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How Do Credit Card Processing Fees Work?

The fees incurred for processing credit card transactions can be complex. However, these fees must be paid by merchants who wish to accept credit cards in their stores, and it’s important to understand how they work.

There are a number of entities involved in credit card processing fees, and they should be thought of as intermediaries that exist between the buyer and the seller. These entities are the issuing bank, acquiring bank, merchant account, and card associations.

The card associations, which consist of organizations such as American Express and Visa, are the entities that design the cards. The issuing banks provide them to customers, and the acquiring banks are responsible for processing transactions between the card associations and merchants via merchant accounts.

Wholesale and Markup Fees

Wholesale and markup fees are associated with merchant accounts. The difference between the two is that wholesale fees cannot be negotiated, while markup fees can be. Wholesale fees are established by the issuing bank and the card association. These are set fees which don’t change even when a merchant chooses a new provider. Mark up fees is the rates used by credit card processing companies to turn a profit. When a merchant chooses the correct processor, these fees can be reasonable.

However, should a merchant choose the wrong processor, this can lead to problems. Some processors make it hard for merchants to determine the markup fees they will pay, using complicated language and pricing structures. Because markup fees will vary from one processor to another, a shrewd merchant will shop around, comparing rates and terms before opening an account.

Pricing Structure

A credit card processor can charge wholesale or markup fees in a few different ways. The first is through interchange plus. This is the most visible pricing structure, as it has terms and fees which are easy to understand. Interchange plus itemizes the wholesale and markup fees and will show them on payments which are made monthly. Tiered is the second pricing structure that processors will use.

Most merchants use a tiered pricing structure, which will catalog credit card transactions based on three variations, and these are qualified, middle qualified and not qualified. Qualified rates will be the lowest, while non- qualified rates will be the highest and middle qualified rates will be moderate.

Subscription is one of the newest pricing structures. Like Interchange plus, the transaction cost will be split from the markup. However, unlike Interchange plus, merchants don’t have to pay a percentage markup, just a low transaction fee. When a merchant conducts a large transaction, subscription pricing can allow them to save a decent amount of money.