Why does it cost so much to accept credit cards?

Now more than ever, the convenience of paying with credit cards and debit cards can help businesses reduce physical contact and keep customer revenue intact. But the cost of credit card acceptance can be significant for businesses. Why does accepting credit cards cost so much? What are the individual fees that make up these costs? And what can merchants do to save money on payment processing?

The Common Costs of Credit Card Payments

It helps to start by identifying the common costs associated with card transactions. They fall into three major categories: interchange, assessments, and processor fees. Here’s an overview of each.

1. Interchange

Interchange is the fee merchants pay to issuing banks that provide payment cards to businesses and consumers. Interchange fees are established by the card brands (Discover, Mastercard, and Visa), resulting in hundreds of different interchange rates. These rates can vary based on a number of factors inherent in each individual transaction. They include:

✔️ The type of payment card used. A payment card that offers generous perks and rewards will have higher interchange rates than those that do not (debit cards, for example).

✔️ The merchant’s industry. Transactions made at lower-risk, higher-volume businesses like supermarkets tend to qualify for lower interchange fees. On the flip side, industries with higher rates of fraud (like ecommerce) might incur higher interchange fees. A merchant’s industry is identified using the merchant category code (MCC) associated with the account.

✔️ How the payment is made. For example, an in-person transaction where an EMV chip card is dipped into a reader will qualify for a more favorable interchange rate than a payment given over the phone. This reflects the lower likelihood of fraud in the EMV transaction versus the higher likelihood of fraud in the phone payment.

Interchange is calculated using a flat fee plus a percentage of each transaction. For example, an interchange rate might be established at 1.80% + $0.10. It’s important to remember that interchange is the costliest component of payment processing fees, comprising an average of 80% of the total cost of each transaction.

Interchange is set by the card brands and cannot be negotiated. However, with the help of a consultative payment processor, merchants can employ strategies to qualify for the most favorable interchange rates. It’s worthwhile to note that payment processors do not receive revenue from interchange – it all goes to the card issuing banks.

2. Assessments

Assessments are the fees that merchants pay to the card brands to manage and operate the card networks. These are fixed fees established by Discover, Mastercard, and Visa and represent a small percentage of each transaction calculated according to sales volume. For example, if the assessment fee is 0.12% on monthly sales totaling $10,000, the monthly assessment fee equals $12.00.

3. Processor fees

Processor fees are what merchants pay processors for their payment acceptance solutions and merchant accounts. Of the three fees covered in this blog, processor fees are the only ones that are negotiable.

There are other fees that merchants might incur including those related to PCI DSS compliance, chargebacks, and monthly minimums. It’s important to work with a processor that offers fully transparent pricing and strategies for keeping fees at a minimum.

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