Understanding Credit Card Processing Fees

Fees. Fees. Fees. This is how merchant account providers make money. Before signing on with a provider for your credit card processing needs, you should be clear about what the charges are going to be.

Read the fine print in your service agreement. Keep in mind that different fees will have a different bearing on your total cost, depending on the volume of your credit card transactions, the size of each transaction, whether you have card-present transactions, and other aspects of your business.

Discount rate: This is a percentage of each transaction, anywhere from 1 percent to 3 percent on average. Discount rates vary based on the method of payment. The following list shows cards in order of lowest rate to highest:

• Debit cards
• Diner’s Club
• Visa and MasterCard
• Discover Card
• American Express

Frank Ross, owner and operator of several e-commerce Web sites, says, “Debit cards will only give you a lower rate if you accept them as debit cards. Since they are usually Visa/MasterCard debit cards, you can swipe them as credit cards, but you will get the Visa/MasterCard discount rate if you do so. You will generally only get the advantageous discount rate if you use them in a debit card–enabled device or system, such as a PIN pad device.”

Qualified rate: This is the lowest possible rate charged for processing a credit card in the most secure type of transaction, such as physically swiping the card. A midqualified rate is for a slightly less secure transaction made by retail businesses, such as keying in a card number rather than swiping. It is usually 1 percent to 1.5 percent higher than the qualified rate.

Nonqualified rate: This is the rate for the least secure type of transaction, such as keyed transactions without address verification and mail order/telephone order transactions. It is usually 1 percent to 2.5 percent higher than the qualified rate.

Minimum monthly fee: This is a makeup fee for slow business. This is a fee that you’ll be charged if your other transaction fees are below a certain amount (often $25). If the various transaction fees don’t add up to a specified amount, you’ll be charged the difference between that month's fees and the minimum. This is a common charge with low-volume accounts.

Transaction fee: This is a flat rate for individual transactions, usually anywhere from 10 cents to 30 cents, depending on the transaction method.

Setup fee: This is an upfront cost to create the merchant account and configure any terminals.

Batching fee: This small fee is added to the end-of-the-day batch processing, when you settle your terminal-based transactions for the day and send them to the acquiring bank.

Application fee: Some companies charge this just to look at your application. Be sure it’s refundable so you’re not out hundreds of dollars if your application is rejected.

Chargeback fee: This is assessed anytime you reverse a charge, whether or not the reversal is successful.

Authorization fee: This is assessed each time a transaction is sent to the acquiring bank for approval or rejection. This is charged regardless of the result. Often this is bundled into the discount rate. Some providers charge a “voice authorization fee,” which kicks in if you call for card authorization over the phone.

Statement fee: This charge covers the monthly statement of your transactions; it’s usually around $15 a month.

Gateway fee: This monthly fee is for the payment gateway; it’s around $25 a month.