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With inflation running near 40-year highs, and skyrocketing costs for everything, smart business owners need to look at every expense to protect their margins and profitability. While payment processing costs may not be the first thing you think of, they should be seriously considered. According to the National Retail Federation, “Regardless of size, the fees are most merchants’ highest operating cost after labor.”

Credit Card Acceptance

Accepting credit cards is a necessity. In 2021, card payments accounted for 50% of small business total sales.

Of the 50% of card payments, approximately 50% will be debit cards, with the balance in credit cards.

While both card types have processing fees, the fees vary somewhat by card type, method of entry (Swipe/dipped/tapped), and payment channel used (online, mobile, etc.), among other factors.

Debit cards have an average interchange rate of around 0.3%. Credit card fees typically range from 2.87% to 4.35% on each transaction, which doesn’t include merchant service provider fees.

Breaking Down the Fees

The major card brands (Visa and Mastercard) have two major classes of fees, interchange and assessment. Therefore, a high-level understanding of how each fee type works is essential in calculating what credit card transactions are costing you.

Interchange Fees

Interchange fees are the non-negotiable transaction fees that your merchant bank account must pay whenever a customer uses a credit/debit card to make a purchase. This fee collected by card issuers makes up the lion’s share of total interchange and rate expenses.

Interchange fees vary widely based on several factors, including; whether the card is a debit or credit card, how the payment is entered (keyed/swiped/dipped), the card network, and the merchant category code.

How interchange fees are calculated

Many factors influence the interchange fee amount. Following are some key factors to understand how the impact they have on the amount you’ll pay in fees:

Card scheme or network (Visa, Mastercard networks)
Different card schemes or networks charge different interchange rates. So, for example, the rates paid to Visa will be different from Mastercard.

Card-present vs. card-not-present
Card-present (CP) transactions, or in-person transactions, have lower interchange fees than card-not-present (CNP) transactions since the fraud risk is lower when the customer’s identity can be confirmed.

Credit vs. debit cards
Credit and deferred debit cards, the transaction value is not debited from the current account’s balance immediately, have higher interchange fees than immediate debit and prepaid cards since the risk level is higher.

Merchant category code (MCC)
Based on your business type, you are assigned an MCC. Your assigned MCC can affect your interchange fees. For example, Visa and Mastercard have lower interchange rates for specific business types, such as charities and utilities.

Consumer vs. commercial
Commercial credit cards have higher interchange fees than individual credit cards due to the higher potential for fraud.

Domestic transactions, where the card-issuing bank is in the same country as the business, have lower interchange rates than cross-border transactions.

Rewards cards
Rewards card interchange fees are generally higher. The increased fees pay for the perks/benefits offered by rewards programs.

However, interchange fees are not the only cost applied to a transaction. There are also assessment fees.

Assessment Fee

An assessment fee is non-negotiable, charged on your total monthly sales for each credit card brand, and paid entirely to the credit brand (Visa, Mastercard, etc.).

Card Brand Assessment Fees

Some card networks charge higher rates for credit cards than debit cards, while others may charge higher rates when the transaction volume is greater.

Similar to interchange fees, the card brands review assessment fees twice a year and are subject to change-read increases.

The combination of interchange and assessment fees is known as “swipe fees” and makeup 80% to 90% of the transaction cost.

It is worth noting that interchange and assessment fees are the same for all merchants and payment processors, regardless of size or credit card volume.

Processor Pricing

In addition to credit card network-related fees, payment processors charge fees for their services. Processors’ fees fall into one of the pricing structures below.

Flat-rate pricing

As it sounds, processors charge a flat fee that includes the interchange and card brand fees plus its fee. The advantage is predictability.

However, since interchange fees vary by a number of factors, you could end up paying more processing costs for a transaction than you otherwise would have.

Tiered pricing

The rate structure is divided into tiers — a lower-priced  “qualified” tier and second and third tiers, known as “mid” or “non-qualified.” The processor sets what transactions qualify for each tier and vary from processor to processor. While the low qualified rate may attract you, it only applies to a few transactions; most transactions end up in higher tiers at higher costs. Tiered pricing is the most common pricing structure in the U.S.

As noted above, a primary disadvantage is that the lower qualified rate only applies to certain card and transaction types. For example, if your customers use rewards cards (most do), you can pay higher fees since the rewards cards aren’t covered in your qualified tier. Therefore, we suggest checking to see if the qualified rates in your plan will cover the credit cards your business typically sees.

Interchange-plus pricing

In interchange-plus pricing, the processor charges you the lowest applicable interchange fee plus a fixed fee. The advantage is you’ll pay the lowest possible interchange fees with a predictable fixed fee.

However, like other fees, interchange-plus processor fees can vary by various factors, including volume, business type, number of monthly transactions, etc.

Membership or subscription pricing

Membership or subscription pricing is a monthly fee plus a fixed charge on every transaction. However, since the processor doesn’t add a fixed percentage fee, the overall charges can be lower.

While the charges may appear lower, your actual fees depend on the number of transactions and business volume. Also, remember you are paying a monthly membership which has to be calculated in to see if membership pricing works for your business model.

Internal Costs

Even after the interchange, assessment, and processing costs, there are some hidden costs to consider. For example, the purchase or rental costs of credit card terminals, internet and data connections, compliance requirements, software, supplies, IT support, accounting, and other related expenses vary by location, industry, and business model.

Your Payment Mix and Cost Structure

In the past ten years, credit card processing fees have increased by over 200%, primarily due to the overwhelming popularity of credit card rewards. Recent research estimated that over 92% of all credit transactions are made on a rewards card. How these trends impact your bottom line is the mix of payments you receive.

For example, if premium or reward credit cards were twenty percent of your payment mix five years ago, now they are ninety percent. In addition, these premium credit cards have up to 2x higher fees than traditional non-premium credit cards and debit cards to pay for the vacation and mileage perks.

So, if your cost structure, particularly the portion allocated to processing costs, hasn’t changed in the past five years, your credit card processing costs are eating into your margins. These higher processing costs are primarily due to the growing percentage of premium or rewards credit cards in your payment mix.

Pulling it all Together

Net Effective Rate 

The first step to calculating your total processing cost is determining what you currently pay per transaction or the net effective rate- the percentage of each sale that goes towards processing fees.

To find the effective rate for your credit card processing, you first need to add all the fees to your merchant statement.


We’ll use the following merchant statement as an example:

Sample merchant statement

In the example above, we marked the total sales volume in green and the total fee in red. The formula for calculating the net effective rate appears on the next page.

Calculating the net effective rate from the merchant statement example, we find the net effective rate is 5.99%  or  $5907.03 / $98511.45 X100 = 5.99%

To complete this analysis, you’ll need to use the net effective rate calculation on your internal costs substituting your internal costs for the total deducted for processing in the formula. Adding the two results will give you a more accurate view of payment processing costs on your bottom line.

So What Can I Do? 

Now that you’ve got your head around the cost of accepting payments, especially rewards credit card payments, on your bottom line, what do you do with this information?

Check to See if You Are Getting A Good Deal

First, you can use your effective rate to compare what you’re paying your current merchant services provider or payment processor to other payment processors to see if you are getting a good deal. That said, rates can vary by business type, percent of online transactions, and other factors.

Below, we examine three common factors that affect processing rates.

Low-Risk Businesses

Some businesses are inherently likely to qualify for more attractive rates. Typically, low-risk or brick-and-mortar businesses with high transaction volumes will get the best effective rates on credit card processing. Why? More transactions lead to more revenue for the processor, and the risk of fraud is minimized.

Online Transactions

Remember that the more payments you accept online, the higher the effective rate will be because online transactions are considered riskier than in-person transactions and therefore have higher fees to compensate for the increased risk.

B2B Payments

If your business is with other businesses and most of your payments are on purchasing cards or business credit cards, look payment processor that processes payments with Level 2 and Level 3 credit card data. Level 2 and Level 3 transactions are processed with more data; the card brands see these transactions as more secure, less likely to be fraudulent or contain errors and qualify for lower swipe fees.

Add a Fee to Customer Bills

Second, you could consider adding a fee to every credit card transaction. Why are you paying for someone else’s perks, primarily when they use a credit card for the rewards?

You shouldn’t. Passing a fee on to the customer is not uncommon or illegal.

Modern payment platforms like IntelliPay provide merchants with the customer (cardholder) paying the processing costs options that automatically add a flat fee or a percentage (3% ) to the customers’ total cost. The system also allows customers to avoid paying fees using a lower processing cost option.

A Word About Fees

Customer fees can be tricky. Some fees can only be added to credit card purchases, with the customer having the option to avoid paying the fee by paying with debit or cash before check-out. Under this fee scenario, the customer pays the processing costs for transactions using a credit card while the merchant pays the lower processing costs of debit cards, usually 1.5% or less.

Other fees can be added if you have a select merchant category code (MCC) or if payment is through an alternate payment channel. Card brand rules and legal regulations can determine the type of fee your business could add and how you add it.

In the next section, we’ll take a higher-level look at the customer’s fees, where they pay for the processing costs.

Customer Fees or Cardholder Pays For Processing Fee Options

Convenience Fee

A convenient processing fee option allows the merchant to add a flat fee to credit or debit transactions. Mastercard calls their government fee program – convenience fee. The catch is convenience fees can only be added to the transaction made outside of the traditional way a merchant accepts payments. For example, a movie theater offers online ticket purchases where the theater can charge a fee versus in their lobby, their traditional method where a fee cannot be added.

Service Fee – Limited Number of Government and Educational Institutions

Service Fee is a VISA term for a fee-based program that enables government and educational institutions with the following merchant category classifications or MCCs 8211; 8220; 8244; 8249; 9211; 9222; 9311; and 9399 to charge a service fee on credit and debit transactions.

Mastercard calls its government program a “convenience fee.” However, Mastercard’s use of convenience fees to describe its government program adds a layer of complexity. Since their rules regulating their government’s “convenience fee”  program differ from the convenience fee available to all businesses mentioned previously.

American Express has a government fee option under its OptBlue program; Discover does not have a government fee option program.

Surcharge Fee

Surcharge fees can equal the merchant’s cost of processing a credit card transaction or a maximum of 3% (2% Colorado) of the total invoice price. Surcharging  or FairPay reduces the total cost for cash and debit customers since they are not subsidizing the higher interchange fees applicable to credit cards. Surcharge fees are charged only on credit card sales, not debit, prepaid, or gift card transactions, and are permissible in all but Connecticut, Masasssheutts, and Puerto Rico.

Other states and cities might have specific rules or regulations regarding surcharging. Merchants’ interest in surcharging should work with a payment provider like IntelliPay, which has experience in surcharging, to ensure compliance. For a more detailed look at surcharging, see our guide here.

When Adding a Fee Makes Sense

Deciding to add a fee is a strategic decision and should not be taken lightly. However, applying fees can be complicated because the rules and regulations are continually changing, and adding a fee can affect the systems and processes the business may already have.

Further, competitive situations, geographies, your industry, and customers should all be factored into your decision.

That said, adding a customer fee may be the right decision if your primary business is:

  • B2B products, warehouse or distribution
  • Charity or non-profit
  • Business or professional services
  • Consumer services
  • Auto
  • Legal
  • Construction/Restoration
  • Professional services
  • Towing
  • Veterinary

You might NOT want to add a fee if:

  • If a consumer can get a similar product or service for the same or lower price, that merchant doesn’t add a fee.
  • Your typical transactions are higher dollar amounts. The higher the ticket price, the more likely a surcharge fee will be an objection.

Not a DIY Project

VISA, Mastercard, and the other card brands have rules about how, when, and what type of additional fee can be added to a customer bill. Certain added fees, like surcharges, are prohibited in Connecticut, Massachusetts, and Puerto Rico.

While other fee types have limitations on how and when they can be applied, these rules are constantly in flux, so if you have multiple locations or do business across state lines, compliance may be cumbersome.

For these reasons, we recommend consulting legal counsel for regulations affecting where you do business before attempting to add a fee. We also use a payment processor with experience with all types of cardholders paying the processing cost or fee-based payment options.


IntelliPay has offered a range of reduced cost payment options to private and public sector merchants for over 12 years.

Our PCI DSS Level 1 compliant payment suite and proprietary payment gateway, combined with our robust API, make transitioning to IntelliPay and integrating existing systems easy.

Accept It All

Our payment suite enables payment acceptance from virtually any source and every major credit and debit card brand, eChecks, and eCash. In addition, if you opt for adding a fee, our payment suite automatically handles the details behind the scenes, so you are always 100% compliant with card network rules and applicable regulations.

More Customer Facing Options

Our twelve customizable front-end options, from hosted payment pages to customer portals to an innovative email and text payment link portal, allow your company to give customers more ways to pay. Research has shown that offering more ways to pay speeds up customer payments and reduces late payments and receivables while improving customer satisfaction. In addition, our Google cloud-based suite makes all this functionality accessible anywhere you need it.

Centralized Control and Management

Our parent/child reporting structure supports multiple locations, users, and fee-based models, giving you complete control over how the site and employees accept payments. In addition, reporting is highly customizable to your business’s processes, while real-time data flow between our payment suite and your systems via our API simplifies payment management and reconciliations.

Superior Reliability and Unlimited Capacity

Because our payment suite is hosted in the Google cloud, the same provider as YouTube and Gmail, you can rest assured you’ll have the capacity you need to meet today’s needs and tomorrow’s. Even more importantly, we will be there when you need us, with superior reliability – no service outages in 2021 and 2022 despite unprecedented demand. IntelliPay has you covered no matter what comes next.

Payments for All

We also support Paysafe ecash payments for those who are either un or underbanked. Unbanked or underbanked customers download the Paysafe app onto a web browsing device, create a QR code on that device, then take the code to one of the thousands of convenience or retail locations nationally and pay the staff. Payments are then quickly transferred to your business bank account.

IntellIiPay‘s payment suite is the only PCI DSS Level 1 compliant platform you will need for payment processing. To learn more, call or email our sales team at 855-872-6632 or You can also visit our website to schedule a free, no-obligation demo.