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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.
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