Demystifying Processing Fees

Payment processing is an integral part of every business. Whether you run a brick-and-mortar store or an online ecommerce platform, understanding the dynamics of payment processing and its associated fees is crucial. But, what exactly are these fees? Why do they exist? And how can businesses effectively navigate them?

What Are Processing Fees?

Processing fees are the costs that merchants pay to their payment processing company (or merchant service provider) every time a customer makes a transaction using a debit or credit card.

The fees cover the cost of the technology, infrastructure, and security measures required to process electronic transactions. They also represent the risk and liability the payment processors take on when facilitating these transactions.

Composition of a Per-Transaction Fee

To better understand processing fees, let’s break them down:

Interchange Fees: This is the largest portion of the processing fee, typically representing about 70-90% of the total cost. Interchange fees are set by the credit card networks (Visa, Mastercard, American Express, etc.) and are paid to the card-issuing bank to cover handling costs, fraud and bad debt costs, and the risk involved in approving the payment.

Assessment or Network Fees: These are fees that the card networks charge for each transaction. The money is used to maintain and improve the card networks’ infrastructure.

Processor’s Markup: This is the only negotiable part of the processing fee, which goes directly to the payment processor or merchant services provider. It covers their operational costs, customer support, profits, and other expenses.

These three components make up the total processing fee. However, the exact fee can vary greatly depending on various factors, such as the type of card used (credit, debit, rewards, corporate), the way the card is processed (swiped, keyed, online), the type of business, and the merchant’s processing volume.

Common Merchant Services Pricing Models

There are several pricing models that payment processors and merchant services providers use, including:

  1. Flat-Rate Pricing: On this model, the processor charges a fixed percentage for all transactions. This is simple and predictable, making it suitable for small businesses with low sales volumes.
  2. Interchange-Plus Pricing: This model charges a fixed markup in addition to the interchange and assessment fees. It’s often considered the most transparent pricing model.
  3. Tiered Pricing: Here, transactions are split into three tiers (qualified, mid-qualified, and non-qualified) based on their risk and cost. This model could be tricky as the processor decides which tier a transaction falls into.
  4. Zero Cost Processing: With this structure, you’re able to pass credit card transaction fees to your customers should they choose to use a credit card. You as the merchant are still responsible for debit card transaction fees, but they tend to be lower than credit card fees.
  5. Subscription/Membership Pricing: On this model, merchants pay a monthly membership fee plus a fixed charge per transaction. It’s ideal for businesses with high sales volumes.

Choosing the right model for you depends on your business type, sales volume, and personal preferences.

We recommend using past sales data to calculate your monthly or annual processing costs with different pricing models to see which is the most cost-effective for your business.

Other Costs and Fees to Keep in Mind

So far, we’ve talked a lot about processing and membership fees. However, there may be other costs and less-common fees you may be responsible for as well, including:

  • Monthly Statement Fees: These cover the cost of preparing and sending monthly statements.
  • Monthly Minimum Fees: If a merchant’s processing fees don’t reach a certain threshold, they’re charged this fee.
  • Software Usage: Some merchant services providers build their own proprietary software and charge their users a monthly fee to use it.
  • Hardware Leasing: If you decide not to purchase hardware up front, you’ll likely have to pay a monthly fee to continue using it. This is similar to leasing a car or WIFI router.
  • Gateway Fees: For online transactions, this fee covers the cost of using a payment gateway.
  • Batch Fees: These are charged whenever a merchant settles their terminal, usually once a day.
  • Chargeback Fees: Chargebacks unfortunately happen regularly and come with their own fees.
  • Non-Compliance: If you don’t meet PCI DSS standards, you may have pay a hefty fine.
  • Early Termination Fees: If a merchant ends their contract early, they may be charged this fee.

Be sure to ask about all of these fees up front so you understand what you’re responsible for before making any decisions. These can significantly raise your overall processing costs if you’re not careful.

What You Can Do to Minimize Processing Costs

Unfortunately, processing fees are a part of doing business. There’s no way to avoid them entirely. However, there are several strategies you can try to reduce processing costs, including:

  • Understand fees upfront: Many providers aren’t transparent about their fees, so it’s crucial to ask and make sure you understand what you’ll be responsible for before signing up for anything.
  • Negotiate: You could try to negotiate a lower markup, especially if you have a high sales volume.
  • Set a minimum transaction amount: To offset processing costs, consider setting a minimum for card payments.
  • Regularly optimize your solution: Don’t pay for equipment, hardware, and software you don’t need. Regularly evaluate what you have and consolidate when you can.
  • Encourage mobile wallet and debit payments: These tend to have lower fees than credit cards.
  • Use a payment gateway with lower fees: If your business operates online, shop around for a solution with lower fees.
  • Prevent fraud and chargebacks: High levels of fraud and chargebacks can lead to higher processing fees. Implementing measures to prevent these can help reduce costs.

The Emerging Role of Tech in Lowering Processing Fees

In our digital age, technology continues to revolutionize payment processing and the costs associated with it. Various technological solutions can streamline the payment process, enhance transaction security, and potentially lower processing fees.

Payment gateways, for instance, can help reduce fees by ensuring smooth, secure, and fast transactions. They have the added advantage of integrating with various ecommerce platforms, thus providing a seamless experience for both the merchant and the customer.

Mobile payment solutions, such as digital wallets or mobile POS systems, can also help reduce the costs associated with traditional POS systems.

They offer the flexibility of accepting payments anywhere, and often come with lower setup and maintenance costs.

Emerging payment trends like cryptocurrency could also influence processing fees in the future. While still not mainstream, cryptocurrencies offer the potential for lower fees, especially for cross-border transactions. However, their volatility and regulatory uncertainties make them a less stable option at present.

What Processing Fees Mean for Your Pricing Strategy

Understanding the structure and impact of processing fees as well as the basics of merchant services aren’t merely about cost management; it’s also a strategic tool for pricing your products or services. While setting prices, it’s essential to consider the average processing cost per transaction. For instance, if your average transaction value is low, the fixed part of the processing fee can take up a significant portion of your revenue, thereby affecting your profitability.

You might consider implementing a minimum transaction amount for card payments, a practice that’s especially common in small businesses and restaurants. On the other hand, if you deal with high-value transactions, finding a favorable rate with your processor becomes pivotal.

Pricing psychology also plays a crucial role. Customers are often sensitive to price changes, so simply raising prices to cover processing fees might not be the best strategy. Instead, you could creatively absorb these costs into your pricing structure. For instance, you could offer discounts or incentives for cash payments, which can help steer customers away from card payments and thus reduce your processing fees.


Understanding processing fees is not just about knowing what they are, but also how they impact your business and what you can do to control them. By demystifying these fees, you can make more informed decisions, potentially saving your business a significant amount of money in the long run.

Remember, the right payment processor can make all the difference. So take the time to understand your business’s specific needs, review your options, and make a decision that benefits your business in the long term. After all, every penny saved in processing fees is a penny earned for your bottom line.

Scroll to Top