Why Some Credit Cards Cost You More to Process Than Others

Why Some Credit Cards Cost You More to Process Than Others

Credit card processing statements are difficult to understand due to the number of different rate categories listed on the statement. In fact, different merchant account fees charged by a credit card processor for merchant accounts can make it difficult for business owners to understand what they are paying to accept credit cards. Though it may seem like every transaction should be charged the same amount, there are a number of reasons for the costs of credit card transactions to vary from one transaction to another. In order to choose which processing plan is best and save the most money, business owners need to understand the basics of processing charges including why some credit card transactions cost more than others to process.

Interchange Fees

Interchange fees are charges that the banks charge for credit card processing. Banks typically charge both a flat fee and a percentage of the transaction. For example a bank may charge 10 cents per transaction and 1% of the total transaction. Each type of card (Visa, MasterCard, etc.) sets their own rates and the rates will actually vary on the same card depending on a number of factors. For example, a credit card issuer may charge different rates for the purchases of different types of products and for different types of cards. All of these different factors mean that one type of card may charge a business a larger amount for a transaction than another.

Markup Fees

Every credit card processor charges a markup above the interchange fee. This markup is used to pay the costs of the transaction for the processor as well as to create a profit for the processor. In general, the markup fee is based on a percentage of the interchange fee, but the fee can be calculated in different ways. When the fee is based on the interchange fee, the markup fee will vary from one card transaction to another along with the different interchange fees charged by the card issuer.

If the differences between the fees charged for different credit cards are not enough to confuse those trying to understand the fees on merchant accounts, the fee structure for debit cards also varies. Debit card fees are typically slightly less than the fee charged for credit card transactions. However, the fee that a business will be charged for a debit card transaction will vary depending on factors such as whether or not the charge was a PIN based transaction.

The Relationship Between Interchange Fees and Credit Card Processing

Merchants who accept credit cards as one of their payment options must pay an interchange fee for every transaction. This fee is an integral part of credit card processing, and a necessary expense for every business holding a merchant account. The merchant is responsible for paying this fee, since accepting credit cards is not exactly a requirement. The fee covers the maintenance and security costs associated with keeping this system in place.

The relationship between credit card processing and interchange fees is an interesting one to say the least. On one hand, most merchants understand the importance of accepting credit cards. They know offering this convenient payment method will attract customers, increase sales, and decrease their liabilities. In contrast, since most business owners work hard to increase profits and cut expenses, having a mandatory fee on almost every transaction will raise concerns. Merchant account holders are aware of the fact that interchange fees will keep the system running properly. Nevertheless, it is extremely difficult to keep this fact in mind while continuously paying this fee.

The percentage deducted from each transaction is usually less than three percent. This number may seem minuscule, but after running a number of transactions through a number of merchant accounts, this can add up to a significant amount of money. So who receives the money coming from credit card transactions? Well, just over 75% of the fee goes to the cardholder’s bank. The remainder of the fee goes to the merchant’s bank for acquiring the transaction. In turn, these banks are responsible for handling any problems that may occur during a transaction such as fraud, identity theft, equipment failure, and processing errors.

Since credit card processing happens so swiftly, most individuals may believe it is an inexpensive, low-maintenance system. On the contrary, it just appears this way because it is a solid mechanism that took years to construct. As with any system, it requires regular maintenance and monitoring. The interchange fee, regardless of how taxing it seems, pays for this upkeep so the public can have a convenient payment option in the marketplace. So while the financial burden may seem as if it is unfairly placed on the merchant, this system also encourages consumers to spend, which is a plus for the merchants as well.



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