Perhaps the most confusing part of credit card processing involves the fees paid by the business. If you’ve ever spent any time trying to read a merchant statement, chances are you didn’t experience any particular revelations of clarity. How exactly are those fees determined?
Before we get too in depth with fee talk, it helps to first understand how the processing network actually works.
Most everyone is a middleman
When you contract with a merchant services provider, in most instances, they won’t be the ones actually processing your credit cards. This includes most banks that offer merchant services, as well as non-bank merchant services providers. For the most part, they all act as middlemen, meaning that—at minimum—there are three companies involved with each transaction performed by a merchant: the card issuer (Visa, MasterCard, Discover, etc.), the processor, and the merchant provider.
How are the fees calculated?
Of the above-mentioned entities, the card issuer (Visa, MasterCard, etc.) largely controls the pricing that a merchant pays for credit card processing. Each issuer sets a percentage rate associated with not only the type of card used for the transaction, but also the way in which that card is presented (swiped vs. key-entered). This percentage rate is referred to as the “Interchange Rate.” While not always true, these rates typically adhere to the following rules:
- Debit cards have lower rates than credit cards.
- Consumer credit cards have lower rates than business credit cards.
- Cards without rewards have lower rates than cards with rewards.
- Swiped transactions have lower rates than key-entered transactions.
Processing rates are—in some ways—correlated with the perception of risk associated with a transaction. So naturally, a card-present transaction (where the card is swiped) is perceived as less risky than an over-the-phone transaction. To help achieve lower rates on over-the-phone transactions, merchants who provide the billing zip and CVV code reduce the perceived risk of the transaction, thus helping them achieve a lower Interchange Rate for that particular card.
Let’s talk numbers
We’ve talked about Interchange Rates in theory, but now let’s talk hard numbers. A merchant could reasonably expect to pay the following Interchange Rates for transactions:
- Swiped Debit Cards – 0.10% to 1.45%
- Key-Entered Debit Cards – 1.00% to 1.75%
- Swiped Credit Cards – 1.50% to 2.25%
- Key-Entered Credit Cards – 2.25% to 2.95%
These rates mostly apply to Visa, MasterCard and Discover cards. American Express controls its own pricing, which is based on the business category in which the merchant is classified (Ex. “restaurant” is 2.89%). So, you can see that retail businesses who swipe the majority of their transactions will—on average—pay a lower Interchange Rate than a business who receives their orders over the phone/Internet.
As mentioned above, the Interchange Rate covers the bulk of a business’ processing fees. For a look at the additional fees paid to the merchant provider, you can check out this post from a while back about the differences in merchant pricing structures.