Merchant Fees Explained: How They Work & Types

As a business owner, accepting credit card payments is essential for making sales and growing your customer base. However, every time a customer swipes their card, they incur certain costs known as credit card merchant fees. Understanding these fees is crucial for managing your business finances effectively. In this article, we’ll break down the different types of merchant fees. We will also explain how they work and offer insights to help you navigate these costs strategically.

What are Credit Card Merchant Fees?

Credit card charges for merchants are the costs that businesses pay to banks. They also pay payment processors for the ability to accept credit and debit cards. These fees cover the costs of securely processing transactions, mitigating fraud risks, and providing the payment infrastructure.

Typically, merchant fees are charged as a percentage of each transaction amount plus a flat fee. Suppose your fees are 2.5% + ₹0.30 per transaction, and a customer makes a ₹1000 purchase. Then, you would pay ₹25.30 in merchant fees (₹25 + ₹0.30).

While accepting cards helps drive sales, the accumulated merchant fees can significantly impact your bottom line. As per RBI data, in Jan 2023 alone, Indians made over 78 crore credit card transactions worth ₹82,993 crore. Businesses paid substantial credit card merchant fees on these sales.

Components of Credit Card Merchant Fees

Knowing the components of credit card merchant rents is essential for businesses. Here are the key elements that contribute to your overall costs:

Interchange Fees

The interchange fee is a percentage of each transaction that the customer’s card-issuing bank charges the business. It makes up the largest portion of credit card vendor fees.

Interchange rates vary based on factors like card type (credit/debit), transaction type (online/in-person), business category, etc.

For example, in-person debit card sales may have a 0.4% interchange rate, while online credit card sales could be 1.5%.

Assessment Fees

Assessment fees are charged by the card networks (Visa, Mastercard, etc.). They are usually a percentage of sales volume and go towards network costs.

Payment Processor Fees

Your payment processing company charges a fee for connecting you to the card networks. Processors may bundle this fee with the interchange fee.

Incidental Fees

You may incur additional merchant fees for chargebacks, international cards, monthly POS rentals, etc. Carefully review your contract to understand all costs.

Factors Impacting Credit Card Merchant Rates

Several variables affect the credit card costs for merchants:

• Business type and size

• Average transaction value and monthly sales volume

• Transaction methods (swiped, dipped, keyed-in, etc.)

• Processor pricing model (interchange-plus, flat-rate, tiered)

To estimate your fees, consider this example. Let’s say you have a retail store with ₹20 lakh in monthly card sales, with an average transaction of ₹1500. On an interchange-plus plan, your merchant fees could work out to:

(1.54% + ₹0.30) x ₹20,00,000 = ₹30,800 + ₹6000 = ₹36,800/month

Comparing Credit Card Swipe Charges for Merchants

When choosing a payment processor, carefully evaluate their pricing structure and fees. Here’s a quick comparison table of credit card swipe charges for merchants across providers:

Remember, the lowest rate isn’t always the best deal. Factor in the processor’s features, service, and contract terms, too. Use Airtel Finance’s Credit Score for insights into your creditworthiness when applying for a payment processor.

Minimizing Your Credit Card Merchant Fees

While you can’t avoid credit card vendor fees entirely, you can take steps to reduce them:

• Negotiate with your processor for lower rates, especially if you have a high sales volume.

• Train your team to handle card transactions to avoid incidental fees properly.

• Set a minimum purchase amount for card sales.

• Offer incentives for customers to pay with cash or use debit cards, which have lower fees.

• Regularly audit your merchant statements to catch discrepancies.

Conclusion

Merchant fees are an inevitable cost of doing business in today’s card-centric world. Understanding credit card merchant rates helps you make informed decisions to manage costs effectively. Use this to choose a payment processor that aligns with your business needs and implement strategies to minimize your fees.

Stay on top of your business credit health with Airtel Finance’s free Credit Score. A strong credit profile can help you access better merchant fee rates and business loans. Download the Airtel Thanks App to unlock a world of business finance solutions tailored to your needs.

FAQs

1. What are merchant fees, and why do businesses have to pay them?

Merchant fees are costs paid by businesses to accept card payments. They cover transaction processing, fraud prevention, and network access provided by banks and payment companies.

2. How do merchant fees work in credit and debit card transactions?

For each card sale, businesses pay a percentage of the transaction value. They also pay a flat fee to the card-issuing bank, payment processor, and card network.

3. What are the different types of merchant fees?

The key types are interchange fees charged by card-issuing banks. There are also assessment fees by card networks, payment processor fees, and incidental fees for chargebacks, rentals, etc.

4. How is the interchange fee determined, and why is it charged?

Interchange fees vary based on factors like card type, transaction method, and business category. They compensate issuing banks for processing costs and risks.

5. What’s the difference between interchange fees and payment processor fees?

Interchange fees go to the customer’s card-issuing bank and form the base of credit card merchant fees. Processor fees are charged on top by your payment provider.