As a business owner, you need to make a profit from the goods and services you provide in order to stay in business. This is why fees, especially for the privilege of simply accepting credit cards, can be so frustrating.
Credit card processing fees are what the payment providers charge businesses for using their services. They often represent a percentage of your credit card sales. Numerous providers enable your acceptance of credit card payments, and each charges its own fees. Some are charged directly to your business; others are passed down.
As a refresher, we’ll cover how the different middlemen make credit card processing possible, followed by the typical fees they charge.
How Credit Cards Are Authorized
In any given transaction, a six-step process occurs to authorize the credit card payment.
- The cardholder swipes or inserts a debit or credit card into the merchant’s card reader, which is provided by the business’s Merchant Service Provider.
- The Merchant Service Provider communicates the transaction information to its Payment Processor.
- The Payment Processor communicates the transaction to the Card Association’s network.
- The acquiring bank determines whether sufficient credit or funds are available via the Card Association’s network.
- The acquiring bank communicates the information back to the Payment Processor.
- An approve or decline code is issued. If approved, the transaction will process, and the Card Association network will facilitate the transfer of funds from the issuing bank to the depository bank account of the merchant.
It’s easy to take these interactions for granted because they occur within a matter of seconds. However, given the work involved, it makes sense that your many payment providers require a fee for their services.
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How Credit Card Fees Are Charged
Here’s how each payment provider makes money on a given transaction.
- Issuing Banks extend lines of credit to their cardholders and charge interest on balances that aren’t paid in full.
- Acquiring Banks collect a small fee for every transaction.
- Card Associations charge what’s called “dues and assessments” based on each business’s monthly transaction volume. These rates may change on a biannual basis when the Card Associations release their updated Interchange guides.
- Payment Processors collect a per-transaction fee. This fee is never seen directly by a merchant as it’s baked into the Merchant Service Provider’s fees.
- Payment Gateways typically charge a gateway fee for their services, unless they offer combined Payment Gateway and Merchant Services.
- Merchant Service Providers charge a markup on their transactions because they don’t make money off Interchange (aka the wholesale cost to run a transaction). Additionally, they may charge fees to use their services.
- Payment Facilitators make money on the markup over Interchange, similarly to Merchant Service Providers. Because they only offer Flat-rate pricing, a single high rate for every transaction, this margin is larger than that of Tiered or Interchange-plus plans.
Now, with a better understanding of just how many providers handle your transactions (some of them don’t have a direct relationship with your business), you can better understand what certain fees in your merchant statements are for, how they’re calculated and who is ultimately being paid.
Have additional questions about your credit card fees? We’re here to help. Simply ask us in the comments section below.