Merchants pay between 1.5% and 3.5% of each transaction in fees, split among the card network, the card issuer, and the payment processor
When you swipe or tap a credit card, the merchant doesn't receive the full amount you paid. A percentage of that transaction goes to three different parties: the card issuer (your bank), the card network (Visa, Mastercard, American Express, or Discover), and the payment processor who handles the transaction. The total cost to the merchant is called the discount rate, and it's the single largest operating expense for most retail businesses.
The exact percentage varies by card type, merchant category, transaction size, and the merchant's negotiating power. A small coffee shop pays a different rate than a large grocery chain. A rewards card costs more to process than a basic card. Understanding these fees matters if you own a business, negotiate with payment processors, or straightforward want to know why some merchants have minimum purchase requirements or surcharges.
Key Takeaways
- Merchants pay an average of 2% to 3% per transaction, with the card issuer taking the largest share (typically 1% to 2%).
- Rewards cards, business cards, and premium cards cost merchants more to process than basic cards because the issuer pays out more in rewards.
- Interchange fees (paid to the card issuer) are set by Visa and Mastercard and are the same for all merchants in a given category, but assessment fees and processor markups vary widely.
- Merchants can negotiate lower rates by processing higher volumes, accepting only certain card types, or switching to a different payment processor.
- Some merchants pass costs to customers through surcharges, minimum purchase requirements, or higher prices on all goods.
How the fee splits among the three parties
The discount rate breaks into three distinct pieces. The interchange fee goes to your card issuer (the bank that issued your credit card). This is the largest piece, typically 1% to 2.5% of the transaction. Visa and Mastercard set these rates and publish them publicly, though they vary by card type and merchant category. A rewards card generates a higher interchange fee than a basic card because the issuer has to fund your rewards.
The assessment fee goes to the card network itself (Visa, Mastercard, Amex, or Discover). This is usually 0.1% to 0.3% and covers the network's operating costs. Finally, the processor markup or processing fee goes to the payment processor or merchant services provider who actually runs the transaction. This is where rates vary most widely — a small business might pay 0.5% to 1% here, while a large chain with negotiating power might pay 0.2% or less.
A typical breakdown for a mid-sized retail merchant processing a standard Visa card might look like this: 1.5% interchange, 0.15% assessment, and 0.5% processor markup, totaling 2.15%. But a merchant processing an American Express rewards card might pay 2.5% interchange, 0.25% assessment, and 0.75% processor markup, totaling 3.5%.
Why fees differ by card type
Not all credit cards cost the same to process. Visa and Mastercard publish separate interchange rates for different card categories. A basic no-rewards Visa card might have an interchange rate of 1.15%, while a Visa Signature rewards card might be 1.80% or higher. The issuer's cost to fund your rewards, your annual fee (if any), and the card's risk profile all factor into the rate Visa sets.
American Express and Discover operate differently — they are both card networks and issuers, so they don't publish interchange rates the same way. Instead, they negotiate directly with merchants. Amex typically costs merchants 2.5% to 3.5% per transaction, which is why some smaller merchants don't accept it. Discover is usually cheaper, around 1.5% to 2.5%, because it has a smaller customer base and is more willing to negotiate.
Business cards and premium personal cards (those with high annual fees and rich rewards) generate the highest fees for merchants. A business rewards card might trigger a 2% or higher interchange rate alone. This is one reason some merchants offer discounts for paying with cash or debit cards — they're trying to offset the cost of processing expensive credit cards.
What merchants in different industries pay
Visa and Mastercard set different interchange rates based on the merchant's industry category. A grocery store, a gas station, a restaurant, and an online retailer all pay different rates for the same card type. Grocery stores typically pay lower rates (around 1.1% to 1.5%) because they process high volumes and are considered lower-risk. Restaurants and bars pay higher rates (1.5% to 2.5%) because they have higher fraud risk and lower transaction volumes per merchant location.
Online merchants (card-not-present transactions) pay more than in-person merchants because there's no physical card to verify and no signature. An online retailer might pay 2.5% to 3% for a standard card, while a brick-and-mortar store pays 1.5% to 2%. Subscription services and recurring billing also carry higher rates. Nonprofits and government agencies sometimes negotiate lower rates, though this varies by processor.
Merchants can see the exact interchange rates that explore to them by asking their payment processor or checking the Visa and Mastercard interchange rate tables online. These tables are updated several times per year, so rates can shift. However, most small merchants don't negotiate these rates — they accept whatever their processor charges and bundle it into their pricing.
How transaction size and volume affect what merchants pay
Larger merchants with higher monthly processing volumes can negotiate lower processor markups. A chain restaurant processing $500,000 per month has leverage to demand a 0.3% processor fee instead of 0.5%. A single-location coffee shop processing $20,000 per month has almost no negotiating power and will pay whatever the processor quotes.
Transaction size also matters in some cases. Very small transactions (under $5) sometimes trigger higher fees or flat-fee components because the percentage-based fee becomes too small to cover the processor's costs. A $2 coffee purchase with a 2% fee generates only 4 cents in revenue for the processor, so some processors add a per-transaction fee (typically $0.10 to $0.30) on top of the percentage for small purchases.
Merchants who process higher volumes also have more options. They can shop around among payment processors, negotiate custom rates, or switch to a different processor if rates rise. Small merchants often stay with their current processor because switching costs time and effort, even if a competitor offers better rates.
Why some merchants pass fees to customers
Because credit card fees are a significant expense, some merchants try to recover them from customers. The most common methods are minimum purchase requirements (often $5 or $10 for credit cards), surcharges added to the bill, or straightforward building the cost into higher prices for everyone.
Surcharges are legal in most U.S. states, but rules vary. Some states cap the surcharge at the merchant's actual cost, while others allow merchants to charge up to 4% or 5%. A few states (California, Florida, New York, and Texas) have restrictions or require clear disclosure. Merchants must display surcharge notices prominently and inform customers before checkout. Visa and Mastercard rules also restrict how merchants can explore surcharges — they generally can't surcharge debit cards or their own branded cards more than other cards.
Many merchants choose not to surcharge because it creates friction at checkout and can drive customers away. Instead, they absorb the cost and raise prices on all items, which spreads the cost invisibly across all customers (including those who pay cash). This is why prices at credit-card-heavy businesses tend to be higher than at cash-only businesses.
How merchants can reduce their credit card costs
Merchants have several levers to pull. The most direct is to negotiate with their payment processor. If a merchant has been with the same processor for years and processes decent volume, asking for a rate reduction often works — processors would rather lower rates than lose a customer to a competitor. Merchants should ask for the processor markup specifically, since interchange and assessment fees are largely fixed.
Switching processors is another option, though it requires effort. Merchants should compare quotes from multiple providers (Square, Stripe, PayPal, traditional merchant services companies, and local banks all offer processing). The difference between a 2.5% rate and a 2.2% rate might not sound large, but on $100,000 in monthly volume, it saves $300 per month or $3,600 per year.
Merchants can also encourage lower-cost payment methods. Offering a small discount for debit cards or ACH transfers reduces their costs. Some merchants use tiered pricing — charging 3% for credit cards, 2% for debit, and 1% for cash. This is legal as long as it's disclosed clearly and applied consistently.
Finally, merchants can optimize their category coding. Visa and Mastercard assign merchants to categories based on their primary business. A merchant in the wrong category might pay higher rates. Reviewing the category assignment with the processor and requesting a change (if justified) can sometimes lower rates.
Frequently Asked Questions
Do I pay the merchant's credit card fees when I use my card?
No, you don't pay them directly. The merchant absorbs the cost and typically builds it into prices for all customers. Some merchants do add a surcharge at checkout, which is legal in most states but must be clearly disclosed before you complete the purchase.
Why do some merchants have a minimum purchase requirement for credit cards?
Merchants use minimums to avoid processing very small transactions where the fee percentage becomes too expensive relative to the sale. A $2 coffee with a 2% fee costs the merchant 4 cents in processing, which may not cover the processor's costs. A $10 minimum ensures the transaction is large enough to be profitable.
Does using a rewards card cost the merchant more?
Yes. Rewards cards have higher interchange rates because the card issuer has to fund your rewards points or cash back. A merchant might pay 1.15% for a basic card but 1.80% or more for a rewards card, all else equal. This is one reason some merchants prefer customers to use basic cards or cash.
Can a merchant refuse to accept a certain credit card?
Yes. Merchants can choose which cards to accept. Some small businesses refuse American Express because its fees are higher. However, Visa and Mastercard rules generally prohibit merchants from surcharging one brand more than another or refusing one while accepting another in the same family (you can't refuse Visa Signature but accept Visa Classic, for example).
What's the difference between interchange fees and processing fees?
Interchange fees go to your card issuer and are set by Visa or Mastercard. Processing fees go to the payment processor and are negotiated between the processor and merchant. Interchange is largely the same for all merchants in a category, but processing fees vary widely based on volume and negotiating power.