It’s easy to pull out a credit card to pay for goods and services. But if you’re a small business owner, you might have wondered why there’s an extra charge when a customer pays by card. These extra charges are called merchant fees.

These fees might seem small at first. It’s like buying a coffee on your way to work every morning. That expense, even though it’s only a few dollars, adds up quickly. Before you know it, you’re spending dozens each month during your commute. Merchant fees, too, are small but consistent charges that could cost your business a lot of money each year. 

In this guide, we’ll cover what these fees are, how they work, and some tips on how to keep them from hurting your bottom line.

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What is a Merchant Fee?

Merchant fees are extra costs you pay whenever a customer uses a card to buy something from your business. They’re a type of payment processing fee, like transaction and account fees. 

These charges can have a big effect on a business owner’s income. In fact, according to this financial report by Nilson, business owners shelled out a whopping $172.05 billion (yes, with a B) in processing fees in 2023. That’s a lot of cups of coffee. 

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What Are the 3 Different Types of Merchant Account Fee Pricing?

There are three main types of pricing models for merchant fees, and each one works differently. Let’s look at the three types:

1. Flat-Rate Pricing Model

In a flat-rate pricing model, the business pays a set fee every time a card is used. This could be a fixed amount for each transaction or a fixed percentage of the sale amount. Sometimes, it’s a combination of both.

For example, a business might pay 2% of the transaction plus 10 cents each time a card is swiped. This pricing model is easy to understand, making it a good choice for small businesses that want predictability in their expenses.

2. Interchange Pricing Model

Also known as Interchange Plus, this model starts with a base fee that card companies like Visa or MasterCard charge for each transaction. Then, the merchant service provider adds a small extra cost. 

This model shows the actual cost of processing each transaction plus any extra charges. It’s often less expensive and gives businesses a clearer picture of what they’re paying for.

3. Tiered Pricing Model

Tiered pricing is the most complex and least transparent model. The fees vary based on the type of card used (credit, debit, or prepaid) and how the card is processed (swiped, inserted, or keyed in). 

This model divides transactions into categories or tiers with different costs, making it harder to predict how much you’ll pay. Because of its complexity and higher costs, tiered pricing isn’t usually recommended for small businesses.

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Universal Merchant Account Fees 

No matter which pricing model you choose for your business, there are some fees that you’ll always see on your statements. These are called universal merchant account fees. They include charges that all companies must pay when they accept card payments. 

Here’s a breakdown of the standard universal merchant account fees:

• PCI Compliance Fee. This fee ensures your business meets the Payment Card Industry (PCI) Data Security Standards, which helps keep card information safe.
• Authorization Fee. This fee is charged whenever a card is used, even if the transaction isn’t approved. It covers the cost of checking with the cardholder’s bank to see if they can make the sale.
• Transaction Fee. This is a charge for each transaction processed through your account. It might be a fixed fee per transaction or a percentage of the sale.
• Assessment Fee. Card networks like Visa and MasterCard charge these fees. They cover various costs, including fraud prevention and maintaining the card network.

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Situational Merchant Account Fees 

Besides the usual fees, there are special charges called situational merchant account fees. They only occur in certain situations. But they can affect your payment processing costs unexpectedly. Here’s a list of common situational merchant account fees:

• PIN Debit Transaction Fee. This fee applies when a customer uses a PIN (Personal Identification Number) to complete a transaction.
• Address Verification System Fee. This small fee occurs when you need to verify a customer’s address to ensure the security of a transaction.
• Retrieval Request Fee. If a customer questions or doesn’t recognize a charge, this fee covers the cost of providing evidence the transaction happened.
• Chargeback Fee. This fee is applied when a customer returns a product or disputes a transaction.
• Voice Authorization Fee. This fee is charged if you need to call to get approval for a transaction.
• PCI Non-Validation Fee. PCI fees help your business meet data safety standards, which helps keep card information safe.
• Batch Fee. This is a flat fee charged when you process a batch of transactions at the end of the day.
• Early Cancellation or Termination Fee. Also known as an early termination fee, this is charged if you end your contract with the merchant service provider before the agreed time.

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What Are the Red Flags to Watch Out for in Merchant Fees?

If your business accepts card payments, knowing warning signs related to merchant fees can help you avoid extra charges. Here are some key issues you should watch for:

• Hidden Fees. Check your payment statements carefully for unusual or unnecessary fees. Sometimes, these fees are hidden under complicated names that make them look important, but they might not be necessary.
• Misleading Terminology. Be careful of difficult or unclear words used to describe fees. For example, a fee called an “interchange clearing fee” might sound official, but it could just be an extra charge that isn’t needed.
• Unclear Assessment Fees. The fees for using card brands like Visa or MasterCard should be clear and understandable. If these fees seem too high or don’t make sense, contact your payment processor to determine what’s going on.
• Excessive Fine Print. Read all the terms and conditions carefully. Look for parts of the contract that could cause unexpected fees later, like a fee for canceling or renewing a service.

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The 3 Best Practices to Reduce Merchant Fees

If merchant fees are hurting your bottom line or you’re just setting up card processing, here are some simple steps to lower them:

1. Choose the Right Pricing Model. Card processing companies charge fees in different ways. Some charge a fixed fee for every transaction, while others have more complex systems. Choose the model that fits how many and what type of payments you usually handle. 
2. Negotiate the Markup Fee with Credit Card Processors. Credit card merchant fees can often be discussed and reduced. If you handle many transactions, you might be able to convince processing companies to lower these fees.
3. Use an Address Verification Service (AVS). AVS checks if the home address given by a card user matches the address the bank knows. This service can help stop fraud, lowering the risk and the fees that come with risky transactions.

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Use a Better Business Expense Tracker

Keeping an eye on all your costs, from merchant fees to business expenses, is crucial. 

Invoice Simple simplifies expense management. Scan any receipt and it automatically captures the crucial information for you. This way, you can stay on top of your expenses and have a detailed summary report ready whenever you need it.

Start simplifying your expense tracking today with Invoice Simple. Try our business expense and receipt tracker to see how easy it is to keep your finances organized and under control.