Everything you need to know about credit card processing fees

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For small business owners, accepting credit cards as a form of payment seems to be a necessary expense in the modern age. According to the Canadian Bankers' Association, "the majority of Canadians use their credit card as a method of payment rather than a means of borrowing," signalling a years-long pivot toward credit card usage, digital payments, and e-commerce. (Canadians, like most people, also love the points and perks that credit cards can offer.) It's more affordable too: In 2020, the Canadian government lowered the average cost of credit card transaction fees from 1.5% to 1.4% per transaction over the next five years. The estimated annual net savings for small businesses was $250 million!

Accepting these forms of payment is key for small businesses, building consumer trust and bringing more customers through your business' (physical or digital) door. Yet, credit cards can cost more to process than cash or debit cards. So, how much are credit card processing fees, what are the different types of fees, and how can one offset them? Read on to learn more.

Common credit processing fees

Here's a rundown of typical credit processing fees you'll likely come across:

Payment processing fees
Service fees charged by your payment processor (also known as a merchant acquirer) for the credit card transaction services provided. If you set up a daily billing cycle, then your processing fees will be debited every day and you will receive a daily statement. Similarly, if you set up a weekly or monthly billing cycle, then your processing fees will be debited at the end of that term and your activity will appear on your next bill.
Interchange fees
Interchange fees make up the lion's share of credit card processing fees. These fees, paid by merchants, flow through card associations (i.e Visa^®, Mastercard^® or American Express^®) and are, ultimately, paid to the card's issuing bank. Interchange fees for purchases made online or over the phone are higher than in-person purchases. That's because these types of transactions pose a higher security risk. As noted on the Chase website, "card-present" environments like stores are lower risk, due to the fact that the cardholder is face-to-face with the merchant with their physical card.
Assessment fees
Also known as brand fees, these charges are small fees (PDF) from card associations (Amex^®, VISA^®, Discover^®, or Mastercard^®). They're often relatively small, ranging from 0.08% to 0.10% of monthly transactions.
Terminal fees
If your small business has brick-and-mortar locations, you'll need a POS system to handle the credit card payments. In Canada, most merchants rent their terminal from their processor.
Payment gateway fees
If you have an e-commerce business, you'll be charged with a payment gateway fee, which is to link your merchant account to your digital shopping cart. Payment gateway fees may be monthly.
Incidental fees
Incidental fees aren't regularly occurring or standard fees. Rather, your small business will be charged such a fee in the case that a specific event happens, like a disputed transaction (also known as a chargeback), insufficient funds, or if you don't meet your monthly minimum requirements. There is also usually a per-incident fee.

Typical costs per credit card transaction

So how much do fees generally cost per transaction in Canada? Let's take a look at how the fees stack up, and how to calculate the credit card processing fees from a credit card processing statement.

The good news is that in recent years, Canadian interchange fees have generally seen a decrease. More recently, in 2020, the federal government and credit card companies worked out a five-year deal to lower the average cost of credit card interchange fees.

As is evident, a 0.1% decrease per transaction is substantial, particularly given the fact in Canada, there were 76.2 million Visa^® and MasterCard^® credit cards circulating as of December 2021.

As emphasized by the Department of Finance Canada, a decrease in interchange fees is "good news for Canadian businesses that accept credit cards, and good news for Canadian consumers. With lower interchange fees, businesses will be able to save money that they can use to invest, grow, and create more jobs — an important part of strengthening and growing the middle class."

Here are the typical ranges for the different credit card processing fees:

Interchange fees: 1% to 4% per transaction
Processor (or merchant acquirer) fees: 1.43% to 3.5% per transaction (depends on the processor)
Assessments fees: 0.08% to 0.10% of monthly transactions
Payment gateway fees: $25 to $50 per month (+ $0.10 to $0.25 transaction fee)
Terminal fees: $25 to $45 per month for wired or desktop devices (wireless devices may cost more)
One-time activation fee: $0 to $300

Keep in mind, transaction fees that occur online or over the phone may be higher than in-person transactions because they typically pose a higher security risk.

How to calculate credit card processing fees from a statement

Trying to figure out how much you're paying in credit card processing fees from a statement may be a bit overwhelming, as it's not typically intuitive. When looking at a credit card processing statement for your small business, to determine credit card processing fees, you'll want to figure out the effective rate.

Calculating your effective rate is a simple way to cut through the complex nature of credit card processing and gauge how your fees measure up to your profits. It's particularly useful if you find yourself getting lost in percentages and add-on fees.

The formula is as follows:

Effective rate = (total fees charged) divided by (total amount processed), multiplied by 100

For example, let's say your sales last month totalled $50,000, and your credit card processing fees totalled $3,000. Using the above formula:

3,000÷ 50,000 × 100 = 6
Your processing fee is 6%.

You may be surprised to see that your effective rate is higher than the initial processing fee offered by your provider. That's normal, as your effective rate is an overarching, comprehensive number that boils down all your processing fees (transaction fees, markup fees, assessment fees, etc.) into a single, digestible calculation. Be sure to log how your effective rate measures up to your profits every month and see how it impacts your bottom line.

Different pricing structures offered by payment processors

Besides looking at the common credit card transactions, let's also look at the different pricing structures offered by payment processors:

Flat pricing
Also known as blending pricing, flat pricing is a pricing structure wherein your small business pays a percentage of the transaction plus a flat fee. Flat pricing is used by major processors across the board. For example, the rate might be 2.6% plus 10 cents for contactless payments.
Tiered pricing (also known as MDR)
With tiered pricing, the charge depends on what kind of credit cards you accept and the type of transaction. There are three main types of tiers:
- Qualified: According to the Financial Consumer Agency of Canada, qualified rates are charged for transactions that are eligible for the lowest merchant discount rate for that category of card, under the terms of the merchant's contract. Generally these are point-of-sale transactions involving a PIN to verify the cardholder's approval of the transaction.
- Non-qualified: Although this is a rarity, payment processors may charge a non-qualified rate for remote transactions, like telephone orders, or other exchanges that do not meet the criteria for the lower qualified rate.
- Mid-qualified: These rates fall between the two described above, and typically occur when customers utilize credit cards with some rewards programs, or manually enter their card numbers.
  
  Credit card processing fees that fall under "qualified" typically have the lowest rates, while fees that are of the non-qualified category typically have the highest rates.
Interchange-plus pricing
Interchange-plus pricing is usually the least expensive option. However, the charges can vary greatly and depend on the card network, type of card, and the way in which the card is processed. The variability of rates for each transaction can be confusing for small businesses when trying to reconcile their processing fees.

How you can lower credit card processing fees for your small business

To help you save on the costs of credit card processing fees for your business, which can quickly add up depending on the number of transactions and your sales volume, consider employing the following strategies:

Minimize risk of chargebacks

As the merchant, your small business may get hit with a chargeback fee when a customer disputes a given transaction and asks the credit card to undo the charge so they get their money back.

The more chargeback fees you incur, the more it hurts your business. You lose a sale and pay chargeback fees, and your processing fees can end up costing more because you're seen as a higher risk to banks.

To avoid chargebacks, set a clear refund or return policy and make your contact information highly visible on your website and social media platforms. Also, add detailed descriptions and thorough information about your products, services, or anything else that the customer can expect. To reduce chargeback fees, address customer complaints promptly. You can also use contactless and chip card readers which reduce fraud.

Review your statements regularly

Aim to look over your statements regularly to check for any changes in fees or to spot any inaccuracies. Credit card networks are required to give at least 90 days' notice of any new fees, or changes in fees. But if you don't look over your statements regularly, you may miss announcements. Also, processors do change their fees, so you'll want to review every quarter or every six months to monitor any changes in fees.

The good news is that all merchant-processor agreements must include a cover page with a fee disclosure box. The payment processor may also include any other fees, such as administration fees and monthly minimums. This information is meant to be easy to find.

Conclusion

Saving on operating costs can free up money to scale and grow your business. Knowing about the different credit card processing fees and payment structures is a great way to take control of your finances and project business growth month over month.