What Are Credit Card Processing Fees, and How do You Reduce Them?

Every time a customer makes a purchase using a credit or debit card via a card machine, your small business has to pay a fee. These fees can add up quickly, eroding your hard-earned revenue and making it harder to turn a profit on your products and services.

There’s no way to avoid card processing fees entirely, but the good news is that you have some control over how much you’ll pay. However, to reduce credit card processing fees, you first need to understand what they are and how they work.

In this guide, we’ll explain everything you need to know about credit card processing fees for small businesses and how you can reduce them.

Key Takeaways

• Credit card processing fees include interchange fees (charged by card issuers), scheme fees (charged by card networks), and processor markups (charged by your merchant account provider).
• In total, small-business credit card processing fees typically range from 0.7% to 3.4% per transaction.
• Fees vary for each transaction based on a variety of factors, including what bank issued a customer’s card, what network a customer’s card uses, and whether a purchase is made online or in-store.
• Interchange and scheme fees are fixed for each card transaction, but you can negotiate the processor markup with your merchant account provider. In the UK, it’s illegal to pass surcharges to customers who pay by credit card.

What Are Credit Card Processing Fees?

Credit card processing fees are the charges your business pays each time it accepts a credit or debit card payment, typically ranging from 0.7% to 3.4% per transaction.

Your merchant account provider lists the fee for each transaction on your merchant account statement at the end of each month. Fees are deducted from the funds your merchant account provider transfers to your business’ current account.

While credit card processing fees appear as a lump sum on your statement, there isn’t just one fee you pay for processing a credit card payment—there are several. Below, we break down the different types of fees and what they’re for.

Interchange fee

The interchange fee is charged by the bank that issued your customer’s credit card. It covers the cost of paying your business upfront for a customer’s purchase (the bank assumes the risk that the customer will fail to pay their credit card bill).

For example, if your customer has a Visa credit card issued by Santander Bank, the interchange fee will go to Santander Bank. Importantly, the card network (Visa in this example) sets the interchange fee, typically a percentage of the total transaction amount.

UK regulations limit interchange fees to 0.3% of the purchase amount for consumer credit cards and 0.2% for consumer debit cards. Interchange fees for business cards aren’t capped and typically range from 1% to 3% of a transaction’s total cost.

Scheme fee

The scheme fee, also known as the network fee, is paid to the credit card companies that run the payment networks, such as Visa, Mastercard, and American Express. These fees cover the operating costs, which enable credit cards to function.

The scheme fee comprises several charges: an assessment fee, an authorisation fee, and a settlement fee. They’re typically calculated as a percentage of each transaction plus a fixed fee, and the exact fee can vary based on factors such as the card type, how the transaction was processed, and the country where the card was issued.

Here’s an overview of average scheme fees on the major networks:

• Mastercard: 0.0398% + £0.0054
• Visa: 0.0140% + £0.0145

Processor markup

The processor markup is the fee you pay to your merchant account provider, also known as your credit card processor. Examples of merchant account providers include Square, PayPal, and Stripe. Processor markups cover the costs of managing your merchant account and include a fee to generate a profit for your merchant account provider.

Merchant account providers can charge flat fees (e.g., 50p per transaction), percentage-based fees (e.g., 2.5% per transaction), or a combination of both (e.g., 20p + 1.5% per transaction). They can also offer tiered pricing or more complex structures that include additional services, such as access to business loans.

Here are the markups at some large merchant account providers in the UK:

Notably, processor markups include a variety of small fees, such as:

• Payment Card Industry (PCI) compliance fees: Cover the cost of complying with standards to prevent fraudulent purchases.
• Payment terminal fees: Cover the cost of leasing a credit card processing machine.
• Payment gateway fees: Cover the cost of accepting online purchases.

All of these fees reflect services your merchant account provider offers. They’re usually included in the headline rate that your provider charges for every transaction, but some providers break them out into separate charges. For example, you may pay 1.75% per transaction plus a flat £20 monthly fee for PCI compliance.

You may also incur additional one-time fees for events such as chargebacks and refunds. Your merchant account contract will specify the fee amount, but expect to pay a flat fee of around £15 to £25 per chargeback.

Common Credit Card Processing Fee Models

There are three common pricing models used by credit card processors to assess fees: interchange plus, flat rate, and tiered. We’ll dive into each and explain how they work.

Interchange plus

With interchange-plus pricing, you pay the interchange and scheme fees plus the processor markup. It’s a highly cost-effective pricing model for growing businesses, since you typically pay the lowest possible rate per transaction. However, the exact cost of any individual transaction can be difficult to predict in advance, as interchange and scheme fees vary by card type and payment method.

Despite this variability, interchange-plus pricing is highly transparent. “Interchange-plus pricing makes it easier for merchants to understand what they’re actually paying,” says Vatsal Bhandari, CAMS and finance, legal, and research consultant. “It reflects real transaction costs instead of hiding them behind blended or tiered rates.”

It’s also well-suited to small businesses that can implement payment and acceptance policies—such as encouraging lower-cost payment methods or using stronger authentication—to minimise fees.

Flat rate

With flat-rate pricing, you pay the same amount for every transaction, regardless of the actual interchange and scheme fees. This provides certainty about how much you’ll pay per transaction, but it also means you may pay more for some lower-cost transactions.

Flat-rate pricing can be suitable for growing businesses that are willing to pay a premium for predictability. However, it’s not the best option if you’re looking to cut processing costs.

Tiered

With tiered pricing, you’ll pay different rates depending on whether a transaction is ‘qualified,’ ‘mid-qualified,’ or ‘non-qualified.’ Qualified rates can be extremely low, making this pricing model attractive on the surface. However, mid-qualified and non-qualified rates can be very high, and most of your business’ card transactions will likely fall into these categories.

Tiered pricing is cost-effective for businesses that accept only qualified card payment methods. But growing businesses that want to offer as many payment methods as possible should generally avoid this pricing model.

What Impacts Credit Card Processing Fees?

Credit card fees can vary based on many factors, some of which you might not expect. Here are some of the most important considerations.

• Credit vs. debit cards: For UK-issued cards, credit card interchange fees are capped at 0.30%, while debit card fees are capped at 0.20%. For foreign cards that don’t have these limits, credit card interchange fees are usually higher than debit card interchange fees.
• Consumer vs. business cards: Although interchange fees on consumer credit and debit cards are capped in the UK, there’s no limit for business cards, which can incur much higher processing costs.
• In-person vs. online payments: Interchange fees are typically higher for transactions where a card number is entered manually, including most online purchases. You’ll pay less if a card is physically present and is swiped, dipped, or tapped.
• Card network: Each credit card network provider sets its own scheme fees. Discover is usually the cheapest, while American Express is generally the most expensive.

How To Reduce Credit Card Processing Fees?

The only way to eliminate credit card fees entirely is to stop accepting credit and debit card payments. However, as credit card processing in hotels, restaurants, retail stores, and pretty much every other major business you’d expect to find in a bustling city is a given, refusing card payments is not likely to go down well with customers. The overwhelming majority of people expect businesses to accept their cards.

Instead, you can reduce the amount you pay in credit card processing fees. Here are a few approaches.

Avoid flat-rate fees

Flat-rate fees, such as 50p per transaction, may seem low at first, but they can add up quickly over time. Not every customer will make a large purchase, and 50p on a £10 purchase is equivalent to a 5.0% fee.

Businesses are usually better off with a percentage-based processing fee. You’ll always pay 2.5%, for example, no matter the size of a customer’s purchase or what type of card they use.

Comparison-shop

Comparing processing fees across merchant account providers can help you reduce costs. However, this can be challenging because not all providers structure their fees the same way.

Bhandari suggests “standardising fees into a transparent, comparable cost structure.” He recommends checking processor markups, monthly fixed charges, PCI fees, chargeback fees, and hardware costs. He says, “To ensure a fair comparison, consider the total cost of ownership, not just the headline per-transaction rate.”

Renegotiate rates with your merchant account provider

Contacting your merchant account provider and asking for a better deal is one of the best ways to lower your processing fees. Your provider is incentivised to offer you lower rates if it means preventing you from switching to a competitor. You’ll be especially well-positioned in negotiations if you have a quote at hand.

If your provider refuses to budge, think about switching. While changing merchant account providers can be a hassle, the savings from securing a lower card transaction rate can be worth it.

Encourage customers to buy in-store

Most merchant account providers charge lower rates for transactions where the card is physically swiped, dipped, or tapped than for transactions where the card number is keyed in manually. This is because keyed-in transactions have higher rates of fraud and chargebacks, which eat into merchant account providers’ profits.

You can reduce your fees by encouraging customers to make in-store purchases rather than online. Just don’t go wild nudging customers to shop in-store—it’s almost always better to make an online sale and pay the card fee than miss out on a sale altogether.

Reduce chargebacks

Chargeback fees can be extremely costly for your business; each time a customer initiates a chargeback for a fraudulent transaction, your business may incur £15 to £25.

You can reduce chargebacks by using an address verification service. This verifies a customer’s address with their credit card issuer, helping to prevent unauthorised users from completing credit card transactions online. Note that address verification services usually cost a few pence per transaction. However, you can pay for verifying hundreds of transactions with the savings from avoiding a single fraudulent transaction.

Bhandari also suggests investing in card security. “Updating terminals and adopting EMV contactless payments can significantly reduce chargeback risk,” he says.

Can Merchants Pass Processing Fees On to Customers?

You can’t apply surcharges to customers who pay with a credit card—this is illegal under UK law. However, you can charge extra fees during checkout as long as they apply equally to all customers.

While this can reduce the impact of card processing fees on your business, be very cautious when doing this. Many customers will be annoyed to learn that your business charges a hidden fee when they try to pay. In most cases, you’ll be better off raising your prices rather than introducing checkout fees.