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How Payment Processors Charge Merchants

You'll need a payment processor to take credit and debit cards for your small business

Let’s talk about what business folks hate: the cost of doing business. For many businesses, one of the biggest costs of doing business is the cost of taking payment cards. You’re pretty much forced to let customers pay with a card, but each payment costs you money to process. You usually can’t pass that cost down to your customers. So, it’s really important to find a payment processor that doesn’t overcharge you.

In our first intro article on payment processing, we talked about the mechanics of how credit cards, debit cards, and other payments work. We highly recommend you read through at least the how credit card processing works and how debit card processing works articles. They will help you understand some of the industry terms we use in this article.

In this second intro article, we’ll go into the different pricing models the payment processors use to charge merchants. We’ll also link to more detailed articles where we highlight a few processors. But, because every business is different, there is no “best” credit card processor out there. Even when your business stays the same, depending on what growth stage your business is in, you might need different processors to get the best value.

But, before we get to all that, we start with what we consider is the first and most important rule in finding a payment processor.

Rule One in Finding a Good Payment Processor: Never Sign a Long-Term Agreement

Years ago, in order to sign up with a payment processor, you’d have to sign a long-term agreement. A three-year term is pretty typical. But, the industry is infamous for salesfolks who make everything sound wonderful just to get you to sign up (they work on commission). Afterwards, you discover things are not so great.

Problems with Multi-Year Processing Agreements

Once you sign the long-term agreement, whether you discover that there are less expensive processors out there or your processor provides horrible customer support, you’re stuck with that processor. And you might be stuck with them for a long time.

These multi-year agreements often are difficult to cancel. You either have to have a very specific reason that’s clearly set out in the contract, or you have to wait until the agreement naturally ends. And, even when the initial three-year term ends, the agreement automatically renews. To properly cancel the auto renewal, you’d have to give them written cancellation notice way in advance.

Fortunately, many processors have learned that customers hate agreements like this. So, they’ve stopped making you sign long-term agreements. (You’ll still have to sign an agreement to govern the other aspects of doing business with them.) They put their pricing and reputation where their mouth is. You stay with them for as long as you’re happy with them.

And that’s the type of processor you want. So, don’t sign a long-term agreement if you can help it.

Beware of the Equipment Lease Agreement

Some of these processors will talk you into leasing, instead of buying, the card processing equipment. Try to avoid that.

Often, an equipment lease agreement is separate from the processing agreement. So, cancelling one does not cancel the other. To get out of an equipment lease agreement early, you often have to pay a lump sum right away. And, even if you don’t get out early, at the end of the lease, you might have paid several times as much for the equipment than if you had simply bought the equipment outright.

Some processing equipment like a full point-of-sale system can get expensive. Try to finance these with a bank loan instead. Or you might be able to make-do for a little while with a tablet and an inexpensive card reader.

One Possible Exception: High-Risk Processors

Now, there are exceptions to the never-sign-a-long-term-agreement rule. The most notable one is with high-risk processors.

We’ll go over the reasons why this is so in the High Risk Merchants section below. But, if you’re a high- risk merchant and your processor requires you to sign a long-term agreement, try to negotiate and make the contract term as short as possible. But you might just have to deal with a long-term agreement for a while.

Pricing Model for Third Party Processors

In an earlier article, we explained the mechanics of how third-party processors work and how they differ from traditional processors. In this section, we will focus on how third-party processors charge merchants.

Types of Payments Third-Party Processors Can Help You Take

A typical third-party processor can help you process both credit cards and debit cards. Some will also help you take ACH, eCheck, or even wire transfers, for a different fee.

Third Party-Processors Usually Won’t Work with High-Risk Merchants

Most third-party processors won’t work with high-risk merchants. This is because the third-party processing business model depends on keeping the risk of chargebacks low. And, almost by definition, high-risk merchants tend to have higher than normal chargeback rates.

But, as of this writing, at least one third-party processor (Square) is dipping its toes into the high-risk category and are taking CBD merchants.

How Third Party-Processors Charge Their Merchants

Third party processors tend to charge a more-or-less uniform price. They will have one charge for online purchases and another charge for in-person purchases. The online purchases tend to be higher because there’s a higher risk of fraud for online purchases (easier for people to use stolen cards, for example).

The charges are in the form of:

  • Percent of total sale price + set fee (e.g. 2.6% + $0.10 per transaction)

As explained in our how credit card processing works article, credit card processing fees vary quite a bit. Exactly how much the charge varies often depends on the purely random act of which card your customer decides to use to pay you. A reward credit card tends to cost most to process, followed by a regular credit card. Debit cards tend to cost the least.

A third-party processor evens out these charges and bills you on one rate. So, sometimes, they make more money per payment and other times they make less.

Well-Known Third-Party Processors

Some well-known third-party processors include:

  • PayPal
  • Stripe
  • Square

However, some shopping platforms like Shopify and Etsy also have their own payment processing services using the third-party processing business and pricing model. (Other platforms like Patreon simply connect you to one of the big third-party processors.)

For more information on pricing, we took a closer look at the three big third-party processors listed above and compared and contrasted their offerings. Here’s the link to the article.

Third Party Payment Processors and Their Typical Charges

Should Every Business Use a Third-Party Processor?

There are advantages and disadvantages to the third-party processing pricing model. For businesses that are just starting out and expect low volume sales in the beginning, third-party processors allow you to sign up fast and start taking payments almost right away. As well, you won’t have to understand very much about the payment processing industry or deal with their jargon. As long as you don’t have a high chargeback percentage, you and your third-party processor will get along just fine.

But, once your business grows, you might be able to save some processing costs if you move to a merchant account provider. A simple rule of thumb is that, if you process $10k or more per month, you should be able to save costs if you move to a traditional merchant account provider.

Merchant Account Provider Pricing Models

We explained how merchant account providers work in our how credit card works article. Merchant account providers operate on many different types of pricing models. However, some pricing models are prone to abuse and you often can be surprised by unexpected charges.

Four Types of Payment Processing Pricing Model

Broadly speaking, there are four types of pricing models used in credit card processing. These are:

  • Flat rate
  • Interchange plus
  • Membership
  • Tiered

Third-party processors usually offer flat rate pricing.

Some very large merchant account providers offer tiered pricing. In tiered pricing, credit card payments are broken into three buckets: qualified, mid-qualified, and non-qualified. Qualified payments have the lowest rates, and then the mid-qualified. Non-qualified payments have the highest rates.

Here’s how each payment gets categorized into each bucket:

  • Qualified: In person payments of debit cards and non-reward credit cards
  • Mid-Qualified: In person payments of membership reward cards, loyalty cards, and keyed-in payments
  • Non-Qualified: Online payments and payments using corporate cards, high-reward reward cards, and international cards

Tiered pricing are often prone to abuse. The payment processor’s salesperson will present you with qualified rates. But, today’s customers like reward cards and online payments. This means you’ll often be paying the mid-qualified and non-qualified rates.

We think membership and interchange plus pricing are the most fair. At the very least, because processors using these models tend to publish their pricing on their website, you’ll at least be able to do an intelligent comparison before you decide on your new processor.

Look for Merchant Account Providers Offering Membership or Interchange Plus Pricing

The three pricing models we recommend are:

  • Membership
  • Interchange plus
  • Combination membership and interchange plus

All these models are based on interchange fees, which are the fees the credit card networks and debit card networks charge to process each payment from a payment card.

Interchange fees look like: percent of total sale + set fee.

As nearly as we can tell, the percent of total charge goes to the risk the networks and banks take when helping you process the payment, and the set fee goes to paying for the computer network.

Typically, with a membership model, you pay a monthly subscription fee and then the interchange fee for every card processed. If you process more than your subscription tier, you’re moved up to the next tier and charged the subscription fee for that tier.

With the interchange plus model, you pay the interchange fee plus the processor’s markup fee for every card processed.

With the combination model, you pay a smaller monthly subscription fee, the interchange fee, and a smaller per card processor markup fee.

The credit card processor’s fee also looks somewhat like the interchange fee. It’s expressed as percent of total sales + set fee.

Your total credit card processing charge usually looks like:

  • Per transaction: Interchange fee + credit card processor fee
  • Subscription: set fee per month

Which Pricing Model and Which Processor is Best Depends on Your Business

If you think all the pricing models sound complicated, it can be. This is one of the reasons that it’s hard for a business with less than $10k/month processing volume to figure out if a merchant account provider can save them money. There simply isn’t enough sales data to analyze for trends for your specific business.

However, if you do have more than $10k/month of credit card payments, switching to a merchant account provider could save you money. The pricing model best for your business often depends on your typical clientele and the type of payment cards they prefer to use.

We have compiled a list of five merchant account providers that use interchange plus pricing, the membership model, or a combination of both. These processors are not the only ones out there, but each on our list is a reputable provider of service. Here’s the list:

Five Great Merchant Account Providers for Small Businesses

Most Merchant Account Providers Can Help You With ACH and eCheck Processing

Most merchant account providers can also help you with ACH and eCheck processing. These services are charged differently. Some will charge a flat fee for each transaction. Others will have a set fee for a batch of transactions. Yet others charge a percentage + flat rate for each transaction, like how credit and debit card transactions are charged.

If taking ACH or eCheck payments are important to you, we also go over these pricing in the article linked above.

How High Risk Processors Charge Merchants

So, yes, we said at the beginning of this blog post that you should never sign a long-term contract with a payment processor. But we also said that an exception is high-risk processors.

A high risk processor, as the name suggests, works with high risk merchants. Traditionally, high risk merchants include merchants in industries such as:

  • CBD
  • Tobacco/Vape
  • Liquor
  • Certain financial services (e.g. loans)
  • Firearms
  • Nutraceuticals
  • Pharmaceuticals
  • Internet gambling
  • Adult-oriented services

With these industries, refund and chargeback rates tend to be high. Many acquiring banks think businesses in these industries are a high risk to do business with. So, they tend to not want to work with these businesses. Of the acquiring banks that will do business with high-risk merchants, the banks tend to charge a higher fee to cover their risk.

High risk processors usually do a lot of legwork to help high risk merchants find the right acquiring bank that will work with them. If they can’t find an acquiring bank, they’ll often help you set up eCheck merchant accounts so you can take electronic payments.

Because of the time and work the high risk processors have to do to set up merchant accounts for their merchants, they often require a long-term agreement with them.

There are quite a lot of high risk processors out there. In the article below, we recommend a few of them that we rated before (while working as a payment processing freelance writer).

Five Great High Risk Processors for Small Businesses

Wire Transfer Pricing

Most banks can perform wire transfers. In fact, with some banks, if you have a bank account with them with a sufficient minimum balance, they can perform domestic transfers for free.

Some banks charge a fee for both sending and receiving wires, but others charge a fee only for sending. We have a chart in our Top 5 US Banks article that gives some details (scroll down in the article).

However, you don’t have to go to a bank to make a wire transfer. There are independent companies that can make the transfer for you, typically at a lower fee than a bank.

We discuss a few of these companies in our more detailed article:

Wire Transfer Services for Small Businesses


We want to touch on eWallets here, even though they don’t have much to do with payment processing. eWallets are completely free for cardholders and merchants to use. Just because your customer pays with Apple Pay or Google Pay does not mean you have to pay an extra processing fee.

Card Information in eWallets are Tokenized for Security

Most eWallets have multiple functions. In addition to storing credit cards, they can also store debit cards, some forms of ID, and even public transportation tickets. With at least credit and debit cards, the card information in the eWallet isn’t your actual card information. Instead, it’s a tokenized version of the card.

Tokenization is a type of encryption. In fact, it’s a rather primitive type of encryption. Basically, when you put a card in your eWallet, the app contacts the card’s network to request a new, more-or-less randomly generated number for the card. Only the card network can match the new number to your actual card. And only the new number is stored in the eWallet.

Without going into too much technical detail, the Apple and Samsung wallets keep the tokenized card in something called a secure element in your phone. Google keeps it in the cloud. Either way, the tokenized card is highly encrypted.

The Tokenized Card Adds an Extra Step in the Standard Credit Card Processing Workflow

When a person uses an eWallet to pay, the tokenized version of the card is sent to the appropriate card network. The network matches the tokenized number to the real card number, and then sends the real card number to the issuing bank. The rest of the process follows the normal credit card processing workflow.

eWallet payments can be used for online and in-person purchases. For online purchases, a merchant must first integrate the eWallet into the checkout page. Many platforms like Shopify have already done so for you, so the process isn’t too complicated. For in-person purchases, you’ll have to have an NFC-capable card terminal and your payment processor has to have activated the appropriate software for you. There shouldn’t be an extra charge for this activation.

And there shouldn’t be an extra charge for payments made through an eWallet versus a payment made with the actual card.

The Cost of Payment Processing Can be Difficult to Predict

Now that we’ve gone over some payment processing pricing models, you can see that the cost of taking payments is inherently difficult to predict. Even after you’ve taken card payments for a while and have some data to analyze, it can still be confusing to figure out exactly how much your payment processor is charging you each month.

Our best advice is that, since it’s hard to predict how much your costs are for payment processing, when you price your goods or services, add a high enough margin to absorb these payment processing costs. The reality is, while it is sometimes possible to pass these costs down to your customers, most of the time, it’s difficult to impossible to get them to pay extra when they pay with a credit card or debit card. Your only choice is to add it to your margin and make sure you’re still making a comfortable profit after processing charges.

And don’t forget to add refund and chargeback fees when you calculate your cost of doing business. These can add up quickly too.

Next Up: The Future of Payment Processing: BNPL and Cryptocurrency

For our next intro article, we’ll be exploring the future of payment processing. We want to talk about what some of the fintechs are doing to simplify payment processing. Specifically, we want to give an overview to the buy-now-pay-later (BNPL) business model.

As well, we want to give an intro to cryptocurrency. We’ll talk about what cryptocurrencies are and whether they’re of any use now or in the future.

Here’s the link to the article:

The Future of Payment Processing: BNPL and Cryptocurrency

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

Questions? Comments?