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The Complete Guide to Merchant Account & Credit Card Processing Fees

Merchant account providers and processors charge a variety of fees as part of the process. In order to successfully accept credit cards as a form of payment, you need to know about all those fees, how they work with each other, and whether or not they're negotiable. This guide will explain everything you need to know about processing fees.
#1 - Interchange Fees Explained
Whenever a customer uses a credit card to make a purchase from you, two entities take a fee: the bank (or other financial institution) that issued the credit card and the merchant account provider that enables your acceptance of that credit card. The amount each party charges is called an interchange fee.
Merchant account providers (like Elavon, TSYS Merchant Solutions, Chase Paymentech, etc.) act as the middle man between banks and businesses. They're the ones that set up the merchant accounts through which credit card transactions are processed, but they don't issue credit cards themselves. Instead, your business is linked to one or more card issuing banks through the merchant account.
Banks are just like they sound -- financial institutions that issue credit cards to customers. When a customer makes a purchase using their Visa, MasterCard, American Express, or Discover card, the transaction is approved by the bank that issued their card. For each transaction, they pass along two fees: the interchange fee and the assessment fee.
#2 - Interchange Fees by Card Type
There are four fees that make up what's called an interchange fee: acquiring, discount rate, mid-qualified rate, and non-qualified rate. Not only do each of these fees apply to different card types, but they also depend on whether or not certain conditions are met. To show how this works, let's look at the most popular card type for small business owners: Visa.
Acquiring Fee (Issuer Pays)
When a customer uses their Visa to make a purchase from your business, you pay two fees to the issuer of that credit card (the bank that issued the card). The first of credit card processing fees is called an acquiring fee or interchange fee and it's paid to the issuer for facilitating the transaction.
The rate you're charged for this fee will vary depending on several factors, including: your business sector (businesses in certain sectors like retail and restaurants pay more), your average transaction amount, and the method of processing the credit card. This fee is paid to the issuer for each transaction, regardless of whether or not it's approved.
If you're curious about rates, check out our complete guide to Visa interchange fees.
Discount Rate (Issuer Pays)
The second fee associated with transactions made with a Visa credit card is the discount rate. If you're not familiar with how this fee works, read on!
The discount rate is the rate you pay to the issuer for each transaction that's approved by them. This rate varies between industries and can also depend on whether or not certain conditions are met (like if your business uses keyed transactions).
Mid-Qualified Rate (Issuer Pays)
The mid-qualified rate is a special kind of Visa interchange fee that only applies when certain conditions are met. When a transaction meets specific criteria, it's considered "mid-qualified" and the issuer pays a discounted fee accordingly. For example, if you swiped a customer's credit card and entered the full number into your point of sale system, this would be considered a mid-qualified transaction.
When you process a mid-qualified transaction with a Visa, the issuer pays half of what they would if it were an unqualified or non-qualified transaction (we'll get to those in just a minute).
Non-Qualified Rate (Merchant Pays)
The fourth and final Visa interchange fee category is the non-qualified rate. When specific conditions are met, a transaction made with a Visa will be considered "non-qualified." If your business process these kinds of transactions, then you'll have to pay the full amount of the interchange fee instead of getting a discounted or even free rate (depending on what your merchant agreement says).
The parameters that make a transaction non-qualified vary between credit card companies and types, but there's one factor you can count on: it has to do with something called an "offline authorization." This process is reserved for businesses that have legacy POS terminals without the ability to process card-not-present transactions.
Now that you know what each of these fees are, let's look at why credit card companies charge them in the first place.
#3 - Why do Credit Card Companies Charge Interchange Fees?
When it comes down to it, credit card companies are using credit card processing fees to make money, but they're also using them to encourage certain kinds of card use. Retailers, for example, are more likely to accept expensive cards that come with high merchant discount rates because it allows them to charge their customers more.
On the other hand, banks want you to swipe your credit card as many times as possible, even if that means you end up paying a lot of money.
For this reason, it's important to know what each interchange fee is used for and who pays them because it'll help you choose the best credit card processing company for your business.