CFO Tips … Understanding and Managing Credit Card Processing Fees

If you’re a typical business chances are you accept credit cards as a form of payment from your customers or clients for a variety of reasons. Easy, fast, convenient are just a few reasons for accepting plastic payment but the astute business owner knows that convenience comes with a catch. The catch is, you have to share a portion of each plastic payment with the credit card companies in the form of a processing fee.

Processing fees, as a percentage of sales runs from 2 – 4%. While at first glance they appear to be small, remember these are dollars that are coming off the top line and have a direct impact on profitability. If you’re able to shave off some points it directly helps your bottom line. So the first step to managing is understand how you incur these costs.

Processing fees are made up of the following component costs of “Base Processing Fees” plus “Markup”:

  1. Base Processing fees – are broken down into two areas:
    1. Interchange – fees charged by card-issuing banks when you accept their credit cards.
    2. Assessments – charges assessed by Visa, MasterCard and Discover on every processed transaction.

    The Base Processing Fees account for around 75-80% of the cost of processing. One thing to note- no processor can give you a lower rate or better deal on base costs because these same base fees apply to all processors regardless of volume.

  2. Markup – is the profit margin added by the credit card processor over and above the interchange and assessment costs. Markup accounts for around 20% of the total processing fee and is the only area where you can negotiate for a better deal.

Now you understand the pricing components hopefully you see there is little opportunity to negotiate large savings.

Pricing Models:
There are two approaches to pricing offered in the marketplace, Interchange Plus (or pass through) and Bundled (or tiered).

  1. Interchange Plus (or pass through) – with interchange plus pricing the processor passes through the cost of interchange and assessment and simply adds their markup. This separation of costs keeps the processor’s markup the same regardless of the type of card you accept, or how the card is processed.
  2. Bundled (or tiered) – with a bundled pricing model the processor uses something called an interchange qualification matrix to route interchange fees into three tiers of qualified, mid-qualified, or non-qualified. The bundle approach combines the interchange, assessment and markup fees into set pricing or price tiers.

CFO Tips:

  1. Go With Interchange Plus (or pass through)
    With your current processor, or when you are approached to quote on your business, we find the Interchange Plus (or pass through) is the better choice. The reason is the transparency of separating the base fees from the markup. Now you are able to negotiate on the 20% of the cost that is truly negotiable, which is the markup. You are also able to compare quotes because costs are broken out.
    A big problem with bundled or tiered pricing is that interchange fees are often not disclosed on your merchant processing statement, and the processor doesn’t tell you into which tier individual interchange fees are being routed. This leaves you with no way to calculate exactly how much you’re paying above the actual processing costs of interchange and assessment.
  2. Insists All Interchange and Assessment Fees Are Shown on Statements
    Make sure the processor discloses all the pass through fees on the statement. Have them review the statement and explain how interchange and all the various card type are shown so if you want to shop your account, you have complete transactional data.
  3. Ask for Processing Fee Refunds on Credit or Refund Transactions:
    It’s common practice in the industry to not return processing fees when a merchant processes a credit or return transaction. Call your current processor, or ask prospective processors if they return processing fees on credit card refunds.

Credit card processing and pricing can be complicated and confusing if you’re not familiar. Give your current processor a call and cover these items with them. You may save a few real dollars on those plastic payments.

Need Help?

Subscribe to our blog for more practical, small-business financial tips.
For more information please contact us at


Todd Rammler

Todd Rammler is the President and founder of Michigan CFO Associates.  Todd is a Certified Management Accountant (CMA), and holds an MS in Accounting from Walsh College (cum laude), and a BBA in Finance from Western Michigan University.

Join Our Newsletter & Learn

Get our latest content delivered to your inbox.

Join Our Newsletter & Learn

Get our latest content delivered to your inbox.

Subscribe to Our Newsletter!

Stay updated with the latest news, exclusive articles, and special content by subscribing to our newsletter.