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How Merchant Account Fees Work?

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Whether you are a new business owner or have been in your industry for years, credit card processing is necessary if you are planning to accept digital payments. Even if you have been using a payment processor for quite some time now and are willing to reduce your current rates, it’s essential to gain a deeper understanding of the credit card processing industry.


We know how it is to protect your sensitive data, especially when you are accepting online payments in the face of rising cybersecurity attacks. Hence, it’s vital that you must know what’s right for your business, and where to spend your money. So, before investing in any random credit card processor, read on to learn about the process of how a merchant account works.

What are Credit Card Merchant Fees?

When you start accepting credit cards as a payment mode, you will be charged a processing fee, or better termed as the “credit card merchant fee”. This fee is decided and set by your merchant account provider, and is typically a combination of three main factors:


  1. Interchange fees

  2. Services fees or assessment fees

  3. Markup charge of the payment processor


However, apart from the above key charges, there are numerous other entities that decide the final fees you are paying to your credit card merchant account provider. Additionally, apart from your payment processor, the other parties that determine the fees include the card issue as well as the card network.

The Functioning of a Merchant Account

To begin with, a transaction is made the moment a customer swipes, inserts, or taps his/her debit or credit card against the POS terminal to make the payment. At that time, you will be charged a fee depending on the cost of that transaction.


Again the amount to be charged will depend upon -


  • Your merchant account provider

  • The credit card company (that’s the company that issued the card)

  • Your bank (or the acquiring bank) and the consumers’ bank (or the issuing bank/s).


The fee charged by some merchant account providers is a fixed one without adding any extra charges, while others have set up a tiered pricing system, which is based on the card type along with other variables. Yet, some other providers like to charge a little extra than the fee a credit card issuer would charge directly.

Different Kinds of Merchant Account Fee Structure

The popular credit card processing pricing models are -

  • Interchange-Plus Pricing

Being the most transparent model, an interchange-plus pricing model comes with the easiest and most understandable fee structures, and terms and conditions. This model itemizes the markups and wholesale fees, and then enlists them clearly on your monthly statement. Hence, it is a lot simpler for you to track where your money is going, and why.


Your monthly statement under this pricing model may seem difficult to read at first glance, but with every charge stated precisely in detail, it enables you to learn the difference between rate markups and your wholesale fees.


The rate markups in an interchange-plus model generally comprise both a per-transaction fee markup and a percentage markup. Both of these fees are applicable to all your transactions.

  • Subscription/Membership Pricing

The subscription or membership pricing model is a newer credit card merchant account pricing model and has gained popularity recently. It is similar to the interchange-plus model since the wholesale cost for every transaction is charged as a separate fee from the markup.


The only difference between the two models is that you don’t need to pay any percentage markup on your transaction if you opt for a subscription model. Instead, you would require to pay a small fee charged on a per-transaction basis.

  • Tiered Pricing

This is quite popular among business owners, even though it’s generally categorized as one of the above “cost-plus” models. Tiered models may initially appear simple, but they can be quite difficult to understand at times, especially their fees and rates.


This pricing model categorizes credit card transactions into three parts -


  1. Qualified: These are usually the lowest.

  2. Mid-qualified: It is slightly higher than the qualified rates.

  3. Non-qualified: The rates are the highest for this category.


  • Flat-Rate Pricing

This pricing model is similar to the tiered pricing, only that it is without any tiers. In a flat-rate pricing structure, all the transactions charge the same transaction fee and percentage, irrespective of the wholesale cost. All the costs associated with a flat-rate pricing model are combined together to set up a single fee and a consistent rate.


However, one downside to this model is that it tends to increase the transaction costs, especially for debit card transactions. Nevertheless, this model is a good choice for low-volume businesses, primarily because the processors following a flat-rate pricing model usually don't charge any monthly fee.

Why Merchants Pay a Flat Rate and a Percentage?

The moment you start accepting credit card payments, you may notice some unusual charges on your monthly statement. To understand the basic fees and charges, you must know that you might be paying a combination of a flat fee and a percentage for the ability to process a credit card payment.


The reason for this is you are paying your provider for the financing risks involved with every transaction and its fixed business costs, which may include equipment costs. Modern credit card companies use a number of computer systems and advanced technologies to process a payment.


And therefore, every player at every stage has a cost to maintain each individual part of the entire payment processing framework. You are basically paying for each of these services, including costs of hardware, software, network connections, security systems, etc. Since these maintenance costs are usually consistent, the upstream providers charge a flat rate for accessing and using the entire service.


As already mentioned, there is a financing aspect apart from the computer systems used. To put it simply, let’s take a credit card as a mini loan that a bank provides to the credit card holder. Hence, there’s always a certain risk involved, such as the bank not getting paid back. This holds true for debit cards as well. So, the bank needs this additional money to cover up those losses that might be incurred.


In short, for every credit card transaction, the total processing charge you are paying your merchant account provider is:


Processing Charge = Fixed Business Costs (like Computer Networks) + Financing Risk Charge.


Hence, the formula is complete in itself as it takes into account both the fixed as well as the variable costs associated with a payment processor.

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