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Credit Card Processing Fees

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This is a guest post from Manshu of OneMint. If you like what you see here, please consider subscribing to his RSS feed.

Have you ever noticed that some retailers don’t accept certain credit cards? For example, while Visa and MasterCard are widely accepted, American Express card are often turned away. The reason for this is simple…

When you use your credit card to make a payment, the retailer doesn’t get to keep 100% of the transaction amount. Rather, they pay a “merchant discount fee,” which can vary based on the type of card involved.

For example, whenever you use your Visa card, the retailer loses as much as 3% of the transaction amount in fees. In fact, these sorts of fees apply to credit cards, debit cards, and even prepaid cards. While the calculation of these fees* can be quite complex, a simple example will shed some light on how it works.

Consider a scenario in which you go to the grocery store and use your Visa card to buy groceries costing $100. From that $100, the retailer might get $98 or so. Of the remaining $2, about $1.75 would go to the bank issuing the credit card (the so-called “interchange fee“), about $0.20 would go to Visa, and the remainder would go to the retailer’s merchant account provider, who initially processed the transaction.

Interestingly, these fees get collected on a per-transaction basis. Thus, even if you never pay a penny in interest or fees to your credit card issuer, they’re still making money when you swipe your card. Among other things, these fees help to pay for cash back and/or other rewards programs.

Not surprisingly, retailers are sensitive to these sorts of fees, and often choose whether or not to accept certain types of cards accordingly. Indeed, as I noted above, American Express is less widely accepted than Visa and MasterCard, and one of the main reasons for this is that they charge higher fees to merchants.

*Note: Here’s a link to a description of the fees charged on a Visa transaction.

Published on July 3rd, 2009 - 22 Comments
Filed under: Credit Cards

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. Manshu–Very informative article. Bet most people don’t know about those back end fees, because we tend to be singularly focused on the costs that we bear directly.

    But rest assured, we’re paying the back end fees as well, in the form of higher prices on the products and services we buy.

    Comment by Anonymous — Jul 3rd 2009 @ 8:57 am
  2. And sadly, this is how the credit card companies get our money without us even realizing it. Charge the merchant 3% more, give the customer 1-2% back in the form of rewards, and then the merchants raise the prices to compensate. There’s no such thing as a free lunch.

    Comment by Anonymous — Jul 3rd 2009 @ 9:01 am
  3. @Kevin @ Mathew, Thanks for your comment and like you, I too think that the fees are ultimately passed on to the end customers either in the form of money or inconvenience.

    And thank you to nickel for letting me guest post.

    Comment by Anonymous — Jul 3rd 2009 @ 10:14 am
  4. .

    So it’s a hidden fee that still comes out of the consumer’s pocket when using a credit card.

    That’s why some merchants give a small discount to buyers who pay cash. It can be significant on big-ticket purchases. Good bargaining tactic is always to ask if there is a “cash discount” on expensive items.

    Taxes work the same way… hidden fees in the retail price.

    Manufacturers, distributors, and retailers pay dozens of taxes to federal/state/local government every step of the way– but average consumers only notice the ‘final’ sales tax on the purchase.

    In reality, about 1/3 of the retail price for a loaf of bread or can of soda is government taxes.

    Home utilities are taxed 25-35% for the privilege of having water and electricity. Total taxes on airline tickets & hotel rooms exceed 50%. Beer & Wine 70-80%. Cigarette taxes now well over 100%.

    Credit card fees are a real bargain compared to what your politicians demand.

    Comment by Anonymous — Jul 3rd 2009 @ 10:14 am
  5. Greg–absolutely true. But consumers direct their displeasure at the merchant, who as no choice but to act in the role of statutory tax collector–which also costs them money for the cost of compliance. Guess who’s paying that too???

    Comment by Anonymous — Jul 3rd 2009 @ 10:33 am
  6. I can totally empathize with business owners who insist on having a fee for credit cards or a minimum purchase amount, especially if they specialize in selling low cost items (a 99 cent store, for example), if I put myself in their shoes I’d feel like I was getting scammed if the same guy keeps coming back frequently buying a bag of chips and charging it on his card.

    I myself feel the pinch receiving paypal payments.

    That being said, just as it’s their freedom to impose such limits, I have the freedom to use my credit card as a means of making money, not incurring debt.

    Comment by Anonymous — Jul 3rd 2009 @ 1:25 pm
  7. Arvin: Unfortunately (or fortunately, depending on how you look at it), you’re not allowed to charge a fee or require a minimum purchase for credit card transactions. None of the major card issuers allow this, and they can revoke your ability to accept their cards if you do.

    Comment by Nickel — Jul 3rd 2009 @ 1:50 pm
  8. What happens if customer makes a return? Does the retailer get the merchant fees reimbursed for transactions that get returned?!? (ie. customer1 visa $100 charged; merchant process fee -$2; customer1 visa returns item -$100; does the merchant process fee get refunded?)

    Also, almost all gas stations have “reduced” prices for cash compared to credit, and differs from 5-9cents per gallon. Strangely, sometimes my local Exxon Mobile and BP, which have only 1 price for cash/credit, is the same rate as the “cash price” at its competitors or only 2-4 cents over. Ever since the local or off-brand gas stations, like LukeOil, Valero, and others have offered cash and credit prices, I took my business away from them. I only support those gas stations that have one-price and accepts credit. When gas was $3.99 a gallon, I was not willing to constantly get cash for them. So, I paid $4.06 per gallon with my credit card at the one-price only gas stations, and even got 1% cash back on that for using credit card. Sure, I paid about 2 cents per gallon over to use a credit card; but, I got good gas from a business that does not have different prices. They got my business!

    Nickel, the problem is, I’m not sure how/who/where we can report these merchants who require “Credit card purchases minimum $10 purchase”. What are we consumers supposed to do? Can we make purchase by buying more stuff, and then return items we never wanted? Will our report or complaint really cause the major card issuer to revoke the ability of merchant to accept cards? (that’ kinda sounds counter-revenue for them)

    Comment by Anonymous — Jul 4th 2009 @ 12:57 am
  9. So if I understand the conversation here, at merchants where there is only a one-price policy for both cash and credit, the consumer who pays cash is actually paying more than the guy who pays with a credit card…right? Since the merchant has to factor the credit card fees into the posted prices on the shelves, the final price at the cash register is non-discriminatory. If I pay with cash, I’m paying the credit card fee too….so I might as well pay with a credit card and get rewards like miles or points.


    Comment by Anonymous — Jul 4th 2009 @ 2:28 am
  10. Regarding the different price policies between cash and credit purchases, I believe it all depends on the laws in your state. In some states the practice is common, especially with gasoline.

    Comment by Anonymous — Jul 4th 2009 @ 6:53 am
  11. Chris, merchants where there is 1-price policy for both cash and credit means the consumer who pays cash pays the same as consumer who pays with credit card. If you want “to save”, then go with another merchant. This is very common with gas stations. However, prior to the time of pricey gas, most gas stations accepted cash or credit at same price. There were always some gas stations that were 5-10cents cheaper than the rest (or, there was always ~5cent difference within same town). But, now, most of the gas stations who were cheaper have 2-price policy. Pay by cash, gas is $2.42; pay by credit $2.49. At Exxon, gas is $2.50 with cash or credit. The different price policies between cash and credit purchases does depend on the laws of your state; but, it’s somewhat vague in the Visa/MC/AMEX/Discover merchant agreement about whether they can do this.

    Comment by Anonymous — Jul 4th 2009 @ 3:12 pm
  12. But beyond gas stations…if I go to Target (which I believe has a one-price policy) and pay with cash, I’m paying the credit card fee, which has been factored in to all the merchandise prices as overhead costs. So if that’s the case, I might as well pay with a credit card that offers me rewards. If I pay with cash, I’m in a sense subsidizing the convenience of other people using credit cards.

    Of course, credit cards kill you if you carry a balance….so get a card that offers rewards, always pay the entire monthly balance, and you’ll be taking advantage of the credit convenience instead of it taking advantage of you when you pay with cash.

    Comment by Anonymous — Jul 4th 2009 @ 11:31 pm
  13. So what is the alternative? Is there areal alternative to the credit card system? Accepting credit cards added over 25% of growth, in volume, to my business. I think the secret is making sure your margins can take the fees. And another secret is negotiating your merchant account provider. Don’t just apply with the first one you find. I used to get few offers and narrowed them down. It took me a while but I managed to cut few points% on a regular transaction. Until there will be another cheaper, commonly used method of payment (mobile payments?) merchants who wants to do business will have to accept credit cards!

    Comment by Anonymous — Jul 6th 2009 @ 8:26 am
  14. American Express is also so much slower at paying vendors than Mastercard et al that many companies use a different accounting schedule to track Amex payments. Saw this accounting setup quite frequently while reviewing accounting setups for car dealerships.

    Comment by Anonymous — Jul 6th 2009 @ 9:21 am
  15. Dave – the alternative depends on so many people going back to cash that it’s worth it to retailers to go back to cash-only, or to offer other services (store credit, layaways).

    Any way of handling money costs some money. Credit cards just outsource the cash handling costs for both consumers and businesses (like the cost of tracking layaways, or the risk of being mugged).

    Comment by Anonymous — Jul 6th 2009 @ 10:48 am
  16. The reason why the Interchange for business, corporate and government cards have always cost more is because most businesses do not carry a balance. So the only money the card issuer receives from those clients is what they get from Interchange.

    Comment by Anonymous — Jul 9th 2009 @ 9:53 am
  17. Discover card the least widely used card may have the most neagative effect on the way Intercharge fees end up relating to businesses view of purchases by credit cards. I also think you need to rethink that example in the article, again lets take the shed at $100.00, first take off 50.00 for the part to begin with because the business has already paid for this, then take off a percentage for employees wages, utilities, insurance and other costs related to running a business, then when the banks and credit card companies start asking for their 3-6% ( and before anyone asks this is actual numbers from two major companies) it gets a little tough to swallow.

    Comment by Anonymous — Jul 18th 2009 @ 3:02 pm
  18. A store cannot charge a higher fee if you use a credit card, but yet it’s ok to charge a processing fee if you do? Some stores advise you that there is a 75¢ processing fee if you use a credit card. Today I was charged a $3.50 processing fee for using a credit card without any notice. Is that legal?

    Comment by Anonymous — Oct 30th 2009 @ 1:01 am
  19. @Arvin — “it’s their freedom to impose such limits”
    @ Nickel – “you’re not allowed to … require a minimum purchase for credit card transactions”

    Actually, merchants still don’t have the freedom to set a purchase minimum on debit card transactions, but recently gained the freedom to do so on credit card transactions.

    Legislation in the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act has just recently made it acceptable for merchants to set a minimum of $10 or less on credit card transactions, but merchants are still not able to set a minimum on debit card purchases. Prior to Durbin Visa and MasterCard forbid the practice of setting minimums on both types of cards.


    @ SavingEverything – “What happens if customer makes a return?”

    This is a great question, and small business owners ignorant to the answer lose a lot of money on returns.

    The two pricing schemes a processor can use to assess fees to a merchant are called pass through or bundled. Pass through pricing is preferred, because as the name implies, actual interchange charges are passed directly to the merchant and the processor’s markup is applied separately. Just as importantly, merchants receive a partial interchange fee credit on returns. However, the refunded interchange is often less than the fee paid on the original transaction, and the processor’s markup is not recouped.

    With a bundled pricing scheme a business doesn’t pay actual interchange. Instead, the processor bundles interchange costs and the markup into tiers called qualified, mid-qualified and non-qualified. Under a bundled model scheme the merchant does not *any* fee credit for refunds. Worst still, the merchant may be charged a discount fee a second time when the transaction is refunded.

    So, business owners *always* lose money on returned transactions. They just lose less when their processor assesses fees on a pass through pricing scheme opposed to a bundled scheme.


    @Dave — “another secret is negotiating your merchant account provider”

    Negotiation is key, but know *what* to negotiate is more important. For example, shopping for the best *rate* will leave you chasing bait-and-switch deals from shifty processors all day long. The first thing you want to do is look for the best (interchange pass through) pricing scheme. Doing so levels the playing field by allowing you to accurately compare offers from different processors. Aside from that, pass through is transparent and less expensive than other forms of pricing such as bundled. For this reason, pass through pricing is the *only* type we allow processor to quote at CardFellow.


    @Chris – “I might as well pay with a credit card and get rewards”

    Be sure to thank the small business owner that’s paying for your flier miles and cash back. Card-issuing banks charge merchants a higher interchange fee to accept cards that yield rewards. For example, Visa charges 1.54% plus a $0.10 transaction fee when a merchant swipes a *standard consumer* credit card. The same transaction involving a *reward* card costs the merchant 1.65% plus $0.10. Banks use interchange to pass the cost of marketing their reward programs to merchants.

    Comment by Anonymous — Aug 19th 2011 @ 10:20 am
  20. Thanks to all those who have shared and contributed to this webpage .Actually i wasn’t aware that american express credit cards charged high processing fee..Thanks too Manshu and one mint that shared this important message ..That has helped me a ton…

    Comment by Anonymous — Feb 8th 2012 @ 8:09 am

    Comment by Anonymous — May 30th 2012 @ 10:21 am
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    Comment by Anonymous — May 7th 2013 @ 5:20 am

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