service fees can add up quickly. Since the funds go to multiple organizations, it can be hard to decipher where your money is headed. Let’s take a look at the organizations involved in each transaction.

Customer Bank or Issuing Bank

This is the bank that issued your customer their credit card. It’s not the same as the card network, which refers to Visa, AmEx, Mastercard, etc. The issuing bank confirms that the funds for the transaction are available and deducts the funds post-transaction. These banks charge you a flat fee on each transaction they process at your point of sale.

Merchant Bank or Receiving Bank

This is the bank with which you’ve opened a merchant account. It could be Chase, Bank of America, or any other that lets retailers open business banking accounts. 

Your bank confirms and receives the funds from the issuing bank. Your bank pays all of the other entities involved in the process their percentage of the transaction amount. The merchant bank then deposits said funds in your business bank account.

Credit Card Network

This one is pretty cut-and-dry. The card network refers to your customer’s credit card company –– Visa, AmEx, Mastercard, etc. Each credit card network’s fee depends upon the card brand your customer is using and the type of account they have.

If your customer uses a third-party payment service provider, like PayPal, they may take an additional cut at this juncture.

Payment Processor or Merchant Service Provider

Your payment processing company is in the middle of every transaction. They determine which payment gateways are available and whether your business is eligible for discount rates. So, how much should you pay in merchant service fees per transaction?

Credit card processing fees range from about 1.3% to 3.5% before the payment processor’s cut. Your payment processor fees will vary significantly depending upon which processor and plan you choose. 

There are hundreds of payment processors out there. There is also a wide range of different pricing plans such as­­ tiered pricing, flat-rate pricing, wholesale pricing, etc. 

The plan that is right for you will depend upon the size of your business, the volume of transactions you process, etc. However, fee structures like tiered pricing are generally known to be more expensive for most.

Final Thoughts

With so many options and so little information available, finding the right payment processor can be a complex proposition. Nobody wants to pay a higher rate than necessary. So, it’s essential to find a payment services provider that’s known for its transparency so you can decipher costs. 

You’ll also want one that has a pricing model that helps customers save on card processing and great BBB ratings. Payment Depot is the highest-rated credit card processor in the business and for good reason. 

We offer award-winning, 24/7 customer service and a pricing model that helps merchants save up to $800 a month in processing fees. Our membership-style credit card processing is all set to change the merchant services game forever. Click here to learn how to put Payment Depot to work for your business.