Credit and debit card fees and how to reduce them

Does your business accept credit or debit card payments? If so, you’re surely paying card charges. From transaction fees to monthly service charges, there are several merchant fees for credit and debit cards to be aware of.

This article will walk you through the different types of card charges. And if you’re looking to reduce them, open banking can help. Read more about Pay by bank to find out how.

What are merchant fees for credit and debit cards?

Merchant fees refer to the charges businesses pay when a customer makes a card payment. The amount will vary widely depending on several factors, including:

• the card network used (such as Visa, MasterCard and Amex)

• the merchant’s acquirer (ie the business that processes payments on behalf of the merchant)

• the method of payment (for example, was the payment made over the phone or by mail?)

• transaction volumes and values

In addition to per-transaction fees, credit and debit card charges can include additional monthly service charges and processing fees. The high number of different transaction fees is down to the complexity of the multi-party card scheme, which involves at least seven different parties.

Types of credit and debit card processing fees

Credit and debit card merchant fees include a combination of monthly or one-off payments and transaction fees. These can include the following.

Merchant Service Charge

A Merchant Service Charge (MSC) or processing fee is a transaction fee typically charged as a percentage of each sale. The rate will depend on the type of card used, with commercial credit cards costing more than debit cards.

Interchange fees and scheme fees are included in this category and are charged to merchants directly.

Payment gateway fees

Payment gateway fees might be charged at a flat monthly or per-transaction rate. Fixed rates typically include a standard number of transactions.

If your business handles online card payments, you’ll need a payment gateway to handle the transaction. Gateways act as a third party to communicate between the cardholder’s bank and your merchant account.

Authorisation fees

Authorisation fees cover the cost of card authorisation. This refers to the process of testing the customer’s card details to make sure they are valid.

PCI compliance fees

PCI compliance fees cover the storage and safe transmission of customer data, both crucial security and compliance measures. All UK businesses accepting card payments must comply with the Payment Card Industry Data Security Standard (PCI DSS).

Chargeback fees

Chargeback fees are costs incurred when a transaction is reversed. Customers might request a chargeback for transactions they don’t approve of or recognise, and the bank often sides with the customer.

Card-not-present fees

Card-not-present fees apply to remote transactions that use card details instead of the card itself. If a customer pays by phone or online, the bank takes on greater fraud risks and therefore charges a higher transaction fee.

Minimum Monthly Service Charge

A Minimum Monthly Service Charge (MMSC) ensures that card processors turn a profit. The MMSC acts as a safeguard for the processing provider for periods with low sales. The charge only applies if your monthly transaction fees haven’t met the minimum threshold.

Administration costs include fees for account set-up and early termination.

How much are credit and debit card fees?

Now that we’ve covered the various types of credit card charges for businesses, how much does each cost?

While these will vary by provider and card type, here’s a rough breakdown of what to expect for each transaction:

• Merchant Service Charge (MSC): anywhere from 0.25%–3% depending on card type and card issuer

• Interchange fees: 0.2% for debit cards and 0.3% for credit cards

• Card-not-present transaction: varies, but will be more expensive than other transactions

• Minimum Monthly Service Charge (MMSC): £5–£25 per month (when a minimum threshold isn’t met)

• Online payment gateway fees: varies, but typically £20–£75 per month for hosted checkout pages

• Authorisation fees: 0–4.5p per transaction, depending on the processor

• PCI compliance fee: £2–£20 per month

• Chargeback fee: typically £15 per customer chargeback

• Setup fee: up to £150 at the start of any contract

On average, you could expect to pay anywhere from 0.4% to 3.4% of each transaction’s value in overall fees. Please note that these are rough estimates. Charges vary widely according to card type, payment type, industry and the volume of transactions you process.

Typical costs of fees from major credit card companies

When merchants accept a Visa or Mastercard payment, the card schemes will charge them a MSC that will include interchange and scheme fees. Here are the rates for these fees:

Source: merchantsavvy (October 2024)

Typical costs of credit card processing fees

Payment processors will also charge merchants to facilitate credit and debit card payments. Here are the rates for a few prominent acquirers:

Source: Forbes (October 2024)

Can I charge card fees to customers?

No. Since 2018, it has been illegal for businesses to offset processing fees with surcharges added at the checkout stage.

How can I reduce my credit and debit card processing fees?

For enterprise businesses, credit and debit card transaction fees can really hurt chip away at the bottom line. Here’s how you can minimise the impact.

1. Reconsider your pricing model

Credit and debit card processing isn’t a “set it and forget it” arrangement. A pricing model that may have been affordable at one point can become cost-prohibitive as your business grows and changes.

That’s why you should review your agreements regularly to find a structure that works best for your needs. Today, many processors offer different models beyond flat-rate and tiered pricing, allowing enterprise businesses with higher transaction volumes to reduce their costs.

2. Look for bulk processing discounts

Businesses with high monthly transaction volumes can usually negotiate lower rates with merchant services providers. You might be able to lock in rates of under 1% depending on your business type.

3. Embrace alternative payment methods

Card networks rely on a host of intermediaries that each charge their own fees. In response, a host of alternative payment methods have emerged, streamlining these processes and reducing fees for merchants.

Adding additional payment options can help reduce your reliance on cards, reducing fees and giving you greater leverage over processors. Just be careful with the methods you select. Some, like container wallets, can still rely on card schemes, increasing fees rather than reducing them.

3. Diversify your service providers

Offering multiple different payment methods can help you mitigate fees and get the best rates. The same principle applies with merchant service providers. Working with multiple providers can give you leverage in negotiations.

4. Avoid higher-risk transactions

Card processors charge higher fees for card-not-present sales that involve high levels of risk. Consider moving away from mail or phone orders that come with this added risk.

Eliminate credit and debit card charges entirely

There’s only one way to eliminate costly card processing fees altogether: steer your ecommerce customers away from card payments to more cost-efficient alternative payment methods like Pay by bank.

Powered by open banking, Pay by bank is a great alternative for businesses looking to reduce their reliance on card payments. The average fee for Pay by bank is less than 1% of the transaction value, and that is the only charge applied to the transaction.

With Pay by bank, businesses eliminate chargebacks and interchange fees entirely. And with instant settlement, Pay by bank is faster and easier than cards. Strong customer authentication (SCA) also comes baked into the payment experience, reducing the likelihood of fraud dramatically.

Read more about how Pay by bank can help you avoid costly credit and debit card fees.