Credit card processing fees are an essential part of accepting payments, yet they often feel complicated and, at times, overwhelming to merchants. These fees include a variety of charges, each with its own purpose and impact on a business’s bottom line. So, what is a markup fee in credit card processing, and why is it crucial for understanding? In essence, without clarity on these fees, merchants may unknowingly pay more than necessary.
What Is the Markup Fee in Credit Card Processing?
A markup fee in credit card processing is the portion of the transaction cost that is added by the credit card processing companies as profit on top of the baseline charges. This fee is essentially the processor’s own rate, applied to cover their credit card processing services, and is separate from the mandatory charges imposed by credit card networks.
Markup fees are different from interchange fees and assessment fees, which are set by the card networks (like Visa or Mastercard). Interchange fees are paid to the card-issuing bank for each transaction and vary based on the type of card, transaction, and industry.
Assessment fees, on the other hand, are charged by the card networks themselves and apply to all transactions. These baseline fees are non-negotiable, standardized across all processors, and do not contribute to the processor’s profit.
Unlike these standardized fees, markup fees are controlled entirely by the payment processor and can vary significantly from one provider to another. Processors set their own markup fees based on the business model, transaction volume, and pricing structure, which may be flat-rate, tiered, or interchange-plus. This flexibility allows merchants to shop around for competitive rates on merchant services and credit card processing.
What Is the Foreign Currency Markup Fee in Credit Card Processing?
A foreign currency markup fee, sometimes called a foreign transaction fee, is an extra fee that is added to credit card transactions that are made in a different currency or by a bank in a different country. This fee is typically added on top of the base currency exchange rate and covers the cost of converting one currency to another. In credit card processing, these charges usually consist of two parts:
- Currency conversion fee – This is charged by the card networks (Visa, Mastercard, and others) for converting the foreign currency amount into the cardholder’s domestic currency. This fee is often a fixed percentage (typically around 1%) of the transaction amount.
- Issuer or processor markup – This is an additional percentage added by the credit card issuer (such as a bank) or payment processor. Such markup varies but is generally between 1% and 3% of the transaction amount.
Combined, these fees mean that merchants and cardholders can expect an additional charge of 2-3% for foreign currency transactions. While some credit cards advertise “no foreign transaction fees,” it’s important for merchants to clarify with their processors, as these fees can vary widely and impact total processing costs when dealing with international customers.
How Markup Fees Are Calculated
Processors typically calculate markup fees in three main ways – flat rate, tiered pricing, and interchange-plus. Each method affects the total processing cost differently, depending on transaction types and volume. Here’s a breakdown of these common models:
- Flat rate – With this model, the credit card processing company charges a fixed percentage on each transaction, regardless of the transaction’s type, size, or card used. This approach is simple and predictable but can lead to higher costs for lower-risk transactions.
- Tiered pricing – With tiered pricing, all transactions are put into groups (like “qualified,” “mid-qualified,” and “non-qualified”) based on things like the type of card used and the way the transaction was made. Each tier has its own rate, with “qualified” transactions costing less and “non-qualified” transactions costing more. This model can be complex, as it’s not always clear how each transaction is categorized.
- Interchange-plus – This model adds a fixed markup fee on top of the interchange fees (the non-negotiable fees set by card networks). It’s often considered one of the most transparent pricing structures, as merchants can see the base cost and the processor’s markup separately. This model also scales well with business growth, as it offers better rates for higher-volume merchants.
The table below shows examples of markup fee calculations.
| Pricing Model | Description | Example Calculation |
|---|---|---|
| Flat rate | A fixed percentage fee per transaction, regardless of transaction type. | If the flat rate is 2.9%, a $100 transaction would incur a $2.90 processing fee. |
| Tiered pricing | Different rates based on transaction types (qualified vs. non-qualified). | A $100 transaction may cost: Qualified: 1.5% = $1.50 Mid-Qualified: 2.5% = $2.50 Non-Qualified: 3.5% = $3.50 |
| Interchange-plus | The processor adds a fixed markup fee to interchange rates set by the card network. | If the interchange fee is 1.8% and the markup fee is 0.5%, a $100 transaction would cost $2.30 ($1.80 + $0.50). |
Why Are Markup Fees Rising?
In recent years, markup fees in credit card processing have been on the rise, primarily driven by higher interchange fees set by card networks like Visa and Mastercard. In 2024, both Visa and Mastercard planned to increase these fees again, affecting both in-person and online transactions.
With online shopping on the rise, this change directly impacts e-commerce businesses, especially those with high volumes of transactions. These card networks argue that higher fees are necessary to maintain and improve the complex infrastructure needed to support secure and efficient transactions, covering everything from fraud prevention to regulatory compliance requirements.
Additionally, many payment processors are rolling out more services to support business needs, like enhanced data features, advanced fraud protection, and expanded payment options, all of which come at an added cost. For businesses, this means keeping a close eye on both interchange and markup fees, as these changes can impact their bottom line.
Markup Fee Components
Markup fees often include various components, each designed to cover different aspects of a payment processor’s services. Let’s do a breakdown of the common elements that may make up a markup fee.
Transaction Fees
Transaction fees are charges applied on a per-transaction basis and may include a small fixed fee (for example, $0.10 per transaction) in addition to the processor’s markup percentage. Transaction fees can add up significantly for businesses with high transaction volumes, so merchants need to consider how these fees impact their overall costs.
Monthly Fees
Some processors charge a recurring monthly fee to cover account maintenance, customer support, and service availability. These fees may also include compliance fees, such as those related to PCI (Payment Card Industry) security standards. Monthly fees are typically fixed, but their presence and amount can vary widely among processors.
Batch Fees
Batch fees are charges for processing groups of transactions, usually at the end of each day. Instead of charging per transaction, the processor applies one fee for each batch of transactions. Batch fees tend to be relatively low (for example, $0.20 per batch), but they can still add up if a business processes transactions frequently.
How Markup Fees Affect Total Processing Costs
Markup fees have a substantial impact on a merchant’s total processing costs, as they are a key part of the overall fee structure that merchants pay on every transaction. Since these charges are added by the processing company on top of mandatory interchange and assessment fees, they directly influence how much a business pays to process credit card payments.
When markup fees are hidden or inflated, they can significantly increase a merchant’s expenses. Some processors may include hidden fees under vague terms or bundle them with other costs, and that makes it hard for merchants to understand exactly what they are paying for. For example, high transaction fees or undisclosed monthly charges can drive up the effective processing rate.
Merchants can spot excessive or unusual charges by carefully examining itemized statements. Reviewing statements also allows merchants to identify any opportunities to renegotiate fees, switch pricing models, or even change providers to reduce costs. Transparent and fair markup fees are essential for controlling processing expenses and keeping costs predictable.
How to Minimize Markup Fees
Minimizing these fees can significantly reduce a merchant’s overall processing costs. There are many practical strategies to help lower the costs for businesses through credit card processing and improve cost efficiency.
Negotiate with Processors
Many payment processors are willing to adjust markup fees, especially for businesses with high transaction volumes or steady sales. By demonstrating your transaction history and business stability, you can often negotiate to lower these per-transaction rates or reduced monthly fees. It’s helpful to ask for itemized details in the contract and clarify any negotiable fees.
Choose the Right Pricing Model
The pricing model you select can greatly affect the markup fees you pay. Interchange-plus pricing, which separates the processor’s markup from the interchange fee, is often more transparent and typically results in lower costs than tiered pricing. With interchange-plus, you see exactly what the card networks charge versus the processor’s additional fee, and it allows a merchant to have better control over markup costs. Tiered pricing, on the other hand, can obscure fees and often results in higher charges for certain types of transactions.
Avoid Hidden Fees
Some processors may include hidden or vague charges in statements, such as compliance fees, statement fees, or batch fees, which can add up over time. To avoid these extra costs, ensure you fully understand the processor’s fee structure and ask for a detailed breakdown. Look for a processor that offers transparent, itemized invoices, which makes it easier to identify and address unnecessary fees.
Compare Providers
Different providers offer varying rates and fee structures, so it’s beneficial to compare multiple payment processors to find the most competitive rates. Some may have lower markup fees or waive certain monthly fees, which can lead to substantial savings. Consider asking potential processors about any additional costs, discount programs, or specific pricing options for businesses in your industry.
Take Control of Your Processing Costs with Merchant Chimp
Understanding what these fees entail, including transaction fees, monthly charges, and batch fees, is essential for making informed decisions that can minimize expenses. It’s crucial for merchants to regularly review their processor agreements and stay informed about industry practices in order to stay competitive.
If you’re ready to optimize your processing fees and improve your payment solutions, reach out to Merchant Chimp. Our team can help you identify the best pricing model for your business, ensure transparency, and guide you toward cost-effective solutions tailored to your needs. Contact Merchant Chimp today to start maximizing your profits with a payment plan that fits your business.
