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Credit Card Merchant Fees: Finding the best merchant deal

Credit card merchant fees are often hidden behind a smokescreen of rates and percentages that make them difficult to understand.

Businesses are often left in the dark about what they’re actually paying for, and end up overpaying for services because they don’t fully understand the fee structure.

This guide will help business owners understand the various types of fees associated with credit card processing, so they can make informed decisions about which provider is right for them.

What is a credit card merchant fee?

Credit card processing charges are the fees charged by credit card companies and payment processors for the privilege of accepting credit cards as payment. It’s an umbrella term that encompasses a variety of fees, including interchange fees, assessment fees, and acquirer fees to name a few.

There are a variety of factors that determine the total amount of credit card processing fees a business will pay, including the type of business, the type of credit card being accepted, the average transaction amount, and the volume of credit card sales.

For instance, businesses might pay a higher rate for processing American Express cards than they would for Visa or Mastercard because Amex charges higher interchange rates. The rates are different for credit cards and debit cards.

That’s just a broad overview, though. Let’s take a more in-depth look at the various types of fees associated with credit card processing.

How does card processing work?

A credit card transaction is an agreement between four parties. There’s the cardholder, the merchant, the acquirer (also known as the acquiring bank), and the issuer (the credit card company).

The transaction starts when the cardholder makes a purchase from the merchant. The merchant then submits the transaction to their acquirer for approval. Once approved, the acquirer sends the transaction information to the issuer for payment.

The issuer then pays the acquirer, who in turn pays the merchant. Each party deducts their respective fees from the transaction before passing on the remainder of the funds.

Here’s an overview of the various credit card charges.

Merchant Processing Charges

The first type of fee businesses will encounter is the transaction fee or the processing charge. This is a flat fee charged for each credit card transaction and can be anywhere from 0.5% to 3% of the transaction amount.

So if a customer buys something from your store for £100, it can cost you a transaction fee of up to £3.

The transaction fee generally covers the cost of the interchange fee, which is the fee charged by the credit card company for processing the transaction, and the assessment fee, which is a fee charged by the card association (e.g. Visa or Mastercard).

It’s important to note that businesses will also have to pay a separate fee for each transaction that is processed as a refund or chargeback.

Cardholder Not Present Charges

Remote businesses, such as those that sell goods and services online or over the phone, will also have to pay a cardholder not present (CNP) charge. This is an additional fee charged for transactions where the cardholder is not present to sign for the purchase, such as online or over-the-phone transactions.

The CNP fee is generally a flat fee, but can also be a percentage of the transaction amount.

Amex Charges

Businesses that accept American Express cards will also have to pay an additional fee, called the Amex assessment fee. This is a percentage of the total transaction amount and is typically around 0.5%, but can be more.

So if a customer buys something from your store for £100, you would pay an Amex assessment fee of 50p.

This fee is in addition to the transaction fee and is charged by American Express, not the credit card company or payment processor.

Minimum Monthly Charges

In addition to the fees charged per transaction, merchant accounts levy a minimum monthly fee which will be applicable if your transaction value falls below the bilaterally agreed threshold.

This can range from £10-30. So, if you agreed on minimum monthly transactions of £10000, but were only able to transact £8000, then the merchant account provider will add the Minimum monthly charge to the final invoice.

Authorisation fees

Every transaction undergoes authorization at the issuing bank. The processor needs to pay the issuing bank an authorization fee which is generally 1-5p per transaction.

Chargeback Fees

Each time there’s a chargeback, the merchant account provider will charge a fee. This is usually between £10-20 per occurrence.

Some industries have a high rate of chargebacks, such as travel and entertainment. If your business is in one of these industries, you might have to pay a higher rate or have a higher threshold for chargebacks.

Terminal Rental Charges

If you’re using a physical terminal to process credit card payments, you’ll have to pay a monthly rental fee. This is usually around £10-20 per month.

You might also have to pay a one-time setup fee when you first get the terminal.

PCI Compliance Fee

The Payment Card Industry Data Security Standard (PCI DSS) is a set of security standards that businesses have to follow if they want to accept credit card payments.

To make sure businesses are following these standards, credit card companies require businesses to go through an annual PCI compliance review. This review can cost anywhere from £100 to a few thousand pounds, depending on the size of your business.

If you’re not PCI compliant, you might have to pay a higher transaction fee or be subject to other penalties.

Early Termination Charges

If you decide to cancel your merchant account, you might have to pay an early termination fee. This fee can be a few hundred pounds, depending on your contract.

Make sure you understand the fees associated with your merchant account before you sign up.

Rolling Reserve

A rolling reserve is a pot of money that merchants hold as protection against fraud and chargebacks. This is typically equal to 10-30% of the total amount of credit card sales processed by the merchant.

For example, if a merchant process £100,000 in credit card sales in a month, they would set aside £1,0000 to £3,0000 in their rolling reserve. Some merchants, such as Square, withhold this for up to 120 days. This can create a cash flow problem for some businesses.

Multicurrency charges

If you’re a business that sells internationally, you might also have to pay fees for processing multicurrency transactions. These fees can vary depending on the payment processor but are typically around 2% of the total transaction amount.

What Next

We don’t blame you if the list of charges got you feeling a little overwhelmed. However, the good news is that there are ways to minimise the fees charged by merchant account providers.

The first is to shop around and compare the fees charged by different providers. Make sure you understand all the fees associated with each provider before you make a decision.

The second is to negotiate with your merchant account provider. If you’re a high-volume merchant, you might be able to get a lower rate on some of the fees.

The third is to use a credit card processing service that doesn’t charge any hidden fees. Transparency is a rare quality in the world of credit card processing, but it’s something that can go a long way in ensuring that you are not fobbed off.

How we can help

We understand the frustration that comes with paying hidden credit card processing fees – we have worked with clients that are in the same position as you.

This is why we offer a comparison service that helps businesses find the best suited merchant provider for your business. We only work with providers who are upfront and transparent about their pricing and who we have worked with, so you can be sure you’re getting a good deal.