In this guide, we walk you through everything about credit card processing, its rates and fees, and how to select the best option for your business. Nothing in this guide shall constitute legal or financial advice. Please consult relevant professionals for any further questions or clarifications.
TABLE OF CONTENTS
What is credit card processing?
The parties involved in credit card processing
The role of payments processors
What goes into average credit card processing fees?
What goes into credit card processing fees?
Examples of average credit card processing fees for each major brand
Three types of credit card fees that affect your rate
Selecting the right pricing model
Getting started with merchant credit card processing
Can you reduce your transaction fees?
FAQs about credit card processing
As a business owner, credit card processing is essential for accepting payments. While you don’t need to be an expert in financial transactions to accept card payments, understanding credit card processing is important for operating your business. In this guide, we walk you through everything you want to know about credit card processing — and how to select the best option for your business while avoiding sneaky fees.
What is credit card processing?
Taking a credit card payment may seem simple enough. A customer places an order and hands over their card. You process the payment, and funds land in your account within the next few days. But under the hood of this seemingly straightforward exchange, there’s a lot more going on.
From the time a customer inserts, taps or swipes their card to the time the money is deposited into your bank account, there are a number of different parties and steps involved. This process is what the term “credit card processing” refers to.
The parties involved in credit card processing
Understanding the parties involved in credit card processing can help you identify where extra fees are incurred and choose the best solution for your needs.
Let’s say you go into a place called Cup of Joe Coffee and pay for a latte. Here are the players involved in the transaction:
Payments are just the start
Square helps take care of the day-to-day stuff, too. From point of sale to payroll, we have all kinds of services to help you save time and run more smoothly.
Cardholder
The cardholder is the person who owns the credit card used to purchase a product or service. In this example, it’s you.
Merchant
The merchant is the establishment selling the good and service to the cardholder. In this example, it’s Cup of Joe Coffee.
POS (Point-Of-Sale System)
The POS system is the interface used by the merchant to accept the credit card payment, such as a Square Reader or Stand.
Issuing bank
The issuing bank is the financial institution that provides the cardholder with the card and its accompanying balance. For example, your issuing bank could be RBC. Issuing banks act as middlemen between merchants and credit card networks. When you buy a latte at Cup of Joe coffee, your bank lends you the money to pay the coffee shop.
Acquiring bank
The acquiring bank (or merchant bank) is the financial institution accepting the payment on the merchant side. The issuing bank sends transactions to a card network, which then passes them to the acquiring bank.
Merchant services provider (or payments processor)
The merchant services provider (or payments processor) allows businesses to accept payments by credit card, debit, and mobile wallets like Apple Pay and Google Pay by facilitating transactions between issuing and acquiring banks. Square is an example.
Payments gateway
Say Cup of Joe Coffee had an online store to sell things like T-shirts and mugs. Something called a payments gateway would be involved in processing those online credit card transactions. A payments gateway facilitates the transfer of information between a payment portal (like an eCommerce website) and the acquiring bank. It also encrypts sensitive information like card numbers to ensure security.
The role of payment processors
When businesses rely on payment processors, they entrust them with managing transactions and fees associated with every credit card payment. A payment processor acts as a mediator, ensuring transactions navigate through the payment processing system efficiently.
Different processors offer varied pricing and processing fees structures, so it’s crucial to evaluate and choose a provider that aligns with your business model and cost constraints. Businesses might also consider integrated payment solutions, like Square, that offer additional services such as customized pricing or support in managing chargebacks.
How does credit card processing work?
Now that we’ve gone through all the parties involved in credit card processing, we’ll walk through how everything actually works. Let’s go back to Cup of Joe Coffee.
You hand the barista your card and they tap it, which kickstarts the charge process. Your bank authorizes the transaction, confirming the charge and cost details. Here is what happens next when a credit card is processed with Square:
- Authorization: The merchant taps your card, which submits a charge request to Square. Square sends the transaction to Cup of Joe Coffee’s bank, which then sends it to your bank for authorization. Your bank checks for sufficient funds. It also runs the transaction through fraud models for safety.
- Batching: This is called the settlement stage — and it’s also where credit card processing fees and costs are considered. The money from the transaction is sent to Cup of Joe Coffee’s bank to begin the process of depositing it into their business account. It’s called batching because payments are sent in a large group.
- Funding (aka settlement): The funding step sees Cup of Joe Coffee receiving money from the sale of your latte. There might be a slight delay between the authorization and funding stages. Square’s deposit schedule is usually within one to two business days.
What goes into average credit card processing fees?
Credit card processing fees, also known as qualified merchant discount rates, or just “discount rates,” are the fees a merchant pays for each credit card sale. These costs are predetermined by your merchant services provider. As a business owner, considering them is crucial.
Many companies also have hidden fees when it comes to credit card processing. These can include transactional fees; flat fees like PCI (Payments Card Industry) compliance fees, annual fees, early termination fees and monthly minimum fees; and incidental fees such as chargebacks or verification services.
These fees apply to all business types, including non-profit organizations. So it’s important to educate yourself before you decide how you’re going to process card payments.
The good news is, Square has competitive, transparent pricing so you know exactly how much you’re paying to process credit and debit card transactions.
It’s just 2.5% per tap, dip or swipe for Visa, Mastercard, American Express and international credit cards, 3.3% + 15 cents for each card not present transaction (like Virtual Terminal), and 2.8% + 30 cents for other transactions (like online checkout or invoices paid online). For a debit transaction, it’s a fee of 0.75% + 7 cents for every INTERAC insert and tap.
There are no monthly or hidden fees, and the rate includes PCI compliance and help from dispute experts.
Square charges the same rate for all major credit cards, including American Express. That way, you can accept any payment method your customers prefer. With other POS solutions, credit card processing fees can vary from card to card.
Examples of average credit card processing fees for each major brand
| Mastercard | 1.55% – 2.6% |
| Visa | 1.43% – 2.4% |
| American Express | 2.5% – 3.5% |
These are estimates curated by Value Penguin
Square charges the same rate for all major credit cards, so you don’t have to worry about the differences between major brands.
Three types of credit card fees that affect your rate
1. Interchange Fees
Every time a customer uses a credit card in your store, there’s a fee paid from the acquiring bank (merchant account) to the issuing bank (customer account). It’s called an interchange fee.
Interchange fees are set by each network, such as Visa and Mastercard. They change on a regular basis.
The purpose of interchange fees is to help the card-issuing bank cover things like the risk of approving the sale, fraud and handling costs. So it shouldn’t be surprising that the factors that influence these rates relate in some way to the risk taken on by the card issuer.
They include:
-
The card that’s used
Credit cards with PINs are lower risk, so they typically have a lower interchange rate. And rewards cards (travel, triple points, etc.) and business cards typically have have higher interchange rates. -
How the transaction is processed
In-person card transactions at the POS typically have lower rates compared to card not-present (CNP) transactions (online, over the phone, invoices or mail order). -
The amount being charged
Merchants with small ticket sizes and a large amount of sales can qualify for lower interchange rates to help reduce their costs. -
The type of business
Every business that accepts credit card payments has a merchant category code (or MCC), a four-digit number that’s assigned to them by the acquiring bank or institution. The MCC is used to classify businesses into market segments that simplify tax reporting. The MCC also influences how much a bank or institution charges in interchange fees. Business types that are considered “higher risk” (like financial services, travel, gambling and hospitality) often have to pay higher interchange fees.
Note that American Express serves as both the card network and the card issuer and their fee structure varies from the interchange fees we’ve talked about. But if you use Square, we have the same processing fee for all major credit cards, including American Express.
2. Dues and assessments
Payments processors have to collect something called dues and assessments for the card networks. These fees are paid directly to the networks for the use of their card brand, as well as the ability to process transactions on their payment networks.
Assessment fees are different from interchange fees in that they’re charged based on total monthly sales and not individual transactions. They’re typically lower than interchange fees. But how much you pay in assessment fees varies by network and depends on whether the cards used were credit or INTERAC debit, transaction volume and whether foreign transactions were processed.
Similar to interchange fees, networks review their assessment fees twice a year. You can check your monthly credit card statement to see if there are changes to your assessment fee. Below are the most current (at the time of writing) assessment fees for Mastercard, Discover, and Visa.
| Mastercard | Visa |
|---|---|
| 0.08% (Credit transactions < $1,000) | 0.09% (Credit transactions < $1,000) |
source: Visa and Mastercard
3. Payments processor’s fee
A payments processing fee is what you pay your credit card processor for use of their product. Typically, this fee is charged per transaction, in hidden fees and monthly fees.
Square’s flat payment processing fee includes any fees incurred by interchange, as well as additional dues and assessments or other fees that come from processing cards such as American Express.
Other miscellaneous credit card fees and costs you might be paying
| Types of Fees | What Is It? | Square’s Fee |
|---|---|---|
| ** Payment Gateway | The conduit that passes money between your merchant account and your payments processor | Free |
| PCI Compliance | The security standard all businesses that accept credit cards must comply with | Free |
| Chargeback | The fee incurred when a customer issues a chargeback for a payment | Free |
| POS software (monthly SaaS fees) | The amount you pay monthly to use your POS software | Free |
| POS hardware rental | The monthly costs to rent your POS terminal hardware and other accessories associated with your POS hardware | N/A |
| Batch fees | Charges for the settlement/closing out of your deposits each day (also called batch header fees) | Free |
| Hosting fees | Fees charged for traditional server-based POS systems | N/A |
| Wireless access fee | A fee that can be charged for using a cloud-based POS terminal vs. a traditional phone line | Free |
| AVS | The Address Verification System is for keyed-in transactions and matches a customer’s billing information to the card on file, incurred on a per-transaction basis | Free |
| Monthly statement / support / service fee | Some payment processors charge a flat monthly fee for support-related services, including the preparation and mailing of your monthly statement, as well as general customer support | Free |
| Monthly minimum fee | The fee between your monthly GPV (credit card dollars processed) and the agreed-upon monthly minimum | Free |
Selecting the right pricing model
Choosing an appropriate pricing model for processing credit card payments is important for maintaining low processing fees. Popular models include flat rate pricing, interchange-plusand tiered pricing. Flat rate pricing is straightforward, offering a consistent percentage fee per transaction, which is beneficial for simplifying monthly financial statements.
However, for businesses with a diverse array of transactions, an interchange-plus model might provide a lower total cost in processing fees based on actual interchange fees and card types used. Understanding and calculating the costs associated with each model allows you to make informed decisions that align with your sales volume and customer needs.
Getting started with merchant credit card processing
Ready to start accepting credit card payments? Conventionally, your first step would be to apply for a merchant services account at a bank. Then, you would associate your POS system with your merchant account to start accepting payments. This process can unfortunately be cumbersome and involve extra costs.
But with Square, things work a little differently. Square itself has a merchant services account with acquiring banks. Square acts as one giant merchant services account for all businesses that use Square solutions.
Two simple steps to start accepting credit card payments:
- Order the Square Reader (2nd generation). Create your free Square account.
- Download the free Square app and link your bank account to start receiving deposits.
What you need to use credit card processing services
If you’re new to all of this, setting up credit card processing for a small business can initially seem daunting, especially when you’re worried about potential fees and charges. Here is what you need to get started.
Credit card machine
A credit card machine is a POS device that allows customers to use their cards while allowing merchants to conduct transactions and their associated charges. Square takes the guesswork out of getting up and running by turning your smartphone into one. All you need is a mobile device to process payments and see how fees are calculated. Newer POS systems (like Square Reader 2nd generation) also accept mobile NFC payments like Apple Pay and Google Pay.
Mobile credit card machines
A lot of POS systems are big and clunky. The Square POS is sleek and completely mobile. It looks great on your countertop when you’re selling at your brick-and-mortar shop, and fits in your pocket if you’re selling on the go.
Credit card machine prices
Setup fees can add up. Some credit card machines cost hundreds of dollars. Square’s latest credit card reader, on the other hand, costs just $69. The Square Reader (2nd generation) accepts EMV chip cards and NFC payments.
Additional credit card processing factors to consider
Now that you understand the ins and outs of credit card processing, there are a couple of additional factors to consider before confidently moving forward with a business solution.
What other payment methods should you accept?
Besides EMV chip cards, consider accepting NFC payments, which are convenient for customers. These new payment methods are just as secure as EMV but offer a far better customer experience.
According to the Square Future of Commerce report, all restaurateurs surveyed in 2024 offered a type of contactless payment to their customers. Whereas EMV chip cards take several seconds to process (which is actually slower than magstripe cards), NFC mobile payments are instantaneous.
What is a high-risk merchant services account?
In the credit card processing world, some types of businesses may be considered “high risk.” High-risk merchant services accounts can translate into higher process fees and stricter terms of service. Financial institutions may also deny a high-risk businesses a merchant account.
There’s no hard rule, but certain types of businesses tend to be flagged as high-risk merchants more than others. These include businesses that sell goods or services that border on illegal, buyers’ or membership clubs, credit counselling or repair services, and businesses that engage in questionable marketing tactics.
Read Square’s user agreement and terms of service for more information.
Impact of surcharges on credit card payments
Surcharges are additional fees that merchants may impose on customers who pay using credit cards instead of cash. These charges are typically passed on by payment processors to merchants, reflecting the costs associated with credit card transactions.
Businesses must navigate surcharges carefully, as high surcharges could discourage consumers from making purchases with credit cards. Regulations on surcharges vary widely; hence, it’s crucial to stay informed about the legalities and opt for manageable surcharge rates that do not affect customer acquisition negatively.
FAQs about credit card processing
1. What is a credit card processing company?
A credit card processing company (like Square) handles credit and debit card transactions for businesses. It is often referred to as a merchant services provider or payments processor.
2. How does Square offer credit card processing with no monthly fees?
We believe credit card processing should be as easy and affordable as possible. That’s why we offer simple, clear pricing that includes everything you need to securely process credit cards at your business. Learn more about Square’s merchant services here.
3. What can I save in credit card processing fees?
If you have an annual card processing volume above $250,000 per year and have an average ticket size of $15 or more, your business may qualify for a competitive custom rate. Contact our sales department to learn more.