Credit and debit card fees and how to reduce them

Does your business accept credit or debit card payments? If so, you’ll be 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 how to reduce them.

What are merchant fees for credit and debit cards?

Merchant fees refer to the charges paid by the business 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:

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 costlier than debit cards. Interchange fees are included in this category and are charged to merchants directly.

Payment gateway fees might be charged at a flat monthly rate or per transaction. 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. It acts as a third party to communicate between the cardholder’s bank and your merchant account.

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 cover an important security feature. All UK businesses accepting card payments must comply with the Payment Card Industry Data Security Standard (PCI DSS). This ensures that customer data is stored and transmitted safely.

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

Card-not-present fees apply to card-not-present transactions. If a customer pays by phone or online, the bank takes on greater risk, therefore charges a higher transaction fee.

Minimum Monthly Service Charge (MMSC) ensures that card processors turn a profit. The MMSC acts as a safeguard for the processing provider for months 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: 1–3p per transaction

• PCI compliance fee: £2.50–£5 per month

• Chargeback fee: £10–£20 per customer chargeback

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

• Cancellation fee: typically £115 for early cancellation

On average, you could expect to pay anywhere from 2% to 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.

Can I charge card fees to customers?

No. While UK companies used to be able to pass on the cost of card payment processing to their customers, the rules changed in 2018. It’s now 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?

Credit and debit card transaction fees can really hurt your bottom line. So how can you minimise the impact?

1. Shop around to find the best rates

There’s a wide range of transaction fees. Administrative costs like set-up fees can often be avoided entirely with the right provider.

2. Read the fine print

Some credit and debit card processors will charge fees for early termination or transaction volumes above your agreed-upon monthly rate. Be sure you understand the details of any contract before signing up.

3. Look for bulk processing discounts

Businesses can find the cheapest rates through merchant accounts processing high volumes of monthly sales. You might be able to lock in rates of under 1% depending on your business type.

4. Look for flexible pricing

While your business may not currently be processing high volumes of sales, you never know what’s around the corner. Look for merchant account providers offering schemes designed to grow with your business.

5. 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.

Instant bank transfers, powered by open banking, is one option for businesses looking to reduce their reliance on card payments. The average fee for an instant bank transfer powered by TrueLayer is less than 1% of the transaction value, and that is the only charge applied to the transaction.

With instant bank transfers, businesses eliminate chargebacks and interchange fees entirely. And with instant settlement, open banking payments are faster and easier than they would be with cards. Strong customer authentication (SCA) is also baked into the payment experience, reducing the likelihood of fraud dramatically.

Find out how open banking can help you leave behind credit and debit card transaction fees.