Merchant services are among the most significant yet confusing expenses businesses face. Credit card processing can come with confusing terms, unclear rates, and seemingly endless fees. It can be easy for these costs to add up, especially when they start off reasonably. One of the most common reasons business owners switch to Host Merchant Services is that they feel they are paying more with their current payment processor.

That’s why understanding how credit card processing works is important today so that you can take proactive steps to avoid overpaying for credit card processing. In this guide, we’ll break down the fee structure and share practical strategies to reduce those “pesky” fees for your business, whether you’re a small shop, an e-commerce retailer, or an enterprise company.

Understand the Credit Card Processing Fees Breakdown

To stop overpaying, first make sure you understand what you’re paying for. Credit card processing fees are typically composed of three main parts:

• Interchange fees: A percentage fee set by the card networks (like Visa, Mastercard) that goes to the cardholder’s issuing bank. This compensates the bank for handling the transaction and risk. Interchange is non-negotiable and varies by card type (e.g., rewards cards often have higher interchange).
• Assessment fees: Also non-negotiable, these are small fees charged by the card network (Visa, MasterCard, Discover, etc.) for each transaction.
• Processor markup: The negotiable part of your fee – this is the payment processor or merchant service provider’s cut. It can be a fixed percentage or fee added on top of interchange and assessments. The processor wants your business, so you have the right to negotiate this markup and ensure it’s reasonable.

Understanding this structure is key because the processor’s markup largely determines whether you’re overpaying. If your provider bundles fees in a non-transparent way, you might be paying a high markup without realizing it. A transparent pricing model lets you see precisely what that markup is.

Read through your merchant processing statements line by line to identify all the fees you’re being charged. If the statements look confusing or filled with jargon, that may be intentional – some processors make statements vague to hide extra fees or subtle rate increases. By performing a statement audit, you can spot “junk fees” that drive up your costs. Common examples of potentially avoidable fees include:

• PCI Non-Compliance Fee: Charged if you haven’t completed the required annual Payment Card Industry (PCI) security compliance. This is entirely avoidable by staying PCI compliant, and doing so not only saves you this fee but also protects customer data.
• Non-EMV (Chip) Transaction Fee: Some processors charge a penalty if a chip card is swiped instead of dipped/tapped. If your terminals are EMV-capable, always insert or tap chip cards rather than swiping to avoid this fee.
• Risk or Fraud Assessment Fees: Extra charges some providers add per transaction or per month to offset their risk. These might be negotiable or avoidable with the right provider.
• Monthly minimum fee: If your agreement requires a minimum in fees or volume, you pay a surcharge in any month you don’t meet it. You can avoid this by choosing a processor with no monthly minimum or by ensuring your sales meet the threshold.
• Statement or account fees, batch fees, etc.: These are small recurring charges (for sending paper statements, for daily batch processing, etc.) that not all providers charge. If you find these on your bill, consider asking to have them waived or switching to a provider that doesn’t include them.

You can eliminate or reduce unnecessary fees by identifying them. In many cases, you can ask your processor to remove specific non-essential fees or find a provider that doesn’t impose them. You should know precisely what you’re paying and why – you can’t cut costs if you don’t understand them.

Choose the Right Pricing Model for Your Business

Not all merchant account pricing structures are created equal. The way your processing fees are structured can significantly impact costs. Three standard pricing models are used in credit card processing:

• Interchange-Plus Pricing:

You pay the actual interchange and assessment costs for each transaction plus a fixed markup (e.g., interchange + 0.3% + 10¢). This model offers the most transparency because you see each cost component. It often yields lower costs for businesses with moderate or high volume, since you’re paying exact interchange rates and a modest markup.

Under interchange-plus, if a transaction’s interchange is 1.8% + $0.10, and your processor’s markup is 0.5% + $0.10, you know precisely how that 2.3% + $0.20 total breaks down.

Tip: Interchange-plus (also called “cost-plus”) is usually recommended if you want to ensure you’re not overpaying on each transaction.

• Flat-Rate Pricing:

You pay a single flat rate on all transactions, regardless of card type. For instance, some providers charge 2.9% + 30¢ on everything. This model is simple and predictable – good for tiny businesses or those just starting, as you always know your fee.

However, the flat rate is often set on the high side to cover worst-case scenarios, so you could be overpaying on many transactions that qualify for lower interchange rates. In other words, the convenience might cost you extra if your sales volume grows.

• Tiered (Bundled) Pricing:

The processor groups transactions into buckets like “Non-qualified,” “Qualified,” and “Mid-qualified,” each with a different rate. A non-reward consumer card swiped in-person might be “Qualified” at 1.7%, but a rewards or corporate card might be “Mid” or “Non-qualified” at a much higher rate. The interchange and markup are blended into these tiers, so you don’t see the exact breakdown.

Tiered plans are notorious for their lack of transparency and inconsistent charges – they can easily lead to overpaying, because many transactions are downgraded to higher-priced tiers even when they didn’t need to be. Processors also have leeway in defining the tiers. If you’re on a tiered plan and your statements show only a few rates, it’s hard to tell what the markup is or where you might be incurring unnecessary costs.

• Match the model to your needs:

Take a look at your business’s size, transaction volume, and typical sale amount. Suppose you process a high volume of card sales. In that case, interchange-plus pricing is often the most economical and transparent choice, as you can negotiate a low markup and benefit directly when interchange rates drop or when you run more debit cards (which have low interchange).

Flat-rate might be fine for a small side business or hobby store for simplicity, but as you grow, it’s wise to move to a more granular pricing model to avoid built-in overpayments. If you’re currently on a tiered/bundled plan and suspect you’re paying too much, talk to your provider about switching to interchange-plus, or consider switching providers if they can’t offer it.

Also, remember that the right model for you can change over time. A pricing structure that was decent when you were smaller could become suboptimal as your average transaction size or volume changes.

Reevaluate periodically to ensure your plan still makes sense. For example, some businesses start on a flat rate for simplicity, then graduate to interchange-plus once their sales increase.

Regularly Review Rates and Negotiate with Your Processor

Don’t “set and forget” your credit card processing deal. The payments industry is competitive, and processors are often willing to adjust terms to keep your business, so it’s essential to review your rates at least once a year and negotiate when you have leverage. As your business grows or your transaction history strengthens, highlight improvements such as increased processing volume, low chargeback rates, and strong fraud prevention.

These factors position you as a lower-risk, high-value client and can justify requests for reduced markups or volume-based discounts. It also helps to compare offers from other processors, especially those with transparent interchange-plus pricing, so you have concrete quotes to use as negotiating leverage. Focus your negotiation on the processor’s markup and any monthly fees, since these are typically the most flexible. If you’ve demonstrated consistent or growing volume with few issues, ask for a pricing review and push for reductions, even if they seem small, as they can lead to substantial annual savings.

Be prepared to switch providers if your current one won’t adjust your rates, and you know better deals are available, keeping in mind any contract terms or potential early termination fees. Finally, make it a habit to review your statements regularly and check in with your provider annually to clarify any new fees or rate changes. Staying vigilant signals to your processor that you’re watching your costs closely and helps prevent unnecessary increases.

Minimize Fraud, Chargebacks, and Other Risk-Related Costs

Fraudulent transactions and chargebacks (customer disputes) are not only a headache – they also cost you money in fees and can lead to higher processing rates in the long run. Chargeback fees (an additional fee charged when a transaction is reversed) can range from $15 to $100 per incident, depending on your provider, and excessive chargebacks may even push your account into a higher-risk category.

Plus, when a chargeback occurs, you lose the sale amount and often the merchandise, effectively paying for an unfortunate event twice. Reducing these incidents will save you money, directly and indirectly.

Here’s how to keep these costs down:

• Maintain PCI compliance: As mentioned earlier, being PCI DSS compliant (following the required security standards) not only avoids non-compliance fees but also reduces the chance of a costly data breach. Processors often charge lower fees to businesses they deem lower risk, including those that take security seriously.
• Use fraud prevention tools: Enable tools like Address Verification Service (AVS) and card verification value (CVV) checks for online or keyed transactions. AVS checks the billing address against the one on file with the card issuer to help flag potential fraud. Using AVS can lower your interchange rates on some transactions or at least prevent “non-qualified” higher fees due to missing data. Many processors charge lower transaction fees for AVS/CVV-verified transactions because they’re considered lower risk. Additionally, consider using 3D Secure or fraud-detection filters, if your provider offers them, especially for e-commerce, to catch suspicious orders before they become chargebacks.
• Set explicit billing descriptors: Ensure that the charge description your customers see on their card statement is recognizable (ideally, your DBA or store name) and includes a contact phone number. A surprising number of chargebacks happen simply because customers don’t recognize a charge on their statement and assume it’s fraud. A clear descriptor and an easy way to reach you can prevent misunderstandings from turning into disputes.
• Streamline customer service and refund policy: Sometimes, customers initiate chargebacks out of frustration when they feel they can’t resolve an issue directly with the merchant. Make your refund and return policies clear and accessible, and provide prompt customer service. It’s often cheaper to issue a quick refund or resolve a complaint directly than to let it escalate into a chargeback (which costs more and potentially higher rates). If a customer contacts you with a billing issue, resolving it immediately can save you the ~$25 chargeback fee and protect your standing with processors.
• Monitor your chargeback ratio: Keep an eye on your chargeback rate (disputed transactions vs. total transactions). If it’s creeping up, take action – find the root causes (product issues, fraud, unclear policies, etc.) and fix them. A consistently low chargeback rate strengthens your position when negotiating fees, whereas a high rate can lead to surcharges or even account termination with some providers.

Actively managing fraud and chargebacks, you’ll avoid many unnecessary fees and maintain a healthier relationship with your processor (which can translate into better rates). Think of fraud prevention as an investment that protects your revenue and keeps processing costs in check.

Optimize How Transactions Are Processed

The way you process transactions can significantly impact the fees you pay, and minor operational adjustments can help prevent transactions from falling into higher-cost categories. Using EMV chip or contactless methods for in-person sales ensures that transactions qualify for lower, more secure card-present rates, while swiping a chip card or keying in a number when the customer is standing in front of you can trigger expensive downgrades.

Daily settlement is equally important; if you don’t batch out within a day, many card networks reclassify the transaction at a higher interchange rate, so making end-of-day batching a routine practice keeps unnecessary fees at bay. You should also avoid manual key entry whenever possible, since keyed and card-not-present transactions generally cost more. When phone or online orders can’t be avoided, entering all requested verification data helps secure the lowest rate available for those transaction types.

A properly configured payment gateway is crucial for online payments as well, because missing or incomplete data can push transactions into higher-fee brackets. If you operate in a B2B environment, providing Level 2 or Level 3 data for corporate or government cards can significantly reduce interchange rates by supplying the detailed information card networks seek.

By optimizing these elements, using secure card-present methods, settling promptly, minimizing key-entry, ensuring complete data transmission, and enabling enhanced data levels where applicable, you can avoid preventable surcharges and consistently qualify for the most favorable processing rates.

Consider Passing Processing Fees to Customers (With Care)

Some businesses reduce their processing expenses by shifting a portion of those costs to customers, either by adding fees or offering incentives to use lower-cost payment methods. This approach must be carried out carefully to comply with legal and card network guidelines, but when done correctly, it can significantly offset payment processing costs. One method is applying credit card surcharges, which add a small percentage fee to transactions paid by credit card.

These are capped by card networks, subject to state laws, and require clear disclosure, advance notice to processors, and strict compliance rules. Debit cards cannot be surcharged, so staff must be trained to apply this correctly. When compliant, surcharging can help recover some or all of the processing fee on credit card transactions.

Another option is a cash discount program, where posted prices reflect the credit card price and customers receive a small discount for paying with cash or check. Because it’s framed as a discount rather than an additional fee, it is generally permitted even in places where surcharges are restricted. This gives customers an incentive to choose a lower-cost payment method while allowing card-paying customers to effectively cover the fee by not receiving the discount. Clear signage and transparent receipts help keep this approach compliant and customer-friendly.

Businesses can also establish a minimum purchase requirement for credit card use, typically set at $5- $10, to avoid losing money on small transactions. Since the fixed per-transaction processing fee makes tiny purchases disproportionately costly, setting a minimum helps ensure each sale remains profitable. It should apply only to credit card transactions and be clearly posted so customers understand the policy.

A fourth strategy is charging a convenience fee for payments made through alternate channels, such as phone or online, when these are not the business’s standard methods. These fees are usually flat amounts and must comply with card network definitions of what qualifies as an “alternative channel.” This approach is common for government agencies and utilities and can help recoup the higher processing costs associated with nonstandard payment methods.

While these tactics can meaningfully reduce expenses, they also affect the customer experience. Added fees may put some customers off, while others may appreciate cash discounts when framed positively. Since credit card users often spend more per transaction, it’s important to balance cost recovery with customer satisfaction and competitiveness. Observing what peers in your industry are doing and clearly communicating any policy, along with training staff to explain it politely, helps maintain goodwill while managing processing costs effectively.

Encourage Low-Cost Payment Alternatives

One of the simplest ways to avoid high card fees is to reduce your reliance on credit card payments when possible by steering customers toward cheaper payment methods.

• Encourage debit card usage:

Debit cards usually have significantly lower interchange rates than credit cards. Because funds are drawn directly from the customer’s bank account, processing costs are often much lower. You can promote debit by displaying a “Debit card preferred” sign or by simply educating customers.

Some small businesses even offer a small discount for PIN debit transactions. If you have a keypad for PIN entry, encourage customers to use it. Over time, increasing debit usage and reducing rewards credit card swipes can lead to substantial savings.

• Offer ACH or bank transfers for large payments:

For big-ticket invoices, common in B2B, professional services, or wholesale transactions, suggest or incentivize payment via ACH or direct bank transfer. ACH payments typically carry very low flat fees, making them far cheaper than paying a percentage-based card fee on large amounts. Businesses often use ACH for recurring billing or large one-time payments.

If a client typically pays $10,000 by credit card, offering a small discount or faster service for ACH or check payments can save both sides significant money. Even on smaller invoices, ACH usually costs a fraction of what card processing would, and fees often cap out at a low maximum regardless of transaction size.

• Digital wallets and alternative payment platforms:

Depending on your customer base, offering options like Apple Pay, Google Pay, PayPal, Venmo, or Zelle can expand flexibility and sometimes reduce fees. While many wallet payments still run on traditional card rails, they often include enhanced security features, such as tokenization, that can reduce fraud and, in turn, lower costs by reducing chargebacks.

Some peer-to-peer apps now offer business profiles with competitive fee structures. It’s important to compare options carefully, as some platforms charge fees similar to credit cards while others may allow certain transactions at no cost.

• Consider subscription or invoice models:

If it suits your business, switching to a subscription billing model can reduce the number of transactions you process. This doesn’t lower the percentage fee, but it does cut down on per-transaction fixed fees. Charging $120 once per year incurs only one fixed cost, whereas charging $10 monthly would incur 12 fixed costs.

Fewer transactions also reduce the chances of declines or chargebacks. While this is more of a strategic business model decision, it can indirectly reduce overall processing costs.

Conclusion

Credit card processing is a necessary cost of doing business in today’s world, but you should never just set it on autopilot and accept whatever fees come. With a bit of education and active management, you can significantly reduce these expenses. Start by understanding the fee components and reviewing your statements to find any charges that shouldn’t be there. Choose a pricing model that offers transparency and fairness for your sales volume, and don’t hesitate to negotiate – remember that processors want your business. You have more power if you shop around.

Improve your operations by preventing fraud and avoiding costly mistakes, such as late batch settlements or non-EMV transactions that trigger higher fees. And whenever appropriate, get creative by passing on costs in a customer-friendly way or encouraging payment methods that cost you less.

Frequently Asked Questions