For online businesses, credit card processing and credit card processing fees are second nature. After all, how else will their customers pay for goods or services?

Admittedly, they could put a check in the mail, but that takes precious time and patience. It’s also a very outdated approach. And since it’s never a good idea to put cash in the mail, credit cards or PayPal are the only way to pay for online goods.

Brick and mortar stores always accept cash. Not only do they accept cash, but it’s often the preferred payment method for merchants. Even while consumers are shifting to cashless payment methods, many small businesses are hesitant to accept credit cards. Mostly because of the credit card processing fee ‘horror stories’ they have heard from other small business owners.

While there may be some truth to some of these stories, it’s not all bad. Think about it. If it were really that bad, why would any business accept credit cards? There has to be some advantage of doing so, right? Would you consider $7,000 an advantage? We certainly would. For businesses that do not accept credit cards, they are missing out on $100 billion in sales annually – or about $7,000 per business.

That’s a nice chunk of change you could spend on inventory, hiring another employee, or marketing endeavors to help drive sales.

Unfortunately, there are a lot of misconceptions out there about small business credit card processing. They think the immediate cost of credit card processing fees outweighs any long-term benefits. Also, many of them don’t understand how it works, so they choose to avoid it altogether.

If this sounds like your way of thinking, then this blog post is for you. We’re going to give you an in-depth look at how credit card processing works, the fees associated with it, and the benefits it has for small businesses that choose to accept credit cards.

How Does Small Business Credit Card Processing Work?

When a customer uses a credit card to pay for an item, you probably don’t think twice about what’s going on behind the scenes because it all happens so quickly.

In a matter of seconds you know if the transaction is approved or declined.

Considering all the activity that goes into that approval or decline, the quickness of it all it pretty impressive.

Here’s a look at what goes on in the background.

There are five key players involved in the credit card transaction process.

  • The cardholder, who is also the customer.
  • The issuing bank. The bank that issues, the bank card to the cardholder and is also the financial backer and assumes the most risk.
  • The card networks that work with the issuing banks to issue the cards, such as Visa, Mastercard, Discover, and American Express. Some card networks also distribute their own line of credit cards. The most common example is American Express.
  • The merchant, also known as the business owner.
  • The acquiring bank. Also frequently referred to as the ‘processor’ or processing bank. They are the ones that communicate with the issuing banks for the approval or decline of a transaction. The acquiring bank will also acquire the funds from the issuing bank for the amount of the transaction. This is the bank, or sponsoring company such as an Independent Sales Organization (ISO) or Merchant Service Provider (MSP) that is the merchant account provider.

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Now that you know the key players, let’s take a look at the communication process between these entities and what happens when a customer initiates a credit card payment.

The credit card payment process begins with the consumer, who chooses to initiate the transaction using a payment card from the issuing bank.

First, you have the cardholder or customer that has elected to use a bank card from an issuing bank to pay for their purchase.

The card issuer (issuing bank) performs multiple functions, including approving transactions, using the card network to pay the acquirer, providing detailed statements to their customer, and assuming the financial risk from instances of non-payment and fraudulent card use. It is the card issuer that will face the most significant economic risk during the entire transaction process.

On the other end of the transaction, you have the acquiring bank. The acquiring banks are often referred to as merchant banks. They are the organizations that merchants enter into contracts with to set up their merchant account. The merchant account is the service that enables a merchant to accept credit cards and ultimately receive the funds from those electronic transactions.

SEE ALSO: How is ShopKeep Different from Square?

Funds from credit card sales are deposited into a merchant’s account by the acquiring bank. However, it’s not unusual for acquiring banks to have assistance from third-party Merchant Service Providers (MSP), or Independent Sales Organizations (ISOs). These companies and sales organizations help the acquiring banks sell and facilitate their merchant services. They have a direct relationship with the merchant and also handle the customer service aspect of credit card processing.

A business owner who has ever had an issue processing a credit card transaction either at the point of sale, not being funded, or a chargeback dispute, the ISOs and MSPs are usually the first phone call you make.

Once the cardholder presents their card for payment, the transaction information gets passed by the business’s credit card terminal to the issuing bank to ensure there are enough funds in the customer’s account to pay for the purchase.

In between the credit card terminal that is connected to the acquiring bank, there is a third-party entity that is responsible for securely sending the credit card data from the acquirer to the issuer. This in-between layer is called a payment gateway.

Some acquirers have payment gateway technology, and others will use a third-party gateway provider.

Once the transaction information gets to the issuer, they will determine if the transaction is approved or declined. Once the decision is made, the response will go back through the gateway, to the acquirer, and indicate the response on the merchant’s credit card terminal.

The final agents involved in credit card processing are the card networks themselves. Visa, Mastercard, Discover, and American Express are not credit card issuers nor do they offer merchant services. They are merely services that provide a network of communication for electronic payments.

Think of it in terms of cell phone service. Cellular network providers such as Verizon and Sprint provide a network of communication for 3G/4G data that comes in the form of text, voice, images, and video. Consumers like you and I pay a monthly fee to ‘ride the rails’ and use that network and infrastructure.

It is also the network’s job to act as the governing body of a large community of financial institutions. The ISOs and MSPs mentioned earlier also work in unison with the card networks to facilitate credit card payment processing.

One of the essential roles of these card networks is to govern their members, and the practices and processes that form the members’ businesses. They regulate the merchant’s interchange fees, act as the go-between for the acquiring and the issuing banks, and improve the reputation of their brand as a whole – but of course, they do all of this with the aim of making a profit, too.

Are Credit Card Processing Fees Tax Deductible?

This is one of the most commonly asked questions by small business owners looking for information about processing fees. Understanding if credit card processing fees qualify as a tax deduction is essential to helping businesses generate the most profit.

The short answer to that question is, yes. Although we strongly suggest consulting with your accountant on the exact tax laws for your state, city or county, for the most part, the credit card processing fees you’re charged by the merchant service provider are tax deductible.

Of course, there are stipulations. For example, to deduct charges incurred from processing credit card payments, merchants must file their taxes electronically. However, in today’s digital age, this is a very easy hoop to jump through.

Breaking Down Credit Card Processing Fees

Now we get into the best part. The credit card processing fees. You’ve heard about them, you’re probably paying them, but what exactly are all these fees?

Well, generally speaking, the fees are being charged because the entities involved that we previously mentioned are providing you with a service. And just like any other service that you use such as cell phone service, landscaping service, or dry cleaning service, you’re going to pay a fee for what is rendered.

So while there’s an up-front cost to the business owner to cover these fees, remember what we said about most of them being tax deductible – you’ll make your money back at the end of the year.

Rather than just accepting these charges from your credit card company and paying them without question, it’s crucial for businesses to have an understanding of what exactly they’re paying for. As long as you understand what you should be paying in fees you’ll be able to get a more detailed look at the true overhead associated with accepting electronic payments.

Already feeling overwhelmed? Take the pain out of payment processing

Transaction Fees

These are the fees assessed every time a merchant runs a credit card transaction. The most common is what’s referred to as interchange rate or just interchange. Interchange or wholesale fees are determined by both the credit card associations and the credit card issuing bank. Unfortunately, they remain at a constant, and that’s regardless of the provider that you choose.

Therefore, it is not possible to ‘shop around’ for the lowest wholesale fees and rates, as they will be identical no matter which payments provider you choose to sign up with. ISOs and MSPs just pass this cost onto you. There is no markup, and you’ll be able to see these rates as a separate line item on your merchant statement.

On the other hand, service providers charge something called ‘interchange plus.’ Interchange plus is a tiered payment structure or markup, that’s based on a variety of variables including payment volume, business type, average ticket amount (dollar amount per transaction), and if the card was keyed in or swiped at the point of purchase.

The ‘plus’ part is what you’re paying the ISO or MSP for the processing service. These rates are negotiable, within reason, and we encourage you to discuss your options when shopping for the right merchant service provider.

If an eatery has a high volume of in-person credit or debit card transactions with decent ticket averages, you’ll qualify for a discount rate that will lower your transactional fees. If your average ticket is only around $20 and you have a lot of keyed-in transactions from payments taken over the phone for delivery, you’ll pay more per transaction.

The fees are usually a percentage of the total transaction amount, plus a flat fee. For example, you may find that in-store transactions cost you around 1.75% and $0.10 per transaction, while a keyed-in transaction will cost you 2.5% and $0.30 per transaction. So if a customer has $100 worth of services and they would like to pay for them by credit card, of that $100, you’ll be funded $98.15. For the same $100 check, if keyed-in, you’d only receive $97.20.

It is likely that if you choose the right processor, then your fees will be relatively modest. With the wrong processor, however, well you may find yourself in immense financial difficulty.

To make sure you don’t choose the wrong processing services, here are a few things you should look for when selecting your provider.

  • Hidden Fees. Make sure the processor or merchant service provider can give you complete transparency of your fee structure, so you know what you’re paying per transaction as well as any additional service fees. Some processors will do their best to make it as difficult as possible for you to work out exactly how much markup you will be paying by using technical industry terms and offering complex pricing models that would confuse even the most experienced small business owners.
  • Fraud Protection. The ISO or MSP you choose should also offer you fraud protection to help reduce your risk against fraudulent transactions.
  • Quick Access to Funds. Generally speaking, a business owner should see the funds from credit card transactions in their bank account in 24-48 hours. The faster the money comes in, the better your cash flow will be.

It’s important to understand what you’re signing up for before you make your final decision. The markup fees vary from processor to processor, as do the services they offer. Do your research and find the one that works best for your business.

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Flat Fees

In addition to the transactional fees mentioned above, your business may also be charged flat monthly fees as well. They will inevitably vary by name and value, but most of them should show up on your monthly statements and your credit card processing provider should be able to explain them to you before you make the decision to sign up with them.

Terminal Fees

If you’re not using a point of sale (POS) system and you’re just using a basic credit card reader like an Ingenico iPP320, your MSP may charge you a monthly fee to rent or lease the terminal. Our advice to you is, if you can buy the device outright, it will be cheaper in the long run.

Payment Gateway Fees

We briefly mentioned payment gateways before as a third party that connects issuers and acquirers. These are similar to terminal fees, but mostly for online businesses. Every time you make a purchase online, the card data is being directly entered into a payment gateway through an API on that webpage. While they are most common in online stores, gateways are used in payment terminals and POS systems. Some processors benefit from having in-house payment gateways, meaning that these fees will not be charged to the merchant.

POS Software Fees

If you’re using a more sophisticated payment acceptance method such as a point of sale system, your provider may charge you a monthly service fee for the POS software known as Software-as-a-Service (SaaS).

PCI Fees

PCI stands for Payment Card Industry and is a council formed by the card networks to ensure Data Security Standards (DSS). The council sets the standards for compliance and mainly leaves the responsibility of validating compliance of merchants to the payment processors.

The fees are typically charged monthly or as an annual fee by the ISO or MSP. In exchange for these fees, the MSP should provide merchants with regular network vulnerability scans and self-assessment questionnaires.

Statement Fees

These are the fees that are charged to cover the printing and mailing costs of credit card statements and are usually a few dollars a month. It is possible for merchants to bypass these by requesting electronic bill statements from their providers.

Online Reporting

These are online alternatives to fees associated with paper statements and are charged to merchants who decide to view their statements online. Most providers will not charge this kind of fee, and those that do often lump it together with others.

Incidental Fees

While flat fees are fees charged no matter how many credit card transactions go through your merchant account, incidental fees are only charged by the credit card company per incident.

For example, if one of your customers initiates a dispute with their card issuer about a transaction at your business, you as the merchant will be responsible for a chargeback fee.

Fraud is the most common cause of chargebacks. If a customer’s credit card is stolen and the thief makes purchases at your business with that card, once the customer becomes aware of the fraudulent transaction, they are going to call their issuer and dispute the charges, which will then triggers the chargeback process.

SEE ALSO: How to Accept Credit Card Payments – The Ultimate Guide

Voice Authorization Fee (VAF)

On very rare occasions, it is possible that businesses will be required to make a telephone call to a toll-free number to verify information before a transaction is authorized. This only occurs if there are fraudulent indicators associated with the transaction, such as unusually high dollar amount – the issuer may require a voice authorization to complete the transaction. This is generally a rare occurrence, and as such, businesses should not really worry about this fee.

Retrieval Request Fee

Every single time that a customer disputes a charge from your business, it sets into motion the chargeback process. The retrieval request is the first step. This fee covers any expenses that are related to the retrieval request.

Chargeback Fee

After the initial retrieval request, it is possible that the actual chargeback process may be completed, depending on the individual circumstances. If the chargeback dispute is successful, then not only will your business lose money from the sale, but it will also be charged for the process.

Batch Fee

Every time that a business submits a batch of transactions, a fee (also known as a batch header) is charged. A batch is usually sent once a day, at the end of the day, and includes all the credit and debit card transactions that were processed at the point of purchase. They are submitted for settlement and then ultimately funding to the merchant account. Batch fees are minimal, so it shouldn’t be a significant concern.


If there are not enough funds present in a business’s merchant account to cover the expenses associated with running the account, then an NSF (non-sufficient funds) fee will be applied to the account and deducted from the balance when sufficient funds are available.

Surcharge Fee

We saved the best for last. Rather than this being a fee that is charged to the business owner by the processing company, this a fee that the merchant can charge their customers. Thanks for a court settlement that went into effect in 2013, retailers in most states are allowed to add a surcharge fee to Visa and Mastercard credit cards only – debit cards cannot be charged a surcharge fee.

This law varies from state to state and may also differ depending on the contract you signed with the merchant account provider on behalf of the card networks.

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Should I or Should I Not Accept Credit Cards at my Business?

For most small business owners, operations will inevitably start off small and scale up over time. While you might be able to start off only accepting cash, chances are when the business does start to pour in, you’re going to have to adapt your cash only policy.

Research shows that credit cards have become the most preferred method of payment in the United States, regardless of the industry. Some small business owners may be intimidated by the whole process of accepting credit and debit cards as a form of payment. They may believe that the process will be more trouble than it is worth and be confusing, time-consuming, and expensive.

However, it is likely that it is not as difficult as one may think – there are a lot of famous misconceptions about the entire process. Despite what you may read elsewhere, accepting credit cards is fairly easy. It simply requires a willingness to do some research and find a merchant service provider that will assist you in facilitating the process.

Not only is it easier than you may think, but it’s the form of payment your customers are partial to. A recent study found that 78 percent of Americans prefer to pay using a credit or debit card. And not only do they prefer it, but they also tend to spend more when they use plastic. There have been numerous studies that prove overall spending increases and impulse buys increase because plastic isn’t perceived to be as tangible as cash. Cash is real. The more you spend, the less you have in your wallet.

Before investing in a merchant service provider, consider the opinions of your customers. Have they expressed interest in being able to pay via credit? Will they be more inclined to increase their purchases if credit is offered? If the answer to both of these questions is yes, then it is time for your small business to make the transition to accepting credit cards.

How to Compare Credit Card Processing Fees?

The merchant account and payment processing industry can sometimes make it difficult to compare rates and fees, especially if one company is not as transparent as another.

Instead of blindly guessing, it can be more beneficial to get an accurate idea of processing fees for your business by considering a few things. Your business’s processing method such as keyed or swiped transaction can have a big impact on your charges.

Every business and business owner has different levels of associated risk with obtaining a merchant account, and therefore the charges can vary. For example, if you have bad credit or no credit at all, you may be charged a premium.

Similarly, if your business model is considered risky such as gambling, a marijuana dispensary, or a home-based business, you may be charged a higher rate because your business type is at risk of a higher volume of chargebacks.

SEE ALSO: High-Risk Credit Card Processing- Know Where You Stand

It is important to understand the exact services that a provider offers. This will ensure that you comprehend what services you are receiving, and just as importantly, what services you are not receiving. Not all companies provide the same service packages.

Additionally, it pays to examine the contract length and be sure that it is something that you are comfortable with. If for whatever reason you decide to cancel your contract early, then you are likely to be stung with a hefty fee. If your business is allowing credit card transactions, you want to make sure you can accept as many as possible. Visa, Mastercard, American Express, and Discover are amongst the major credit card issuers you want to be able to take in your business.

With approaching merchant account comparison, you should always make sure that you can give an accurate rough estimate of the volume and value of your potential card transactions. The more that you process, the lower your fee will be per transaction.

Finally, having a POS system in place or credit card terminal designed to handle customer data safely and securely should be of paramount importance to any small business owner. Data breaches are increasingly common and can prove to be somewhat costly.

So there you have it. Credit card processing fees for small business broken down into simple, easy to read, and digestible content. We covered a lot of information, and you’re such a trooper for sticking with us. Payment processing and the business of accepting credit card payments can be a very confusing matter for a lot of business owners. We hope that this post has cleared up a lot of myths and has made you a more confident and educated consumer.

Nicole Walters

Nicole Walters

As Content Writer at ShopKeep, a leading iPad Point of Sale System, Nicole Walters leverages her background in communications and her extensive experience in the payment and POS industry to create valuable content that addresses real problems and solutions for small business owners.