Credit Card Transaction Processing Fees - Who gets whatCredit card transaction processing fees are a part of doing business in today’s plastic oriented world. Since they can be confusing, complicated and somewhat mysterious, it makes sense for a small business owner to try to understand them. With a basic understanding, you will be in a better position to dispute any charges that you may have questions. This knowledge will also give you a more realistic picture of your actual overhead costs.

The Intermediaries Explained

Like many financial transactions, credit card transaction processing fees involve intermediary organizations. These fall into the following five general categories:

Credit Card Transaction Processing Fees – Who takes your cheese?

  1. Credit card companies: This category is pretty self-explanatory. They are the creators of the credit cards that nearly everyone carries at least one of in their pocket. Mastercard, Discover, Visa and American Express are the companies that lay down the rules governing credit card transactions.
  2. Issuing banks: Financial institutions, such as Wells Fargo, Chas, and Citi, that issue the credit cards fall into this category. Some, like American Express and Discover, fill multiple roles of banker, developer, and issuer of the credit cards.
  3. Processors: Credit card processors are akin to messengers. The processors’ shuttle information along between businesses and credit card associations. Also sometimes known as acquiring banks, your company might engage with several different processors in the course of a transaction. Some examples of the messages they might deliver include batch information about monthly statements, authorization requests that release funds to a bank account and technical support — all within one transaction.
  4. Payment Gateways: The typical gateway to payment is often in the form of an online shopping cart. These specialized portals are designed to direct transactions to a particular processor.
  5. Merchant account providers: The daily management involved with processing credit cards fall to these companies. Support, sales and other functions that help ensure that transactions are seamless are taken care of by acquirers that already have a feature in the process or by independent sales organizations and financial institutions.

Credit Card Transaction Processing Fees: A Map of a Transaction

Understanding where all the above players fit into a typical transaction can help solidify the facts in your mind. There are typically four distinct steps:

  1. the customer purchases from the merchant
  2. the merchant activates the gateway which sends the information to the credit card processor
  3. the credit card processor engages the credit card companies
  4. the credit card company then looks to its issuing bank to have the funds released

Credit Card Transaction Processing Fees Categories

The credit card transaction fees fall into two categories: base fees and markup fees.

  • Base fees: These fees are not negotiable and are outlined by the credit card companies as well as the issuing bank. These fees are the same regardless of the processor and are the sum of a flat transaction fee and a percentage of the transaction volume.
  • Markup fees: Markup fees represent the profit margin that your credit card processor tries to maintain and offer some room for you to negotiate. The right company will be one that has modest fees that don’t take a significant bite out of your profits. Some processors make it difficult to know precisely how much in markup fees you are paying as well as the reasoning behind them due to the confusing jargon they use. When you are in the market for a new merchant account, these fees are the ones you need to compare.

Credit Cards Transaction Fees Explained

A discussion that answers the question of who gets what of the credit card processing fee is not complete without learning about all the charges that are involved.

  • Transactional fees: These fees likely need very little explanation as you are probably aware that you are charged them each time a transaction is run. For nearly all businesses, these transactional fees consume the most substantial cost of being a merchant account operator.
  • Flat fees: While other names might know these flat fees, chances are you will find at least a few of them on your monthly statements. The actual number, value, and name might vary.
  • Incidental fees: If a particular transaction is subject to a flat fee, it will be charged that each time. Incidental costs, however, will only be charged when a specific incident arises. For example, if you have a chargeback, then you will notice a chargeback fee on your monthly statement for that particular incident. During those months when you do not have any chargebacks, you will not have that fee. Besides chargebacks, other incidental charges might appear as well.
  • Bank interchange rates: These rates are charged to your business every time you process a credit card and are collected by the bank that issued your customer’s card. Banks charge a flat transaction fee and add a percentage of the transaction volume to arrive at the bank interchange fee. This rate is dictated by factors such as the processing method, the card type, and the card category.
  • Assessment charges by card networks: Every time you accept a card, your business pays assessment charges to the card network that are made up of a flat cost and a percentage. Visa also charges a monthly fee. Except for the variable monthly fee, Visa and Mastercard enact similar assessment charges. Currently, they each charge 0.11 percent of volume with Visa charging a transaction fee of $0.0195. Mastercard charges a transaction fee of $0.0185. Discover charges 0.105 percent of volume and a transaction fee of $0.0185.

This essential primer detailing the distribution of credit card transaction processing fees is designed to help you understand how money is made on each credit card transaction you accept. This knowledge can help you make better business decisions.

So, now you know who eats your cheese and who gets what in the arcane world of credit card transaction processing.

Additional sources of information:

Visa Small Business Credit Card Interchange Rules

Mastercard Credit Card Interchange Rules

American Express Payment Processing Guide