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Payment Processing Fees Explained

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If you’re running a business, you could be leaving a lot of money on the table by not accepting credit card payments. According to Intuit, not accepting credit cards can cost the typical business $7,000 in annual sales.

That said, a lot goes into setting your business up for credit card payment processing. Between numerous middlemen and different rate plans, there’s a lot to consider. Before diving into that, let's discuss what exactly occurs when you accept a credit card payment from a customer.

Payment Processing Ins and Outs

Let’s start off with a scenario that we’re all familiar with. A customer visits a business to make a purchase. When rung up, she opts to pay with her credit card. Four parties are initially involved with the transaction:

  • The customer
  • The business
  • The issuing bank (the bank that issued the credit card)
  • The acquiring bank (the Merchant Account Provider’s bank)

Most businesses turn to a Merchant Service Provider or bank with a merchant services division for their payment processing needs. That’s because accepting a credit card transaction isn’t as simple as a cash deposit. There is more risk involved.

The issuing bank charges the Merchant Service Provider an Interchange fee for the transaction. This fee varies greatly due to factors like credit card type and risk. This Interchange fee is passed onto the business while the Merchant Service Provider simultaneously charges the business a markup to process the transaction.

Payment Processing Fees Explained

The acquiring and issuing banks are both taking a risk on the transaction. From the perspective of the issuing bank, the customer could fail to pay his credit card bill. From the perspective of the acquiring bank, the customer could file a chargeback if the product is deemed insufficient, doesn’t arrive or is the result of a stolen or fraudulent credit card.

Payment Processing Middlemen

We expound on this further in this article, but there are more behind-the-scenes players powering payment processing. In brief, they include:

  • Card Associations: They set the rules and manage Interchange for the credit card brands (Visa, MasterCard, Discover and Amex)
  • Payment Processors: They maintain the computer network that supports communication between the Merchant Account Provider and banks
  • Payment Gateways: They facilitate the transfer of information between the credit card terminal and Payment Processor.

Some of this complexity can be bypassed by working with a Payment Facilitator like Square or PayPal. These companies are ideal for small-scale businesses due to their quick setup. That said, they can also hold funds from your bank account since they don’t underwrite their customers. The funds are held in the event of a chargeback.

If your credit card terminal is managed by a different company, then there's a whole different support staff to deal with.

We know, there are many parties involved. That’s what we meant when we said credit card payment processing is more complicated than depositing cash in your bank account. Unfortunately, not accepting credit cards can be dire for a business — especially since credit cards are the preferred payment method for larger purchases, according to CreditCards.com.

Luckily, you can work with a Merchant Service Provider that provides all these services in one. This will reduce the number of middlemen you have to deal with and result in peace of mind having your credit card payment processing fees explained. The more streamlined your services, the easier it is to focus on other important aspects of your business.

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Does your business accept credit cards? What was most surprising to you when you set up your credit card payment processing? Let us know in the comments section below!

Editor's Note: This post was originally published in December 2016 and has been updated for comprehensiveness and accuracy.


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Picture of Christina Lavingia

Christina Lavingia

Christina Lavingia delights in crafting content that helps business owners fight fraud, reduce risk and process payments with ease.

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