Credit card merchant fees: what to expect as a small business owner

Handling card payments is a normal part of everyday operations for most small businesses. These transactions are convenient for customers and enterprise owners alike, offering a hassle-free way to pay and get paid.

For customers, paying by card is straightforward – whether it’s tapping or swiping at an in-store card machine, entering their card details at an online checkout, or providing those details via a payment link or over the phone.

However, businesses pay fees to process card payments, which can vary depending on factors like the type of card and the payment method used.

If you’re thinking about how to start a business, it’s important to understand these costs from the start. Even if your business is already up and running, being aware of and managing these costs can help keep your small business finances in check.

This guide can help. We’ll run through what you need to know about debit and credit card merchant fees in the UK, covering the different types of fees, how they’re calculated, and an overview of possible solutions for your enterprise. 

Credit card merchant fees

If you want to take card payments from your customers, you’ll need to team up with a merchant services provider. These providers, which can include banks or specialised payment processors like SumUp,handle the transaction process between your business and your customers’ card issuers.

Understanding how this process works can help you grasp where and why fees are incurred. Here’s a quick breakdown:

1. Your customer makes a purchase using their card.

2. The card details are electronically transmitted to your payment processor.

3. Your payment processor requests authorisation from the card network, like Visa or MasterCard, to ensure the transaction is valid.

4. The card-issuing bank checks to see if the customer has enough funds available.

5. The approval or denial is sent back to you, letting you know if the transaction went through.

6. If approved, the transaction is completed, and you can provide the goods or services to your customer.

7. At the end of the day, all your transactions are batched together and sent for settlement.

8. The transactions are processed, and the funds are transferred to your business’s merchant account, a special type of bank account used to temporarily hold funds from card transactions.

9. Finally, the money is moved from your merchant account into your regular business account, typically within a few days but often sooner.

What are credit card merchant fees for?

Now that we’ve looked at how the card payment process works, let’s look at the main fees involved in these transactions. Merchant credit card processing fees will differ depending on your provider and your agreement, but here are some of the most common ones you’ll come across.

Interchange fees

Interchange fees are paid by a merchant’s bank to customers’ issuing banks to cover the cost of transactions. These fees are set by the card networks and vary depending on the type of card and transaction. For instance, premium rewards credit cards usually have higher fees than standard debit cards. 

In the UK, the Payment Systems Regulator (PSR) caps interchange fees to 0.2% for consumer debit cards and 0.3% for consumer credit cards.

Network fees

Network fees, also called scheme fees or assessment fees, are charged by card networks like Visa and MasterCard. These fees are small percentages of the transaction amount, covering the network’s operational costs and infrastructure.

Network fees are generally consistent across all transactions processed through a particular card network. However, the fee can vary from as low as 0.01% per transaction to as high as 1%, influenced by factors such as the type of payment and the transaction volumes over a month or year.

Businesses that handle a lot of transactions might be able to negotiate lower scheme fees with the card networks. However, this can be tough for smaller businesses.

Payment gateway fees

These fees are charged by the provider of the payment gateway used to process card payments on e-commerce sites. They typically comprise a small percentage of each transaction, with an additional flat-rate charge.

If you’re exploring online business ideas, it’s worth getting to grips with payment gateways and what they can offer.

Authorisation fees

Authorisation fees are charged each time a transaction is authorised, regardless of whether the transaction is ultimately completed. This fee, usually around 1-3p per transaction in the UK, covers the cost of checking with the cardholder’s bank to ensure that funds are available, and that the transaction is valid.

Processor fees

Processor fees are what you pay your merchant services provider to handle transactions between you and the card networks. They can vary depending on the provider and pricing model.

Here are the most common pricing models for processor fees:

Flat-rate pricing 

With flat-rate pricing, merchants pay a fixed percentage of each transaction, regardless of card type or transaction method. This model is simple and predictable, making it a popular choice for small businesses and side hustle ideas. 

Tiered pricing 

Tiered pricing sorts card transactions into different tiers, each with its own rate. Tiers are usually based on the type of card and the risk associated with the transaction. This model can suit businesses with low transaction volumes or those that primarily process standard, low-risk transactions.

Interchange-plus pricing  

Interchange-plus pricing separates the interchange fee from the processor’s markup. Merchants pay the actual interchange fee plus a fixed markup from the processor. This model can be cost-effective for businesses with high transaction volumes or high average order values. 

Incidental fees

There are other debit and credit card merchant fees which can occasionally arise in relation to specific issues. These include: 

Chargeback fees 

Chargebacks pop up when a customer disputes a charge and gets it reversed. This can happen due to fraud, a customer being unhappy with a purchase, or mistakes in processing. Fees associated with chargebacks can make a dent to your bottom line, and incurring too many chargebacks can harm your reputation in the eyes of financial institutions.

Refund fees 

These fees can be incurred when you need to refund a customer. While not as costly as chargeback fees, they can still add up, especially for businesses with high return rates.

PCI compliance fees  

PCI compliance fees keep you in line with the Payment Card Industry Data Security Standard (PCI DSS). This is all about protecting cardholder data and ensuring payment security. Staying compliant is key to securing transactions and avoiding fines for data breaches.

Additional fees

There may be some fees on top of the ones we’ve already touched on, including:

Monthly fees 

Some payment processors charge a monthly fee for maintaining your merchant account. These fees cover things like statement processing, customer support, and account maintenance.

Setup fees 

These are one-time fees for setting up your account. They cover the cost of setting up your payment processing equipment, software integration, and initial configuration of your merchant account.

How much are SumUp credit card merchant fees?

All the fees we just discussed can seem overwhelming, but using an all-encompassing merchant services provider like SumUp simplifies the whole situation.

There are no setup fees to worry about beyond the cost of any hardware you’d like to use for your business, and no monthly fees unless you decide to join our cost-saving membership plan.

Instead, SumUp charges a straightforward all-inclusive rate per transaction, incorporating interchange fees and other additional costs, so you always know what to expect. The only exception are MOTO payments which are charged at a small percentage plus an extra fee.

Here’s what you’ll pay across a range of solutions:

• Card readers – 1.69% per transaction.

• Tap to Pay on iPhone or Android – 1.69% per transaction.

• Payment links – 2.5% per transaction.

• Payments through SumUp online store – 2.5% per transaction.

• Online gift cards – 2.5% per transaction.

• Online invoices – 0.99% to 2.5% per transaction, depending on the plan.

• Self-service kiosk – 0.99% per transaction. 

• QR codes – free. 

What about incidental costs?

We touched on incidental merchant credit card fees earlier. With SumUp, these remain straightforward:

• Chargebacks – There’s a non-refundable £10 fee for chargebacks. You can read more about the chargeback procedure and how it works by visiting the SumUp online support centre.

• Refund fees – SumUp doesn’t charge for refunds if you process them before the transaction is paid out to your bank account. If you refund a transaction after it’s been settled, you’ll still need to cover the transaction fee. There are no extra fees just for initiating a refund.

• PCI compliance fees – Robust payment security, including PCI DSS compliance fees, are all part of the service with SumUp. These costs are included in our transaction fees.

How credit card merchant fees impact your small business

Credit card merchant fees don’t simply affect your small business finances. They also impact your operations management, with a direct bearing on the following aspects of running an enterprise.

Pricing strategies

You might need to tweak your pricing to cover merchant fees. This could mean raising prices slightly or offering discounts for cash payments.

Knowing how to price a product correctly is essential for staying profitable. However, be aware that you cannot add surcharges for card payments to consumers. Instead, you can adjust your overall pricing strategies to cover these costs.

Cash flow management

High merchant fees can eat into your profit margins and disrupt your cash flow. Efficiently managing these fees helps keep your cash flow statement healthy and ensures you have the funds needed to run your business smoothly.

If your business is deemed “high risk”, perhaps because of the particular industry you’re in, you may be obliged to use a high risk merchant account, which will usually come with higher fees. This makes diligent cash flow management even more critical.

Customer engagement

Offering multiple payment options will improve the customer experience, but balancing this with the associated costs is important. Keeping customers happy while managing expenses is key to customer retention. 

Staying competitive

By effectively managing merchant fees, you can potentially offer better prices or more flexible payment options than your competitors. This gives you a competitive edge and can be part of a broader marketing strategy for small businesses looking to stand out.

How to reduce your debit and credit card merchant fees

Whatever type of enterprise you’re running, whether you’re launching business ideas from home with minimal overheads, or taking the leap of opening a brick-and-mortar retail premises on the high street, you’ll want to keep card processing fees as low as possible. 

So let’s wrap up this guide with a look at four rules of thumb for reducing these running costs.

Shop around 

It’s important to have a clear-eyed view of what your business actually needs when it comes to merchant services, and to seek out providers providing a plethora of small business payment options which are relevant to your enterprise and come with the most favourable fees.

So take the time to really shop around and compare the types of services and prices on offer. Will you need to apply for a merchant account? Will you have to concern yourself with the individual fees we mentioned earlier in this guide, or is everything covered in a clear, transparent, all-inclusive pricing structure?

Implement low-fee payment methods

Certain cashless payment methods typically come with lower merchant fees and should be implemented if they fit into your business operations. 

For example, if you’re running a physical shop, you could put up SumUp QR codes by the till and on various shelves and counters. Customers can pay simply by snapping the QR codes on their phone, and there are zero processing fees involved.

Similarly, if you’re running a casual food and drink business like a burger restaurant or a cafe, you could bring down how much you pay in merchant fees by installing a self-service SumUp kiosk. The fee per transaction is only 0.99%, meaning that if customers pay via the kiosk rather than, say, a card reader, you may pay less in merchant fees.

Have anti-fraud measures in place

Debit and credit card fraud isn’t just a problem for cardholders; it can also have costly repercussions for you. 

Let’s say you’ve been considering small business ideas and have opened an online boutique selling luxury fashion accessories. 

If a fraudster makes an unauthorised purchase using stolen card details, and the genuine cardholder then has the payment reversed, your operating cash flow will be negatively affected. Multiple unauthorised payments might even lead to your business being designated “high-risk”, with higher processing fees applied to your transactions.

That’s why it’s vital that your online payment methods have measures in place to prevent card not present fraud. For example, two factor authentication protocols like 3D Secure are highly effective at stopping illegitimate purchases because they require cardholders to verify their identity beyond simply inputting card details.

Keep chargebacks to a minimum

As we touched on earlier in this guide, chargebacks will add to how much you pay in debit and credit card merchant fees, so it’s important to minimise the number of chargebacks your business encounters.

The unfortunate fact is there’s little you can do to stop customers committing bad faith chargeback fraud to get money back on items they want to keep. This is known as cyber shoplifting, and will require you to dispute the chargeback and present evidence that the transaction was legitimate.

However, some chargebacks are filed if customers are genuinely unclear on your refund terms and mistakenly believe chargebacks are an easier alternative, or if they feel dissatisfied with your products or your customer service. You can take proactive steps against such chargebacks happening by:

• Having your refund policy clearly laid out on your website and in purchase confirmation emails.

• Managing customer expectations by ensuring the photos and descriptions used in your product listings are as accurate as possible.

• Communicating with customers in a punctual, friendly way, so complaints are nipped in the bud before things escalate to a chargeback.