Overview of Credit Card Payments & Types of Credit Card Fees

April 19, 2019

April 19, 2019

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When you read the features of a certain credit card, explanations of the fees tend to look like they’re in a foreign language. Whether it’s a rewards card or a card meant just for business owners, there lots of numbers, talk of different fees and rates, cash advances, monthly fees, balance transfers, yields, and all kinds of other confusing details. It’s hard for just about anyone to understand.

This article will talk about all the types of payment fees, and how credit card payments and credit card fees work so that you can make sense of it all. Then we’ll give you some tips for the best resources to make a well-informed decision and minimize your fees when you shop for a credit card for your businesses.

Interchange Fees

Interchange fees are factored into every credit card transaction, and they’re the fees that your bank account has to pay whenever a customer uses their card to buy something. They are paid to the bank that issued the credit card, and help cover the cost of processing the transaction along with any potential issues like fraudulent charges.

The interchange rate is chosen by the credit card company, and comprise 40-60% of the total fees that are charged. However, depending on your credit card provider, there are different ways the process works. This is because some credit cards are self-contained, handling every aspect of the transaction, while others are essentially clients of banks. We’ll discuss both types next, and why it matters for interchange fees.

Amex & Discover vs. Visa & Mastercard

The four major debit and credit card networks are Discover, Visa, Mastercard, and American Express, or Amex. There are major differences between how they work.

Of these four, Amex and Discover issue their own cards. They have the infrastructure to be fully self-contained, and own the transaction process from start to finish. Visa and Mastercard, however, are service providers for banks. These credit card providers partner up with banks so that a third party can issue the cards and help handle payment gateways and other aspects of transaction processing. Since the credit card company is not the issuer, the fees are different.

Other differences also have a direct effect on interchange rates for the credit cards these companies issue. Since Visa and Mastercard have a bank in the equation, this changes the economics and ends up requiring higher per-transaction fees for merchants.

So, what are typical credit card processing fees? Rates change all the time, but there is a general range. For debit cards, the percentage fees tend to come to 5 basis points, which is 0.05%, plus 22 cents. For reference, a basis point is 1/100thof 1%, or 0.0001.

On credit cards, the per-transaction fees are higher. You’ll expect to pay 1.65-2.25 percent on each transaction, plus an additional five cents. For many retailers, processing fees will end up totaling around 11-15 cents per transaction.

Different Transaction Types & Their Effect on Interchange Rates

Credit card transactions can take several different forms. The different forms of payment have a different effect on how the interchange rates are calculated. One payment method for credit card processing is a card-not-present transaction. This applies to any online payment with a credit or debit card. Card-not-present transactions can also occur in person, via manual entry of a customer’s payment information into a POS system. 

Card present transactions can occur in a variety of ways as well. For example, cards can be swiped by the customer or handed to a clerk to be manually keyed into a POS system with integrated payment processors.

Rates change on an ongoing basis, and are different according to how much data you have on a customer. If you have more data on a customer, rates are lower, because there is less data that needs to be processed in order to complete a transaction. However, some rates are known as “wholesale rates,” which are rates that don’t change. We’ll talk about some of these next.

Dues & Assessments 

Dues and assessments make up 20%-50% of your total credit card fees. They’re wholesale fees, and are issued by the credit card networks themselves. They can be quite confusing, as the various credit card network providers all use different names to describe them, and while they can be in different amounts, they work in essentially the same way regardless of the network.

One of the most common types of dues and assessments is called an “abuse fee” or “network misuse fee.” These fees are charged when the authorization process is started, but the transaction is never completed. Essentially, these dues come up because the credit card network needs to spend money, in the form of electricity and the transfer of data, in order to authorize a transaction. 

If the transaction isn’t fully completed, these costs don’t disappear for the credit card provider. Therefore, they try to make it back (plus a little bit of profit) by charging a fee for “misuse” of the network due to incomplete transactions.

Additional Mark-Up or Service Fees

The last 20% of fees come in the form of additional mark-up or service fees. These fees are charged so that the payment processor can profit from each transaction they process on their networks, and are charged as a per-transaction percentage as well as an interchange fee.

The total fee charged will change according to the processor’s perception of your overall risk as a merchant. For example, online merchants who only process card-not-present transactions are charged higher fees. This is because card-not-present transactions come with a higher risk of fraud attempts than those that occur in person.

Additional fees are charged for situations where payments that have been processed are later disputed or need to be processed again. For example, a fee is charged for any chargeback attempts wherein a charge is disputed. Then there are late payment fees. Fees for late payment are often charged as a direct debit from your account. “Filing fees,” flat fees like convenience fees, and other penalties can be processed as well. Read your contracts carefully, as additional mark-up or can come in a potentially unlimited number of forms. 

Final Thoughts

The rates and fees for credit cards are so confusing, they warrant talking to an industry insider to help you understand all of it. Figuring out the details of payment processing is a time-consuming and potentially expensive endeavor, and can drain your checking account independent of all the fees you could face later on. Thankfully, a company like FeeFighters is already staffed by knowledgeable insiders.

They can help by doing the hard work of finding service providers to get you the lowest fees and the best pricing possible. 

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