If your business accepts credit cards, you already know that every transaction comes with a cost. But do you know where your credit card processing fees actually go?
One of the biggest misconceptions about payment processing is that the entire fee you pay goes directly to your payment processor. In reality, the cost of accepting a credit card is made up of several different components, with different parties involved along the way.
Understanding these costs can make it much easier to read your merchant statement, compare payment providers and understand what your business is actually paying for.
In our previous guide, we explained how payment processing works from the moment a customer uses their card until the transaction is approved and settled. Now, let's look at the costs behind those transactions.
Credit Card Processing Fees Aren't One Single Fee
When you look at your merchant statement at the end of the month, it's easy to think of your processing costs as one big fee.
Behind the scenes, however, your credit card processing costs can generally be broken down into a few different pieces:
Interchange fees Card-network fees Your payment processor's markup Other account, transaction or equipment fees
The important thing to understand is that these costs don't all go to your payment processor.
A portion represents the underlying cost of accepting the cards your customers use, while another portion can come from the pricing and services provided by your processor.
Let's break that down.
What Are Interchange Fees?
Interchange is one of the main underlying costs involved in accepting a credit card.
When a customer pays your business with a credit card, the financial institution that issued that card receives an interchange fee associated with the transaction.
For example, imagine a customer makes a $100 purchase at your business using a Visa card issued by their bank. That bank is one of the parties involved in making the transaction possible, and interchange represents part of the underlying cost associated with accepting that payment.
But there's an important detail:
There isn't one universal interchange rate for every credit card transaction.
Why Do Different Credit Cards Cost Different Amounts to Accept?
Think about how many different credit cards are available to Canadian consumers.
There are standard cards, cash-back cards, travel cards, premium rewards cards, business cards and many others. These cards don't necessarily carry the same underlying processing costs.
That means two customers can each spend $100 at your business, but those two transactions may not cost you exactly the same amount to process.
The first customer might use one type of Visa card while the second uses a premium rewards card. Although the sale amount is identical, the applicable interchange costs can be different.
This is also why asking “What's my Visa rate?” doesn't always have a simple one-number answer.
Throughout a month, your business may accept many different types of Visa and Mastercard products, and the underlying costs associated with those transactions can vary.
What Are Card-Network Fees?
Interchange isn't the only underlying cost involved in processing a credit card.
Card networks such as Visa and Mastercard can also have fees associated with processing transactions through their networks.
Depending on your payment provider and how your merchant statement is designed, these fees may appear separately, be grouped together or use terminology that isn't immediately obvious.
As a business owner, you don't need to memorize every individual card-network fee.
What's more important is understanding that interchange and card-network fees are different from your payment processor's own markup.
That distinction becomes especially important when you start comparing payment providers.
How Does Your Payment Processor Make Money?
Your payment provider also needs to make money for providing processing services, equipment, account management and support.
That's where the processor markup comes in.
This is one of the most important parts of your processing costs to understand because, unlike the underlying costs associated with accepting different cards, the processor's pricing can vary considerably from one provider to another.
Different providers also structure that pricing in different ways.
You may have heard terms such as:
Flat-rate pricing Tiered pricing Cost-plus pricing Interchange-plus pricing
We'll break those pricing models down in a separate article because each deserves a proper explanation.
For now, the important takeaway is simple:
The underlying cost of accepting a card and your processor's markup are not the same thing.
A Simple Credit Card Processing Example
Let's say two customers each make a $100 purchase at your business.
The first customer uses a standard credit card. The second uses a different type of credit card with a higher underlying interchange cost.
Even though both customers spent exactly $100, the two transactions may have different processing costs.
Your payment processor didn't necessarily decide that the second customer's card should cost more. Part of the difference can come from the underlying cost associated with the card itself.
Your processor's pricing is then applied according to the pricing structure you have with that provider.
This is one of the most important concepts for business owners to understand about credit card processing:
Not every credit card transaction costs the same amount to process.
What About the Other Fees on Your Merchant Statement?
Your credit card percentage isn't necessarily the only thing contributing to your monthly processing bill.
Depending on your payment provider and setup, you may also see charges for things such as terminal rental, monthly account fees, authorization fees, reporting or software services, PCI-related charges or other account fees.
That doesn't automatically mean a fee is unreasonable. Different providers offer different services and structure their accounts differently.
The important thing is knowing what you're paying for.
This is also why comparing payment processors based on one advertised percentage can be misleading.
A lower advertised rate doesn't necessarily mean a lower overall processing cost if the rest of the account is structured differently.
Your Merchant Statement Tells the Full Story
If you want to understand what you're actually paying for payment processing, your merchant statement is the best place to start.
Unfortunately, merchant statements aren't always particularly easy to read.
You may see multiple pages of percentages, abbreviations, transaction categories and fees that don't mean much if nobody has ever explained them to you.
You don't need to understand every line or memorize interchange categories. But every business owner should be able to get a reasonable answer to a few basic questions:
What am I paying in total?
What are the underlying costs of processing my transactions?
What is my payment provider charging me?
What additional account or equipment fees am I paying?
If you can't easily answer those questions from your current statement, it's worth taking a closer look.
Why JAZ Payments Focuses on Transparency
Understanding the difference between underlying processing costs and your provider's pricing is one of the reasons we built JAZ Payments around transparency.
We're a Canadian family-run business, and we don't believe business owners should have to become payment-processing experts just to understand what they're being charged.
JAZ Payments uses a transparent cost-plus pricing model. Rather than simply quoting one number without explaining what's behind it, we separate the underlying processing costs from our agreed markup.
That means we can sit down with a business owner, look at a merchant statement and explain where the costs are actually coming from.
We also keep our processing relationships month-to-month, without relying on long-term processing contracts or termination fees to keep our clients with us.
Our goal is pretty simple: if you're going to trust us with an important part of your business, you should understand what you're paying and have someone you can actually speak with when you have questions.
Start by Understanding What You're Paying Today
Before switching payment processors, you don't need to make any immediate decisions.
Start by understanding what you already have.
Take a recent merchant statement and look beyond the headline rate. Understanding the underlying processing costs, your provider's markup and your other account fees gives you a much better foundation for comparing your options.
That's how we approach things at JAZ Payments as well.
Send us a recent merchant processing statement and we'll break it down with you. We'll explain what you're currently paying, identify how your pricing is structured and show you how it compares with our cost-plus pricing.
There's no commitment to switch just because we reviewed it.
Sometimes the most valuable first step is simply knowing what you're paying for.
Want Help Understanding Your Merchant Statement?
If you'd like a second set of eyes on your current processing costs, contact JAZ Payments for a complimentary statement review. We'll walk you through the numbers and help make your payment processing easier to understand.
