Credit Card Processing Guide for Small Businesses

Whether you are just getting ready to take the leap of accepting credit cards at your business or you already are, but want to make sure you are getting the best rates possible, this guide is for you. While there is a lot of information to digest, we put this guide together in a clear, logical manner to make fully understanding how to add credit card processing to your business as easy as possible. To help explain everything clearly, tables and examples are provided to shed as much light as possible on the really difficult parts.

We will start by discussing whether credit card processing is actually right for your business. From there, we will get into the basics of credit card processing, covering topics like “the four ways to accept credit cards.” The bulk of this guide will deal with understanding credit card fees: who charges them, the different types, and the various ways to pay those fees. Once you have the basic knowledge necessary to make informed decisions, we will move on to the practical aspects of how to compare and choose the best processor with the lowest rates. We also give important advice on how to keep processing costs low. We will finish off with a couple FAQ’s and a helpful glossary of terms.

At the end of the day, you have two choices: you can let credit card processors take advantage of you by charging unnecessarily high rates, or you can invest the small amount of time it takes to educate yourself so you can be equipped to fight back. That’s what this guide is all about: giving you all the tools and information you need to add credit card processing to your business – without overpaying.

In this article

    Should you start accepting credit cards?

    If you are considering adding the ability to accept credit cards at your business, chances are good that you have a lot of unanswered questions. While the actual systems needed to accept credit cards are pretty straightforward, there are definitely some drawbacks to consider. For most people, however, the benefits to your business far outweigh the drawbacks.

    There are three main reasons to start accepting credit cards:

    Most customers don’t carry cash: 57% of Americans say they “never carry cash,” and the number of transactions that are completed using debit or credit cards is dramatically on the rise every year. According to the US Small Business Association, customers are more likely to make “impulse buys” that they would not have made without easy access to their bank accounts or credit lines.

    Added convenience for customers: Since convenience is king in today’s economy, accepting credit cards is a great way to help retain current customers and gain new ones. Many customers don’t view the ability to swipe their card as a luxury but as an expected norm.

    Growth potential: If you don’t accept credit cards, your growth potential will be severely limited and your competition will be sure to take that advantage. On the flip side, if your competition is not currently accepting credit cards, this is a great opportunity for you to get ahead.

    There are also a couple of drawbacks when adding credit card processing:

    Fees: There are several fees you need to be aware of at the outset: setup fees, the cost of purchasing the necessary equipment, the monthly fees, and the transaction fees. Some of those might not apply to you, but the transaction fees are inescapable and will slightly cut into your profit margin. If your business processes a lot of small dollar transactions, then the transaction fees can really add up. Fees are covered in detail later on in this guide.

    Bookkeeping complexity: Another aspect to take into account is the added layer of accounting necessary when accepting credit cards. While there are some systems that can integrate with your existing software and lessen the blow to your bookkeeping workload, there is always an additional bit of paperwork involved.

    Shopping for a credit card processor: Trying to find a quality, cheap credit card processing company can be difficult and confusing as many credit card processors intentionally obscure their terms and fees. You can overcome this obstacle, however, by using this resource to learn how to compare processors. We take an in-depth look at comparing processors shopping for the best rates later on.

    The Basics of Credit Card Processing

    Four Ways to Accept Credit Cards

    There are four basic ways to accept credit or debit cards from your customers. Which you choose will depend a lot on your unique situation as each have their own upsides and drawbacks. It’s important to know that 3 of the 4 options will usually require you to open a special merchant account that acts as a holding account for customers’ funds until the transactions are completely processed.

    Point-of-Sale (POS) Systems

    A POS system is a tool used to accept credit cards, but it has many more available functions like tracking inventory and accessing sales reports, just to name a few. These systems are typically used by retail companies with a higher sales volume. Good POS’s will integrate with your existing software and bookkeeping tools and will be easy to use while saving you time. There are generalized POS systems as well as those that are optimized for a specific industry like coffee shops or antique stores.

    There are two basic types of POS systems:

    The traditional POS system: Your traditional POS will integrate a terminal and a screen (usually touch enabled) with a cash register and a receipt printer. There are also optional peripherals like pin input devices for debit cards. The traditional POS will typically require some type of merchant account.

    The mobile POS system: Mobile POS systems, such as Square or Shopkeep, utilize a third party device (such as an iPad) to run a program that allows you to accept credit cards. The POS will come with a stand and a means to swipe cards. However, you will need to provide your own tablet or smartphone. The mobility of the POS combined with the convenience of being able to access your data in the cloud are two factors that make up the difference in cost for some business owners. Some mobile POS options don’t even require you to have a merchant account; the company will just take a predetermined percentage of each sale off the top and deposit the rest into your business’ bank account.

    Pros and cons: While there are a lot of solid reasons to go with a POS, like integrated bookkeeping tools and sales reports, you will pay a little more for the added convenience and extra services that it offers. You also have to take into account the added time it will take to train your employees (or yourself for that matter) how to use all the various applications.

    What to look for:

    • A NF reader (think Apple Pay)
    • A chip reader
    • An integrated system that will work with your current accounting software
    • The ability to access your POS from the cloud

    Credit Card Terminals

    If you just need a small device with a card reader that will allow you to accept credit cards, then a credit card terminal may be right for you. For instance, if you own a small body shop and you are processing 10 or 15 credit card transactions a day, you might not need all the extras that a POS provides, but you would still want the ability to accept credit or debit cards. If that’s your situation, a credit card terminal is a prime solution for you.

    The benefits: A credit card terminal simply requires you to choose a processing company, open a merchant account, plug in a couple cords, and you are all set. Overall, it’s the simplest and cheapest way to go if you are looking to accept credit cards at a single location.

    The drawbacks: With a credit card terminal, tracking transactions is done manually which may add a considerable workload if you start processing more than a modest number of transactions each day. There is also a lack of mobility that may come into play for some businesses. Also, you will need to open a merchant account to facilitate the use of a credit card terminal.

    Mobile Credit Card Processors

    A mobile credit card processor is essentially an app on a smartphone or tablet combined with a dongle that allows you to accept credit cards wherever you are. This type of setup is best for a small business that primarily does business with customers on the go, such as a food cart or street vendor. Another possible application is for retailers that want to swipe debit or credit cards away from the register.

    There are three main benefits to choosing a mobile processor:

    Mobility: If you don’t primarily do business at a set location, the ability to accept payments where you are actually doing business will be a huge plus if not an outright requirement. Accepting payment at the time of service can also save you a lot of the time and trouble it would take to follow up with customers later to collect payment.

    Additional Functions: Depending on which service you choose, there are also some apps that have some great additional functions. While not all are a full-fledged POS system, there are many that have the ability to do things like generate reports or integrate with accounting software.

    No Merchant Account Required: In all but a few situations, you won’t be required to set up a merchant account which will greatly simplify the process of accepting credit cards. The company you choose will simply take a set fee and/or percentage off the top of every transaction and deposit the rest into your business’ bank account.

    There are also several drawbacks to consider:

    Higher Fees: While the mobility of your card reader is a huge plus, you will have to pay for the extra convenience. The fees associated with a mobile credit card processor are typically higher than those with a simple credit card terminal.

    Purchasing Equipment: You will have to supply your own device that is compatible with the operating system of the app you are considering. For businesses with more than one employee, it could result in an extra expense.

    What to look for:

    • Compatibility with your current devices
    • The ability to accept signatures
    • A tool to email or text receipts to customers

    Online Credit Card Processors

    An online credit card processor is a third party company that processes your credit card transactions without the need for a merchant account. This is a viable option for small businesses that primarily do business online, businesses lacking sufficient credit history, or those with a low credit score. By using a dongle or credit card terminal, you can utilize this service for more than just online shopping.

    There are several main benefits with online credit card processors:

    No merchant approval needed: For small businesses just starting out with little to no credit, or those with a poor credit history, finding a merchant that will approve them for an account can be problematic. In that situation, a third party online service can be a great option.

    E-Commerce solution: If you are conducting a considerable amount of your business online, good online credit card processors can greatly simplify that process – both for you and your customers.
    There are also several drawbacks when using an online credit card processor:

    High transaction fees: Online Credit Card Processors tend to charge a higher rate than the rates offered by other merchant services providers.

    Higher risk of disputed charges:Rerouting online customers: Some online card processors will reroute customers to their own website to finish online transactions. Some customers will not finalize the transaction and will simply choose to do business somewhere else.

    What to look for:

    Ease of use: Customers should be able to quickly enter their information without setting up an account with the third party provider. There should be a simple three or four step process to completing an online transaction.

    Easy to integrate into your website: You shouldn’t have to do any coding other than a simple copy and paste to facilitate online shopping on your website. Quality technical support to assist with this process is also a major plus.

    Modern e-commerce capabilities: Customers expect a certain level of sophistication when shopping online. An online shopping cart and a “buy now” button are two examples of modern features.

    This table recaps the differences between the credit card acceptance models:

    Table of Credit Card Acceptance Methods

     ProsConsWho Should Use ItMerchant Account?
    POS SystemsIntegrated bookkeeping options; Highly customizable and versatileSlightly more expensive; Added training timeRetailers with a mid to high sales volumeUsually
    Credit Card TerminalsCheapest optionLack of versatility and mobility; Requires manual record keepingThose with a fixed location and low sales volumeYes
    Mobile CC ProcessorsMobility; Additional functions and versatilityHigher Fees; must purchase own equipmentThose that do business remotely or on the goUsually Not
    Online CC ProcessorsE-Commerce solutionHigher fees; Higher chance of disputed charges; Sometimes reroutes online customersThose that mostly do business online or have poor creditNo

    Every Method Has Fees

    Whether you are considering accepting credit cards for the first time, or you are switching to a different type of acceptance model to take advantage of a lower fee schedule or increased functionality, it’s important to choose an option that will minimize cost while adding tools that save time and provide necessary functions.

    Once you have chosen the best acceptance model for your business, you can get onto choosing the merchant account (processor) that will charge you the least and still provide great value. Before you do that, however, you have to understand the confusing world of credit card fees.

    Understanding Fees Part 1: The Four Major Players

    There are four main groups of organizations that work together to make credit card processing a reality. They each have a different role, but the bottom line is that they all make money when people use credit cards.

    Issuing Banks

    Issuing banks are the organizations that provide the actual plastic. Their name will be on the card, and they will be the ones holding the funds or providing the credit that the consumer will draw on to make purchases. They have a large influence on the rate that businesses pay to accept credit cards. Bank of America and U.S. Bank are both examples of large issuing banks.

    Acquiring Banks

    Acquiring banks provide and maintain merchant accounts for businesses that accept credit cards. Basically, they assume the risk of providing refunds or chargebacks if the business becomes insolvent and is unable to pay back the consumer. Wells Fargo and Chase are both examples of large acquiring banks.

    Card Brands

    Visa and Mastercard are the overseers and the muscle behind credit card processing. While they don’t actually issue the cards to the consumers (that’s the issuing bank’s job), they do coordinate the whole process of using one of their credit or debit cards. They make money when people use their cards, so they have heavily invested in increased usage of credit and debit cards.

    They have three main duties:

    Rates: Visa and Mastercard play a huge role in determining what a business will pay to accept customers’ credit cards.

    Management: Card brands also manage the issuing and acquiring banks and set rules and regulations that banks must follow.

    Networks: Visa and Mastercard each have their own computer network that routes transactions almost instantaneously between the issuing banks, the acquiring banks, and the businesses which will allow for the approval or denial of individual transactions.

    Merchant Service Providers (Processors)

    Merchant Service Providers are the engine of the credit card industry. They are the ones that handle the sales and service as well as actually pushing the transactions through the networks provided by the card brands. From the perspective of a business, there are quite a few different types of organizations that fulfill this role in different situations.

    Those include:

    • Agents
    • Acquiring Banks
    • Third Party Service Providers
    • Processors
    • Independent Sales Organizations

    Since this is probably the most unclear and complex part of the credit card machine and understanding the in’s and out’s of each won’t really help you save any money, we won’t take the time to go into much depth here and we will simply refer to this group of organizations as “processors.”


    There are two card brands that don’t play by quite the same rules as Visa and Mastercard. They have a unique way of allowing businesses to accept customers’ credit cards.

    American Express

    American Express handles it’s all of its own processing and issuing. Basically, it handles the whole business of accepting credit cards in-house. The only entity that affects the rate you pay to accept an American Express card is American Express itself. That’s why you will typically pay more to accept an American Express card then you will with any other brand.


    Discover isn’t quite the closed loop system that American Express is. Instead, it’s more of a hybrid between the traditional Visa and Mastercard model and American Express’ model. Typically Discover’s rates will be similar to those of Visa and Mastercard.

    Understanding Fees Part 2: The Types of Processing Fees

    To help you understand processing fees better, we will break down the processing fees for a typical transaction where the consumer is using a Visa, Mastercard, or Discover credit or debit card and the business is using a traditional processor combined with a merchant account.

    It’s vital to understand the breakdown of each separate aspect of your total cost to accept credit cards. Like a traditional budget, if you don’t know where your money is going, you have little chance of minimizing the cost and maximizing your profit margin.

    Important: There are three basic types of processing fees; you can only negotiate one of them: processing markup fees.

    Interchange Fees: Not Negotiable

    The bank that issued the card collects an interchange fee on every transaction the cardholder initiates. This fee is calculated by adding a percentage of transaction volume with a flat fee added to each transaction. While this fee varies very slightly with each major brand (Visa, Mastercard, Discover), the individual banks don’t get to set the rates themselves – they are set by an agreement made by representatives from the major banks and those from the individual card brands.

    For example: Visa’s current interchange rate for a swiped consumer credit card is 1.51% of volume plus a $.10 fee per transaction.

    If a customer bought $100 worth of goods, the business would pay an interchange rate of $1.61. (100 x .0151 + .10 = 1.61)

    Interchange fees are determined on a “per-transaction” basis: Depending on the details of each transaction, the interchange fee can rise or fall. There are a vast number of scenarios that affect the interchange rate. Some factors represent a very small change, others can have a dramatic impact.

    The interchange rate for each transaction is determined by four main factors:

    • Card Type (credit or debit)
    • Card Category (Reward, Commercial, et cetera)
    • Processing Method (Swiped, Keyed-in, et cetera)
    • Business Type (Gas Station, Restaurant, et cetera)

    Using Visa’s interchange rates, the following table illustrates how much a business would pay in interchange fees to the issuing bank on a $100 purchase.

    * The percentage and transaction fee make up the total interchange fee.

    Card Type & CategoryBusiness TypeProcessing MethodPercentage*Transaction Fee*Total Fee
    Consumer CreditRetailE-Commerce or Keyed-in1.80%$0.10$1.90
    Consumer CreditRetailSwiped1.51%$0.10$1.61
    Consumer CreditRestaurantSwiped1.54%$0.10$1.64
    Visa Signature Preferred CreditRetailE-Commerce or Keyed-in2.40%$0.10$2.50
    Visa Signature Preferred CreditRetailSwiped2.10%$0.10$2.20
    Visa Signature Preferred CreditRestaurantSwiped2.40%$0.10$2.50

    As you can see, there are a whole lot of factors that go into determining the exact interchange rate that will be charged for any given transaction. Many businesses go with a processor that simplifies all those fees into a three-tiered system (bundled pricing). This type of setup makes for a simpler end of month statement, but usually results in paying a considerably higher rate. We will discuss this topic in greater depth in Understanding Fees Part 3.

    Assessment Fees: Not Negotiable

    Assessment fees are paid to Visa, Mastercard, or Discover each time a business accepts a credit or debit card from one of those brands. Assessment fees are series of fees that can be expressed as a percentage of the volume of each transaction and a flat fee for each transaction (Visa also adds in a monthly fee).

    This table shows an example of assessment fees you might pay for a typical $100 transaction from each card brand:

    *These are the most up to date assessment rates provided by Wells Fargo.

    Card BrandPercentageTransaction FeeTotal Fee
    Visa (Debit)0.13%$0.02$0.15
    Visa (Credit)0.13%$0.02$0.15

    As you can see from this table, the difference between the three brand’s assessment fees is negligible.

    Processor Markup: Negotiable

    Processors charge a fee on top of the sum of the interchange and assessment fees. Any fee that you pay beyond that sum is referred to as the markup.

    Important: The only fee associated with accepting credit cards that you can negotiate with processors is the markup. Therefore, your goal should be to find a processor that combines the best value with the lowest cost. We will cover this in greater depth as we go on in this guide.

    Summary of Fees

    At the end of the day, it’s important for you to focus on what you can control: the markup. Analogous to the relationship between the wholesale cost and the retail price of an item, the “wholesale cost” of credit card processing is the sum of the interchange and assessment fees and the “retail price” is the markup charged by processors that will vary from processor to processor.

    To put this all together, take a look at this table that breaks down the total cost to three different retailers that use three different processors for a $100 transaction made with a consumer, non-rewards Visa credit card:

     Interchange FeeAssessment FeeMarkupTotal Fee
    Business #1$1.61$0.13$0.55$2.29
    Business #2$1.61$0.13$0.85$2.59
    Business #3$1.61$0.13$1.05$2.79

    Notice that the only reason that Business #2 and #3 paid more for that transaction was simply because the processor it chose had a higher markup. This illustrates why it’s so important to isolate the cost of the markup you are, or will be, paying a processor.

    Important: Isolating the cost of your markup is the first step to minimizing the cost of your processing fees thereby maximizing your profit.

    Understanding Fees Part 3: Markup Pricing Models

    As you know from the previous section, processors charge a markup that’s negotiable by individual businesses. It’s important to note, however, that the way they charge this markup is not the same across the board.

    There are three common ways that processors pass on the interchange and assessment fees along with their markup to an individual business.

    • Pass-Through Pricing (also referred to as interchange-plus pricing, or cost-plus pricing)
    • Bundled Pricing (also referred to as tiered pricing or bucket pricing)
    • Flat Pricing (also referred to as blended pricing)

    Important: Pass-Through pricing is the only model that will provide transparency which typically results in much lower costs. The type of pricing model you choose will have more influence on your rates than any other factor you can control.

    Pass-Through Pricing

    The true benefit of pass-through pricing is transparency. As the name implies, the cost of the interchange and assessment fees is “passed-through” to the business while the markup is charged separately. This is truly the only way to identify how much of the overall fee you pay to accept credit cards is going towards the markup. If you don’t secure this type of pricing model, you can be sure that you aren’t getting the lowest possible rate with the best services.

    For example, notice how the markup stays consistent in the following table:

    Card Type:Interchange Fee:Assessment Fee:Markup:
    Consumer Debit.05% + $.21.13% + $.0155.35% + $.10
    Consumer Credit1.51% + $.10.13% + $.0195.35% + $.10
    Consumer Rewards2.10% + $.10.13% + $.0195.35% + $.10

    While your end of month statements will be much more complex than this table, each of these categories will be listed separately, which will allow you to identify exactly where your money is going.

    By keeping each fee separate, pass-through pricing provides three main benefits:

    Lower cost: The overall cost of processing fees is brought down due to a lower, consistent markup.

    No hidden fees: Processors love charging hidden fees such as surcharges (more on this below) and the like. This pricing model eliminates that opportunity to siphon a little more money out of unsuspecting businesses.

    Interchange optimization: If you can see exactly what interchange fees you’re paying and why, it allows you the chance to adjust your business’ practices to lower your interchange fees. This process is known as “interchange optimization.” We will give you a rundown on how this works later on.

    Bundled Pricing

    Bundled pricing is by far the worst type of markup pricing model – you should avoid it if at all possible. With this model, the process is simplified (but not improved) as the business will only pay the processor. The processor will then take that fee and pay the interchange and assessment fees while, of course, keeping a hefty chunk for itself. The exact amount processors charge you is based on a tiered system (this is why it’s sometimes referred to as “tiered pricing”).

    This model funnels each transaction into one of three tiers:

    • Qualified (the lowest rate)
    • Mid-Qualified (the average rate)
    • Non-Qualified (the highest rate)

    Why this is so bad for businesses: The processors can increase your cost without changing your rates since they maintain complete control of which transactions are routed into which tiers. All they have to do is to route more of your transactions into a higher tier and you pay more.

    To illustrate this, let’s suppose there are three processors that have the following rates:

    • Processor 1:
      Qualified: 1.65% + $.25
      Mid-Qualified: 2.21% + $.25
      Non-Qualified: 2.79% + $.25
    • Processor 2:
      Qualified: 1.78 + $.30
      Mid-Qualified: 2.35% + $.30
      Non-Qualified: 2.85% + $.30
    • Processor 3:
      Qualified: 1.50% + $.30
      Mid-Qualified: 2.25% + $.30
      Non-Qualified: 2.80% + $.30

    This table shows the total cost of 100 different $100 transactions routed differently by each processor:

     Qualified TransactionsMid-Qualified TransactionsNon-Qualified TransactionsTotal Cost
    Processor 1:20 trans. = $38.0030 trans. = $73.8050 trans. = $152.00$263.80
     20(100 x .0165 +.25)30(100 x .0221 +.25)50(100 x .0279 +.25) 
    Processor 2:40 trans. = $83.2040 trans. = $106.0020 trans. = $63.00$252.20
     40(100 x .0178 +.30)40(100 x .0235 +.30)20(100 x .0285 +.30) 
    Processor 3:20 trans. = $36.0050 trans. = $127.5030 trans. = $93.00$256.50
     20(100 x .0150 +.30)50(100 x .0225 +.30)30(100 x .0280 +.30) 

    As you can see from this table, the processor with the overall highest rates ended up being the cheapest while the processor with the cheapest rate turned out to actually be the most expensive. You can clearly see how this type of markup pricing model greatly benefits the processors and not the businesses that use their services.

    While a bundled processor might offer a cheaper “Qualified” rate as compared to a pass-through processor’s markup rate when comparing some transactions, there is simply no way to compare how much markup you are actually being charged by the bundled processor.

    To sum up, the bundled model might seem simpler at first, but it’s terrible for businesses because it results in:

    A high, unpredictable markup: Processors don’t disclose how much of your overall payment goes towards the non-negotiable interchange and assessment fees, so it’s impossible to calculate how much markup you are actually paying the processor for the services they provide. There’s no way to plan for or control how the processor will route your transactions.

    An inability to shop around: Because (like we noticed in the table) a processor’s rates don’t actually indicate how much markup they will charge you at the end of the month, you can’t compare processors’ prices effectively. Some processors will resort to deceptive marketing techniques by advertising their lowest (qualified) rate, and then mainly charging you one of the higher rates.

    A disadvantage in interchange optimization: Since you don’t know how much of the fee you are paying goes to interchange fees, it’s hard to lower your processing costs by adjusting the way your business handles credit cards. There’s more on interchange optimization below.

    Flat Pricing

    While flat pricing isn’t the worst possible model, you will end up paying quite a bit more than pass-through pricing. Flat pricing is the simplest pricing model out there and is used by major processors such as PayPal and Square.

    How it works: Flat pricing doesn’t require a merchant account, instead, the processor will take a flat rate off the top of every transaction and deposit the remainder in your business’ bank account. It’s simple and easy to understand, but more expensive. Some processors might have an increased rate if a cardholder is not present, but it will be clear cut and easy to understand.

    Who it’s good for: Flat pricing isn’t the cheapest option out there, and there are many businesses that are paying more than they need to by using this pricing model. However, there may be some situations in which it pays off. The mobility and functionality of many of the processors (Square for example), as well as a lack of any monthly fees, can make it worthwhile for some businesses who process a very low volume and are constantly on the go.

    What it costs: The good news is that there isn’t the uncertainty and lack of transparency that comes with the bundled model. You know the (high) price you will be paying going into it. The processor will take care of the interchange and assessment fees, you will just pay one flat rate (usually a per-transaction percentage).

    For example, Square currently charges a base fee of 2.75% per transaction. It’s quite a bit higher than what you would pay with pass-through. It will also be more expensive than bundled pricing, although non-qualified transactions will still be more expensive than flat pricing in some situations.

    Overall the pros and cons of the flat pricing model are:


    • Simple – There are no confusing statements that charge different rates based on a plethora of factors. There may be several different rates you are charged, but it won’t usually be very complicated.
    • Transparent – There are no surprises or hidden fees as you know what you will be paying before you sign up.
    • Versatile and Mobile – Most processors have increasingly useful technology for you to take advantage of that makes accepting mobile and online payments easy.
    • Can shop around – Since you know how much you will be paying up front, you can compare rates between flat pricing processors and even compare rates with the pass-through pricing option.


    • More expensive – There’s no getting around the extra expense. You will be paying for simplicity and the increased functionality and mobility.
    • Can’t effectively practice interchange optimization – While there is the chance to “optimize” by not paying more than the base rate a flat price processor offers, you won’t be able to take advantage of interchange optimization to the degree you would with pass-through pricing.


    For all but a few situations in which flat pricing may have an advantage, pass-through pricing is the best pricing model available. If you negotiate your rates correctly (more on that below), you will always pay less overall with pass-through pricing then either other model.

    The following table shows a sample of the rates you could expect from each pricing model when processing a transaction with 4 different card types:

    *The pass-through rates are a combination of the average cost of the three types of fees.
    **The bundled rates are shown as a range of the transaction fees you could expect.

     Debit CardConsumer Credit CardCommercial Credit CardRewards Credit Card
    Pass-Through*.53% + $.331.99% + $.222.48% + $.222.58% + $.22
    Bundled**1.5% – 3.0% + $.10 – $.151.5% – 3.0% + $.10 – $.151.5% – 3.0% + $.10 – $.151.5% – 3.0% + $.10 – $.15

    This table illustrates the difficulty of comparing the bundled pricing model with the other models. You can also see that, while the flat fee is almost always more expensive, it stays much more consistent.

    Important: The pass-through pricing model will always be the most transparent and the cheapest option for credit card processing.

    The decision to choose the pass-through pricing model has the most dramatic effect on your processing costs – more than any other single decision you can make. However, the journey to finding the cheapest and best way to accept credit cards at your small business is not over. It’s time to discover how to find the best processor and the lowest processing cost.

    How to Find the Lowest Credit Card Processing Cost

    Now that you understand the basics of credit card processing and processing fees, it’s time to put that knowledge to good use and learn how to find the lowest credit card processing cost possible for your business.

    Compare Processors

    When comparing processors, it’s important to remember:

    Pass-through Pricing Only
    You can’t compare a bundled pricing model with a pass-through pricing model. If you ask a processor for it’s lowest rate, the processor may give you the “qualified” rate from the lowest pricing tier of it’s bundled pricing model. Make sure any rate quotes you get are not a “bundled price.” Any quotes you get need to separate the processor’s markup from the interchange and assessment fees.

    Important: First compare pricing models (as we did above), then only compare individual processors within the pricing model. To get the lowest possible processing cost, you must only accept quotes from processors that offer pass-through pricing.

    Only Compare Processor’s Markup
    The Interchange and Assessment fees will always stay the same between pass-through pricing processors, so your objective is to find out what the processor’s markup is and compare that to other processor’s markup.

    Compare at Least Three Processors
    Just like anything else, the more quotes you get the better. It’s important to compare at least three processor’s rates (if not more). As you will see later, to find the best rates, you will need to negotiate a hard bargain and some processors will inevitably balk. Thankfully, there are literally thousands of processors out there, so finding a good rate simply requires that you invest the time it takes to get multiple quotes.

    Ask for a Full Disclosure of Fees
    You always want to make sure you secure a full disclosure of all of the processor’s fees up-front and in writing.

    You also want to make sure you are getting a full list of all of the fees associated with the processor’s services. Typically, this will mean more than just the volume markup. It will potentially include things like:

    • Volume markup (rate + transaction fees)
    • First-time setup fees
    • Equipment costs
    • Monthly fees (statement fee)
    • Annual fees (membership fee)

    Calculate Your Total Costs for Each Processor

    Once you have a full disclosure of each processor’s fees that you are comparing, it’s time to figure out exactly what each processor will cost.

    See the Big Picture

    When calculating the can’t just look at the volume markup (the rate per transaction), you have to consider all the fees and features of each processor. While there will be some aspects whose importance varies for each business like customer service or compatibility of the processor’s equipment with your current equipment, there is the bottom line to consider: how much will this cost me a month?

    To determine the monthly cost, multiply your average monthly volume by the percentage rate and your average number of transactions by the transaction fee and add the two products together. Then add any monthly or yearly fees (disregard one-time fees for now) and you have your total monthly cost.

    Example: If a processor charges .35% + $.10 per transaction and a business has a $10,000 monthly volume from 100 transactions, multiply 10,000 by .0035 and 100 by .10 and add the two products together. This gives us a total of $45. (10,000 x .0035 = 35) + (100 x .10 = 10) = 45

    Then you add any monthly and yearly fees. If the processor has a $15 monthly statement fee and a $150 annual membership fee, you add the sum of the quotient of 150 / 12 (since there are 12 months in a year) and 15 with the previous total of 45 for a grand total of $72.50. [(150 / 12 = 12.50) + (15) = 27.50] + 45 = 72.50

    When you start comparing processors’ total monthly costs you will quickly realize that the processor that offers the lowest volume markup, often does not end up with the lowest overall rate.

    Use a table like the following to accurately compare processors:

    *Volume markup is calculated using the previous values of a $10,000 monthly volume with 100 transactions.

     Processor AProcessor BProcessor C
    Rate*.25% = $25.40% = $40.55% = $55
     (10,000 x .0025)(10,000 x .004)(10,000 x .0055)
    Transaction Fee*$.15 = $15$.10 = $10$.07 = $7
     (100 x .15)(100 x .10)(100 x .07)
    Monthly Fee$20$15$5
    Annual Fee$150 = $12.50$100 = $8.33$0
     (150 / 12)(150 / 12) 
    Total Cost$72.50$73.33$67.00

    By using a tool like this one, you can accurately compare the total monthly cost of each processor. Be sure to add all the recurring fees into the mix to get an accurate result.

    Important: The processor that offers the lowest volume markup may not have the overall lowest rate once you add in the other fees.

    Negotiate Favorable Terms

    The last step to finding the lowest possible credit card processing cost is to negotiate highly favorable terms. Good negotiating will take decent rates and make them excellent. Although this can be somewhat tricky, if you can demonstrate that you understand the industry standards and are willing to walk away, you can end up saving a considerable amount of money. Think of it as an investment of time and energy that will pay dividends in the years to come.

    Since shady processors will try to take advantage of those that are unwary or unwilling to negotiate a hard bargain, it’s important to let processors know from the outset what it will take from them to earn your business. Don’t start by asking questions, start by dictating your terms.

    Here’s a list of terms that we recommend using to negotiate:

    Only accept pass-through pricing quotes: As we eluded to earlier, you must specify to processors that you will only accept pass-through pricing (also known as interchange-plus).

    Their best offer first: Since you will probably need to compare quite a few processors until you find one that will offer great rates at the terms you dictate, it’s important not to waste your time haggling back and forth. Let the processor know up-front that you will be comparing its first offer with competitors’ offers.

    No assessment fee markup: Processors sometimes try to sneak an assessment fee markup past unsuspecting customers. Make sure to specify that they must pass the assessment fees through to you without any markup. Refer to this resource to double check any suspect rates.

    Interchange credit pass-through: If you issue a refund, the bank is supposed to issue you a credit for part of the interchange fee that you paid. Processors sometimes elect to keep this credit when it rightfully belongs to you.

    Require a complete list of fees in writing: This is a must. If you ask processors if they have this or that fee you will waste time, and you may leave some out. Get a complete list of every fee each processor charges in writing so you can accurately compare quotes.

    Guaranteed rates for life: While there are some processors that will refuse to give you this guarantee, don’t be discouraged – there are those out there that will. Make sure you get a written promise that your rates won’t jump from month to month, or even from year to year.

    Exempt yourself from cancellation fees: This is an important one to establish in writing before you sign on the dotted line. If a company offers competitive rates and provides great service, it shouldn’t need to hold you hostage with large cancellation fees. While you should always give your processor a chance to match better offers before you cancel, refuse to accept cancellation fees.

    Some processors might try to tell you that its parent bank requires a cancellation fee provision. Don’t buy it. At the very least, a processor should add a signed addendum to the contract retracting the right to charge a cancellation fee if you terminate service.

    Don’t lease equipment: Leasing equipment is a great way for processors to make a bunch of money off you in the long run. There are almost no situations when it makes sense to lease equipment. Always elect to buy equipment outright if at all possible.

    Declaration of proprietary equipment: Equipment that is universally compatible is always vastly superior to equipment that only works with a single processor. We take a dim view of processors that require you to purchase all new equipment (if you are switching from another processor) or those that require you to purchase equipment that would not work if you needed to switch to a different processor.

    A complete cost breakdown on statements: If you want to keep your rates low, it’s important to have complete transparency and accountability. That’s why you should require your processor to separate out the three cost components (interchange, assessment, and markup fees) on each and every statement.


    Finding the cheapest credit card processing cost isn’t necessarily easy, but if you put what you’ve learned into play, it’s not an impossible task.

    Follow these steps to find the lowest possible credit card processing cost:

    • Isolate the markup
    • Choose a pricing model (pass-through pricing will always be the cheapest)
    • Compare multiple processors with fees up-front and in writing
    • Calculate the total cost
    • Negotiate favorable terms

    How to Keep Costs Low

    Now that you’ve gone through the hard work of finding a great processor at a low rate, your work is done, right? Well not so fast. There are still several ways to make sure your low processing rates stay that way. All it will take is an on-going commitment to invest a little time and energy each month towards keeping an eye on your processor’s fees and learning how to optimize interchange.

    Track the Processor’s Fees

    Unfortunately, many processors will take advantage of you unless you are vigilant. That’s why it’s important for you to track your processor’s fees. If you don’t, the rates will ever so slowly creep higher and higher until you are paying a considerable amount more than you initially agreed upon – even if you had an agreement that the rates would never increase.

    Take the time to really read your monthly statement. If your statement doesn’t show your processor’s rates and fees clearly enough, make sure they send you a statement that does. If you simply take the time to track your processor’s rates each month, you can safeguard yourself from waking up a year later to realize that you’ve spent hundreds of dollars in extra fees without realizing it.

    Interchange Optimization

    Because of the inherent risk of processing credit cards, there is a steeper rate for certain types of transactions that carry a higher risk of being disputed. The card brands will “downgrade” certain transactions to a higher rate if certain conditions are or are not met. Those types of transactions are sometimes impossible to avoid, but there are a few steps you can take to optimize your interchange fees so that you pay as little as possible.

    There are two basic punitive interchange rates:

    Electronic Interchange Reimbursement Fee: The Electronic Interchange Reimbursement Fee (or EIRF for short) is assessed when certain pieces of expected information aren’t present for a Visa consumer credit or debit card transaction that is settled within two days. The two biggest causes of this fee are when a customer’s zip code and address aren’t correctly entered when a card is keyed-in or when a transaction takes more than 24 hours to settle. For e-commerce merchants, it’s common to see a few of these fees a month on your statement when a customer doesn’t input the proper zip code or address.

    Standard: Unlike the EIRF, the Standard fee is used for both Visa and Mastercard, and can apply to both consumer and commercial cards. Typically, the source of the Standard fee from consumer cards is transactions that are not settled within two days. For commercial cards, this fee can be assessed for a number of reasons, but it basically indicates that the proper data was not submitted with the transaction to qualify it for the lower “Level II” rates.

    There are seven steps you can take to ensure interchange optimization:

    Ensure equipment is operating properly: The first thing you want to do is make sure that your equipment is operating correctly. If your card reader isn’t properly reading the card’s mag stripe, then you will end up with one of two problems. Either the card’s data will be partially missing or you will have to manually type in the credit card number. Either way, there is the potential for the EIRF.

    Batch processing: For transactions not settled within 24 hours Visa charges the “EIRF”, Mastercard charges the “Standard” fee, and Discover charges the “Mid-Submission” fee. You can usually avoid these fees by making sure that your credit card terminal or application sends out all the transactions at the end of the day for settlement.

    Complete keyed-in transactions properly: Depending on your merchant category, card brands will expect to receive card data in different ways and have different requirements. For instance, card brands expect merchants with the “retail” designation to submit card data via swiped cards while they expect merchants with the “e-commerce” designation to submit card data in digit form, but require the billing address and zip code from the latter. If they do not receive the expected data, a downgrade into a punitive rate is likely. To avoid all possible downgrades, always enter the billing address and zip code properly when entering a card number manually.

    Don’t mishandle tips: For merchants with designations that are expected to receive tips, no penalty will be assessed for adding a tip to the authorized amount. If you aren’t a merchant type that has a variance for tips, you can avoid a downgrade by requesting the tip amount prior to authorization rather than tip-adjusting the authorized amount later. Keep in mind that even if your merchant designation is allowed a variance for tips, any tip over 20% of the base amount will usually result in a downgrade.

    Don’t settle for a different amount: If you have to change the amount of an authorized transaction for some reason, you can avoid a downgrade by voiding the original transaction and authorizing the correct final amount.

    Don’t force a transaction through without authorization: If at all possible, avoid forcing a transaction through without authorization. This will almost always result in a downgrade.

    Handle commercial cards correctly: In order for transactions to be placed into the favorable “Level II” interchange rate, there are several pieces of information that need to be entered correctly: the PO Number (or Customer Code) and the Sales Tax. If a customer does not know their PO Number or Customer Code, enter the last four digits of the business card. Also, be sure to enter the Sales Tax when prompted. If not charging Sales Tax, simply enter “0.” If this data is not entered correctly, a downgrade in the punitive “Standard” rate is likely.


    If you track your processor’s fees to make sure it doesn’t slip in incremental rate increases and practice the seven steps to optimize interchange fees, you are well on your way to ensuring that your low credit card processing fees stay that way. Investing a small amount of time in keeping your fees low will always pay off in the long run.

    FAQ & Glossary


    A few common, costly mistakes include:

  • Processing expired credit cards
  • Duplicating transactions
  • Setting a minimum or maximum limit on your transactions
  • Charging a usage fee for credit card transactions
  • Displaying full account numbers on your receipts
  • Processing Internet transactions with your retail merchant account
  • Running your personal card through your merchant account
  • Splitting one transaction into several smaller transactions
  • Typical corporations will need a business checking account. However, if you are a sole proprietorship, a personal checking account will sometimes suffice. The individual processors make that determination.

    Useful Terms and Definitions

    Assessment fee: The fee paid to the card brand that enables the brand to oversee credit card processing.

    Authorization fee: A flat fee that is often charged when the card and cardholder aren’t present and you need to verify the cardholder’s address to qualify for the discounted rate.

    Batch: A collection of transactions, normally a single day’s worth. Batch processing happens when manually or automatically settling (sending in for processing) the entire batch of transactions at a single time.

    Bundled pricing: A pricing model offered by processors where the processor pays the interchange and assessment fees and you pay one rate determined by which of the three pricing tiers the processor routes each transaction into. It is also referred to as “tiered pricing.”

    Card association: Each card brand’s network of issuing and acquiring banks that process it.

    Card brand: The overseer of each different “brand” of card (Visa, Mastercard, et cetera) that regulates the use and fees of its cards. It also facilitates credit card processing by providing the network that the transactions flow through.

    Chargebacks: Occurs when a cardholder disputes a charge. The issuing bank that receives their request will send a retrieval request (usually with a fee) to verify whether the charge is actually fraudulent. Ultimately, the business where the purchase is made is responsible for any fraudulent charge.

    Dongle: a piece of hardware easily attached or detached from a computer or other device that allows additional functionality.

    Downgrade: A punitive interchange rate assessed when one or more of the qualifying requirements for a lower interchange rate have not been met.

    EIRF: Stands for “Electronic Interchange Reimbursement Fee.” It is a punitive interchange rate established by Visa to be paid to the issuing bank when a transaction is downgraded due to non-compliance with certain standards.

    Flat Pricing: A pricing model in which a business pays a processor one “flat rate” to completely handle credit card processing.

    Interchange fee: A fee paid to the issuing bank to by merchants who process credit cards. This fee is usually expressed as a percentage and flat fee per transaction. The rates are set by the card brands.

    Issuing bank: The bank that issues the credit or debit card to the consumer and extends the line of credit or allows access to the consumer’s checking account.

    Merchant account: A bank of account provided by a merchant bank that facilitates the processing of credit cards. It is the middleman between your business’ bank account and the consumer’s bank account.

    Merchant bank: The financial institution that provides you with a merchant account which facilitates the processing of credit cards. The merchant bank assumes responsibility for any chargebacks or refunds that need to be processed should the account holder become insolvent.

    Merchant service provider: An umbrella term that covers third-party processors, banks, or any other entity that sells businesses the products and services required to accept credit cards.

    Mid-qualified rate: The middle tier in the bundled (tiered) pricing model arbitrarily set by processors.

    Mid-submission fee: A fee assessed by Discover when a transaction is not settled within 24 hours.

    Non-qualified rate: The highest (most expensive) tier in the bundled (tiered) pricing model arbitrarily set by processors.

    Pass-through pricing: A pricing model that “passes through” the interchange and assessment fees directly to the business allowing the business to isolate the markup being charged by the processor. It is also referred to as “interchange-plus pricing” and “cost-plus pricing.”

    Payment gateways: The hardware and software necessary to transmit transaction data from your business to the card brand’s processing network.

    Processors: A descriptive term indicating the entities that actually “process” the transactions. They handle card authorizations, connectivity to card associations, and network authorization. Others receive and forward settlement batches to the issuing banks on a regular schedule.
    (Note: In this guide, we use the term “processors” to refer to the general group of organizations that provide merchant services.)

    Qualified rate: The lowest (cheapest) tier in the bundled (tiered) pricing model arbitrarily set by processors.

    Settling: The process of finalizing a transaction so it can be processed by the necessary entities so that the amount in question can be delivered to your account.

    Standard fee: A punitive interchange rate established by Visa and Mastercard to be paid to the issuing bank when a transaction is downgraded due to non-compliance with certain standards.

    Volume markup: The sum of the percentage and transaction fees charged by processors to pay for their services.

    Take Action

    The sooner you start accepting credit cards, the sooner your business can flourish. That’s why we recommend that you put all the knowledge you’ve gained to good use, and start the process of comparing pass-through processors that will provide great service at a low rate. If you already do process credit cards, it may be time to evaluate your processor’s competitiveness by comparing its rates to those offered by competitors. Once you find a great processor, make sure you follow our tips to keep those great rates low. The result? A maximized profit margin and happy customers due to the added convenience that credit card processing offers.

    Additional Resources

    Business USA: A platform for small and big businesses to access services to grow and hire on talent

    IRS Small Business Portal: Official answers to small business tax questions from the IRS, also shows access to forms and publications, a library of video content, an events calendar and other online tools and products for small businesses

    Minority Business Development Agency (MBDA): Focuses on minority businesses communities by providing information about grants and loans, business opportunities and legal business resources

    National Business Association: Association that provides its members with support programs, useful products and services and business-building resource materials



    SCORE: dedicated to prividing entrepreneur education and resources. SCORE has over 12,000 volunteers with years of business experience available to help small business owners through on-on-one counseling, business tools and training programs

    Small Business Administration (SBA): Provides resources to small business owners wanting to grow their business, has district offices in all 50 states provide resources, training and specialists

    Small Business Development Centers (SBDCs): Resources provided on this site may vary by location, but typically it will include assistance with business planning, access to financing, counseling services and classes

    Small Business Legislative Council: A coalition of trade and professional associations

    Social Security Online: Resources for employers


    Women’s Business Enterprise National Council (WBENC): Provides assistance and education to certified women’s business enterprises (WBEs) and government entities
