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What are Merchant Fees?

Mary McMahon
Updated May 16, 2024
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Merchant fees are fees associated with processing credit cards. These fees vary depending on the type of business, the bank it has a merchant account with, and the credit cards accepted. Consumers are often unaware that when they make purchases by credit card, the merchant does not receive the full amount, thanks to the deduction of merchant fees. This is one reason why businesses which accept credit cards are sometimes forced to raise prices, as a small percentage on each purchase can add up to a major expense over time.

A number of different fees fall within the umbrella of merchant fees. When someone opens up a merchant account, an application fee must generally be paid. In addition to this, the merchant will need to pay an annual fee to maintain the account. Every time a credit card is run, the merchant is charged what is known as an interchange fee, the fee for the merchant's bank to communicate with the issuer of the credit card to authorize the transaction and get the money. Additionally, the merchant's bank charges a processing fee for each credit card transaction.

Per transaction fees may be based on a percentage of the transaction, or they may be flat fees. Some merchant banks combine these two methods, charging a base flat fee per transaction and adding a percentage fee. This ensures that they make a minimum amount with every transaction. Merchants are also charged “batch fees” which are associated with bundling their transaction information and sending it in a batch to the bank for processing. Until transactions are batched, they do not actually go through, with the transactions being considered pending, which is why it sometimes takes a few days for credit card charges to show up on customer accounts.

Different credit cards have different merchant fees, depending on the deals negotiated with banks which handle merchant accounts. This is why merchants usually do not accept all credit cards, because their bank either does not have a deal with a card issuer, or it does but the merchant fees are too high for the merchant to afford. Fees can also vary depending on whether people are using regular or rewards cards. Debit cards, which are handled differently, tend to be less costly to process.

Merchant fees are constantly on the rise, and periodically there are protests among groups of merchants who argue that the pricing for credit card processing is unsustainable. For members of the public, the reverberations of these protests may be felt when businesses stop accepting credit cards, institute a credit card minimum (even though this usually violates the merchant agreement), start charging more for their products, or start offering a “discount” to people who pay cash as a way of getting around restrictions which bar businesses from charging extra for credit card transactions.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By anon992835 — On Oct 06, 2015

Sounds like greedy theft. Everything is automated today and all fees should be non existent.

By Terrificli — On Mar 18, 2014

Smaller retailers might be out of luck because they don't have a lot of bargaining power. A couple of years ago, Walmart, Costco and some other large retailers got together and protested higher fees proposed by Visa and MasterCard. Does anyone know if they were successful -- did the credit card companies back down or did the retailers reach an agreement with Visa and MasterCard?

By Markerrag — On Mar 17, 2014

Retailers may get together and complain about higher merchant fees, but how often are those attempts successful? The credit card companies have them over a barrel -- they can lose business if they ban cards from certain issuers over higher merchant fees.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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