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What are POS payment fees and charges?

The POS payment fee, also known as the eligible merchant discount rate, refers to the fee a merchant pays every time a sale is made using a debit or credit card. The merchant service provider sets this fee in advance and typically encompasses three elements: interchange fees, service point-of-sale payment charges, and payment processor margins.

Who determines the credit card processing fee?

As for determining the credit card processing fee, it primarily involves three entities: the card issuer, the card network, and the payment processor. These three parties play a crucial role in the credit card processing.

The card issuer is a bank or financial institution that directly issues cards to consumers. Examples of card issuers include Chase, Capital One, Citi, and Bank of America. Card issuers collaborate with networks like Visa and Mastercard for credit and debit cards. With every card transaction, the card issuer imposes a fee on the merchant for the privilege of accepting cards. This fee usually consists of a certain percentage of the transaction amount along with a fixed fee.

The payment processor is a financial institution that operates behind the scenes to securely process and complete debit or credit card transactions. In order to streamline all of these processes, payment processors often form partnerships with various companies or brands that directly engage with consumers and merchants. These collaborations facilitate a smooth and efficient payment ecosystem for all parties involved. Like card issuers, payment processors typically impose a certain percentage of the transaction amount and a fixed fee for each debit or credit card purchase.

What is included in the average credit card processing fee?

Ultimately, for U.S. businesses with annual POS payment fee volumes ranging from $10,000 to $250,000, the average payment processing cost per transaction falls between 2.87% to 4.35%.

Many factors determine the final amount paid, including PCI compliance fees, annual account fees, and chargeback fees (referenced below). In fact, for U.S. businesses processing revenues within the $10,000 to $250,000 range annually, additional costs are typically 28% to 60% higher than the initial quoted costs on average (not to mention hardware leasing and software subscription expenses). Therefore, obtaining sufficient information before deciding on how to handle card payments in a business is crucial.

Here are examples of the average credit card processing POS payment charges for major brands:

• Mastercard: 1.55% to 2.6%
• Visa: 1.43% to 2.4%
• Discover: 1.56% to 2.3%
• American Express: 2.5% to 3.5%

Factors affecting credit card processing fees:

Interchange fees

Every time a customer uses a credit card at a store, the acquiring bank (merchant’s account) pays a fee to the issuing bank (customer’s account). This fee is known as the interchange fee. (There are exceptions to this rate, which will be explained in detail below.)

Each card network sets its interchange fees. (You can find Mastercard and Visa interchange fees on their respective websites.) They are updated twice a year, in April and October.

The purpose of interchange fees is to assist card-issuing banks in covering various costs, such as sales approval risk, fraud, and handling expenses. Therefore, it is not surprising that factors influencing these POS payment fees are related to the risk assumed by the card issuers and any associated costs. The following are included:

• Type of card used: Debit cards with Personal Identification Numbers (PINs) generally have lower interchange fees than credit cards since they pose less risk. Reward cards (e.g., travel, 3 points, etc.) and commercial cards typically have higher interchange fees.
• Transaction processing method: Card-present point-of-sale (POS) transactions usually have lower fees compared to card-not-present (CNP) transactions (online, phone, invoices, or mail orders).
• Transaction amount: Sellers with higher transaction volumes and fewer chargebacks can often negotiate lower interchange POS payment charges to reduce costs.
• Type of business: Each business that accepts credit card payments has a Merchant Category Code (MCC), a 4-digit number assigned by acquiring corporations or banks. MCCs are used to classify businesses into market segments, simplifying IRS reporting.

Indeed, MCCs also impact the fees imposed by institutions or banks as part of the interchange fees. Businesses categorized as “higher risk,” such as financial services, travel, gambling, and accommodations, typically pay higher interchange fees.

Regarding American Express, it operates both as a card network and card issuer, and its fee structure differs from the interchange fees we discussed. However, when using Square, the advantage is that the same processing fees apply for all major credit cards, including American Express.

Membership Fees

Payment processors need to charge fees to the card networks, which are fees paid directly to the networks for the ability to process transactions on their card brands and payment networks.

Installment fees differ from interchange POS payment fees in that they are based on the total monthly sales rather than individual transactions. Generally, installment fees are lower than interchange fees. However, the exact amount paid for installments varies depending on the network, the type of card used (debit or credit), transaction volume, and whether the transactions are processed internationally.

Similar to interchange fees, networks review installment fees twice a year. You can check your monthly credit card statements to see if there are any changes to installment fees. Below are the latest (at the time of writing) fee rates for Mastercard, Discover, and Visa:

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What types of fees can you afford to pay?

• Payment Gateway: A channel for transferring money between seller accounts and payment processors, free of charge.
• PCI Compliance: Security standards that all businesses accepting credit cards must meet, at no cost.
• Payback: Free of charge when customers request a Payback.
• POS Software (Monthly SaaS Fee as a service): No charge for the POS software itself; monthly payments for using the service.
• POS Hardware Rental: Monthly cost for leasing POS terminal hardware and associated accessories, N/A (Not Applicable).
• Group Fees: No charge for daily settlement/ POS payment charges or cancellation fees (also known as group header fees).
• Hosting POS payment fees: Charges applied to existing server-based POS systems, N/A (Not Applicable).
• Wireless Access Fee: No charge when using cloud-based POS terminals instead of traditional phone lines.
• AVS (Address Verification System): Free service for manually entered transactions that verifies customer billing information against registered cards.
• Service/Customer Support/Monthly Statement Fee: Some payment processors may charge a fixed monthly fee for customer support services, including monthly statement preparation and delivery, free of charge.
• Monthly Minimum Fee: No fee is charged between the agreed-upon monthly minimum fee and the monthly GPV (dollar amount processed by credit cards).

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Reduce credit card transaction fees

To reduce credit card transaction fees, there are several methods you can consider. For instance:

• Prioritize Card Payments: Whenever possible, encourage and accept card payments. Card transactions often have lower processing fees compared to other payment methods.
• Minimize Card Not Present (CNP) Transactions: Online, manual input, invoiced, or mail-order transactions (also known as CNP or card-not-present transactions) tend to carry higher fraud risk, resulting in higher processing fees. They may also fall into the category of “interchange plus fees” that increase settlement fees for such transactions.
• Opt for POS (Point of Sale) Transactions: If suitable for your business, aim to receive card payments in-person using POS terminals. These types of transactions typically come with lower processing fees.
• It’s important to evaluate your specific business needs and payment patterns to determine the most effective strategies for reducing credit card transaction fees.

Mitigating payment reversals risk

If your business experiences a high number of payment reversals (where customers dispute your business charges and request cancellations with their card issuers), banks may consider you a higher risk and potentially increase processing POS payment charges. Therefore, it’s essential to take measures to reduce the risk of payment reversals.

There are several simple ways to minimize returns, but one of the most effective methods is to use a credit card authorization form. This form allows customers to authorize and sign for regular charges to their POS payment fees, granting permission for future transactions. By having customers sign this document, the likelihood of successful defense against payment reversals significantly increases (not to mention the reduction in complexity). You can download a credit card authorization form to implement this process.

Please note that implementing such measures can help reduce the risk of payment reversals, thereby potentially preventing increased processing fees from banks.

A minimum purchase amount is required for credit card sales

For credit card sales, some businesses, particularly those dealing with small transactions, may impose a minimum purchase amount to offset processing fees. This practice helps them manage the costs associated with accepting credit cards for lower-value transactions. If you choose to set a minimum card purchase amount, it’s important to adhere to the regulations outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. According to this act, businesses are allowed to set the maximum credit card minimum amount at $10. Additionally, in some states, businesses are required to maintain the same credit card minimum amount for all card issuers, regardless of whether it’s Visa, American Express, Mastercard, or other cards. For instance, if a seller sets a minimum of $5 for a Visa, they must also set the same minimum for American Express, Mastercard, and other cards.

Setting a minimum purchase amount for credit card transactions can be a strategic approach to managing processing fees while ensuring compliance with applicable regulations.