How to understand payment processing fees

June 10, 2021

How to understand payment processing fees

When it comes to running a business, accepting credit and debit cards is essential. Your business can offer the right product or service that serves your audience, at the right time and at the right price, but you still need to close the sale. Getting over the finish line means accepting a variety of payment methods.

Businesses that want to accept payment cards need to establish a merchant account and contract for payment processing services. Like any essential service, payment processing is provided by payment processors and is offered at a cost.

Credit card processing seems easy as each transaction takes place in just a few seconds. That’s by design and a great thing for businesses and their customers alike. Behind the scenes credit card processing is sophisticated and complex. 

The rate businesses pay for payment processing fees is a combination of three separate charges: interchange, assessments and payment processing fees. This short primer will help businesses understand these fees so you can best navigate payment processing services.

How to understand interchange fees

Interchange is a fee that a merchant’s acquiring bank pays to the card issuing bank. Interchange rates vary based on the type of card being used, the method used to process it, the type of business and other factors. Interchange is set by the card networks and isn’t negotiated between the processor and merchant.

Sometimes the processor’s fees are included in the rate formula, so it’s reasonable to ask to see those charges broken down separately from the interchange rates for comparison. Current interchange rates can be found on the card brand networks’ websites:  The Visa System: Rates, Fees and Rules and Interchange Fees, Programs & Rates | Mastercard.

Interchange rates vary by card type, business type and acceptance methods because of the risk of financial loss due to fraud that each factor presents. The riskier a transaction is, the more it costs in the form of chargebacks.

Card-present transactions are generally assessed at a lower rate. Card-present transactions benefit from the transaction being processed by certified payment acceptance equipment and can be vetted in a variety of ways during person-to-person transactions.

Card-not-present transactions via phone or online sales increase risk since it’s more difficult to verify that the purchaser is the legitimate cardholder. Card-not-present transactions typically suffer from higher rates of fraud.

Industries with a higher incidence of fraud or disputed transactions tend to pay more to process transactions to cover the potential financial losses the issuing bank could face.

The size and volume of a business’ average ticket also impacts the interchange rate. Business with larger average per-ticket amounts may also see higher interchange rates. High-volume, low-ticket merchants generally pay lower per item fees at a higher percentage, whereas high-ticket, low-volume merchants may pay lower percentage fees and higher per ticket fees.

How to understand assessment fees

Assessments are fees that go to the card brands, such as Visa or Mastercard. Assessments are flat amounts paid to the card associations. Assessments pay for the network infrastructure that makes card payments possible. Assessments help with the establishment and maintenance of rules related to card acceptance, marketing, branding, and R&D.

How to understand payment processing fees

In addition to collecting interchange and assessment fees for distribution, payment processors like Worldpay offer substantial value enhancements and incur their own operating costs. These are passed on to merchants as payment processing fees.  

Processor fees ultimately support the software, equipment and professional services that make efficient payment processing possible: customer and technical support, software updates, risk and underwriting, statements and billing, product development and other overhead.

There is wide variation between providers in terms of costs, based in part on the added-value services they can deliver. Processors that offer value on top of the basic payment authorization function are differentiated by services that can add a lot of value to your business:

  • Accept new and alternative payment types like digital wallets
  • Providing payment security to help prevent data breaches and minimize fraud
  • Being available 24/7 for customer support that’s there when you need it most
  • Easy-to-use reporting and analytics that offer actionable insights
  • Gift and loyalty programs that keep customers engaged and drive higher tickets

How can I reduce payment processing fees?

These tips can help you avoid unnecessary downgrade costs and potentially save on payment processing fees.

Reduce hand-key and telephone orders. Hand-key or telephone orders are card not present (CNP) transactions which are considered higher risk and thus subject to higher processing rates. You can save on related transaction fees when you reduce telephone or hand-key transactions that aren't necessary.

Accept PIN debit. PIN debit card transactions  typically come with lower risk than non-PIN transactions. Cardholder use of a four-digit PIN provides an additional security layer that makes them less risky and are treated more favorably as a result. PIN debit is convenient and increasingly popular with your customers.

Train your employees about how to avoid unnecessary downgrades. You should regularly audit your processing statements. Look for unnecessary downgrade patterns to optimize both your processing behavior at the point of sale and the subsequent rates you're paying for transactions.

What are the next steps?

Worldpay helps businesses of all sizes craft outstanding customer experiences by helping to create seamless and secure payment services.

Connect with one our payment experts to learn more about how together we can help your business simply and flexibly connect to the future of commerce. We’ll take the time to learn about your business and work with you to help provide you with safe, secure and convenient payment processing with easy to understand pricing.