How do Credit Card Processing Fees Work?
Understanding how credit card processing fees work can feel like trying to look into a black box, but it’s actually not all that complicated. There are three major models for how credit card processing fees are determined: flat rate pricing, tiered pricing, and interchange plus pricing.
Flat Rate Pricing
The flat rate pricing model charges the same fee regardless of the type of credit card being used in the transaction or the card network (American Express, Mastercard, VISA, etc) involved in processing the transaction. Common fee rates for this pricing model are 2.9% for online (card not present) transactions and 2.7% for in-person (card present) transactions. This pricing model is simple and makes estimating your credit card processing costs easy. However, this convenience comes at a cost as flat rate pricing often has you paying much higher fees than the underlying cost (interchange fee) that your credit card processor pays to process the transaction. The flat rate pricing model is popular among credit card processing companies that cater to small businesses.
Tiered Pricing
The tiered pricing model breaks down fees into three tiers: qualified rates, mid-qualified rates, and non-qualified rates. Qualified rates are the cheapest and mainly apply to non-rewards credit card transactions. Mid-qualified rates are more expensive and mainly apply to membership rewards card transactions. Non-qualified rates are the most expensive and mainly apply to high-rewards credit card transactions. Processing fees can range from 1.4% to more than 4% depending on the tier that the credit card falls into. Tiered pricing lacks transparency in how the fees are calculated. Furthermore, processors often advertise the low qualified rates when it’s possible that the majority of your transactions fall under the more costly mid-qualified and non-qualified rates. Because of this, the tiered pricing model is the most expensive of the three pricing models.
Interchange Plus Pricing
The interchange plus pricing model charges a different fee depending on the type of credit card being used in the transaction, the card network involved in processing the transaction, and the merchant category. The major card networks are Mastercard, VISA, American Express, and Discover. In the case of Mastercard, the types of credit cards are Standard, World, and World Elite. Similarly, the other card networks offer various types of credit cards. Some merchant categories are grocery stores, restaurants, car washes, etc. This pricing model is highly transparent and can be broken down into three components: interchange fees, assessment fees, and payment processing fees. Interchange fees are paid to the financial institution that issues the credit card involved in the transaction. Assessment fees are paid to the card network. Payment processing fees are paid to the company processing the payment. Interchange plus fees can be highly variable, but on average the fee is 1.81%, which makes interchange plus the least expensive of the three pricing models. The interchange plus pricing model is typically only available to larger businesses with high transaction volumes.
Final Thoughts
In short, interchange plus pricing is the most affordable option, but can be hard to access for many small business owners.
One other cost to consider when accepting credit card payments is the cost of a point of sale (POS) terminal. Almost all payment processing companies require you to purchase their own proprietary POS terminal or a POS terminal from their list of supported machines.
If you are a small business owner that’s interested in easily accessing interchange plus pricing and getting started with collecting credit card payments without having to spend money on a dedicated POS terminal, check out www.payswift.ca. We are building a mobile point-of-sale solution that you can use to instantly turn your phone into a payment terminal that accepts contactless payments and processes them at interchange plus rates.
