Understanding Merchant Account Fees in 2023

It will come as a surprise to no one that when a purchase is made with a credit card or debit card, the final price is more than the cost of the item purchased.

They’re called fees. It’s those ubiquitous little “add-ons” that nibble around the corners of our shopping activity, ever intent on shaving just a little bit off here and there done by those financial institution providers who facilitate the process of electronic sales.


Understanding Merchant Account


Here is a short primer that will demystify merchant fees for both seller and customer alike:


What is a Merchant Fee?

When a seller sets up an account with a bank (or other financial institution) that enables that entity to accept credit card payments, that account is called a merchant account.

A merchant is a seller. When a customer buys from that seller with a credit card, he or she pays a fee, most of which goes to the bank that is handling the merchant account for the seller.

The bank is getting paid via fees because it is handling all the tasks and details of what it takes to manage the merchant account, including things like ensuring a secure transaction, depositing the money for the client, issuing statements to the account holder, and much more.


Three Merchant Fee Components

There are basically three categories or fee components. They are:

a. Interchange Fees

b. Assessment Fees

c. Payment Processing Fees


Briefly, the interchange fee is usually the largest. A credit card network sets its rate based on something called the interchange rate. The network managers remit the fee to the bank that issues a card to a customer. This fee is to offset the risk to the bank.

The assessment fee is paid to the credit card network, and the payment processing fee goes to the player that handles the mechanics and details of the processing itself.

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Merchant Fee Types

Many kinds of fees populate the three categories just described. Some of them are:

     Set up (activation) fee

     Hardware fee

     Payment gateway fee

     Virtual terminal fee

     PCI compliance fee

     Address verification fee

     Monthly minimum fee

     Statement fee

     Chargeback fee

     IRS reporting fee

     Early termination fee


Determining an Average Fee Amount

Merchants will soon discover that calculating an average fee is an inexact science at best. That’s because many variables come into play, and the merchant has no control over them.

One such variable is a determination of whether a seller is a high-risk or low-risk operator. Other examples of variables are the type of credit card used and the pricing structure of the payment processor.

Merchants would do well to clearly identify the type of transaction they complete most often. Whatever the case, it is the average transaction amount that helps to determine a card processing fee.

Overall, it can be stated that the average processing fee is from 1.5% to 2.9%. However, online purchase-generated processing fees are higher because they are riskier. They average about 3.5%.

Keep in mind that a debit card has a different fee structure than that of major credit cards like MasterCard, Visa, Discover, and American Express. Merchants pay lower fees when accepting debit card payments. The latter bear less risk.

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Different Pricing Models for Merchant Fees

Yes, it gets even more complex. There are several different pricing structures but here are the top four:

a. Interchange-plus pricing

b. Flat rate pricing

c. Tiered pricing

d. Subscription pricing


Explaining how these work in detail is beyond the scope of this short introduction to merchant fees, and the reader is encouraged to conduct an internet search to understand them fully.

Now let’s move on to briefly discuss ways that small business owners can reduce the fees they pay associated with their merchant accounts.


Adopt Alternative Cost-Effective Methods

Here are some ways to avoid or reduce merchant account fees:

1. Offer discounts for cash

Inform your customers that paying in cash will save them a small markup on what they purchase by avoiding credit card fees.


2. Encourage Payment by Debit Card

Debit card fees are significantly less than credit card fees. Thus, suggesting the customer pay with a debit card is a good idea.


3. ACH Payments

Automated Clearing House (ACH) is similar to debit cards in that the money comes straight from a customer’s bank account. Learn how to use this method.


4. QR Code Payment

The customer uses a smartphone to scan a QR code and then sends an online payment. This bypasses the credit card hardware for making payments.


Lots More to Learn

Understanding merchant account fees may seem like a complicated and dense jungle at first because of the many different types of fees and the multifaceted processes that come into play in actual practice.

However, millions of entrepreneurs tackle this challenge every day and find ways to enjoy the advantages of a merchant account while avoiding excessive costs due to fees.

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