Merchants pay a percentage of every credit card transaction, plus a flat fee per sale
When you swipe or tap a credit card at checkout, the merchant doesn't keep the full amount you paid. A merchant discount rate — usually between 1.5% and 3.5% of the transaction total — goes to the credit card company, the bank that issued your card, and the payment processor. A separate per-transaction fee, typically $0.20 to $0.30, also comes out of the sale. For a $100 purchase, a merchant might lose $2 to $4 before they see any money.
These costs are why some small businesses set minimum purchase amounts for card payments, offer discounts for cash, or add a surcharge to credit card orders. The fees vary based on the card type (rewards cards cost more than basic cards), the merchant's industry, their sales volume, and their negotiating power. A large chain store pays less per transaction than a solo coffee shop.
Key Takeaways
- Merchants pay a percentage fee (interchange) plus a per-transaction fee on every credit card sale, reducing their profit on that sale.
- Rewards cards and premium cards cost merchants more than basic cards because the card issuer pays the rewards out of the interchange fee.
- Small businesses and high-risk industries (restaurants, gas stations) typically pay higher rates than large retailers or low-risk merchants.
- These costs are why some merchants impose minimum purchase amounts, offer cash discounts, or add credit card surcharges to their prices.
How the money splits between the card company, your bank, and the processor
The merchant discount rate is divided among three parties. The largest share — usually 70% to 80% of the total fee — goes to your card issuer (your bank or credit union) as interchange. This is the bank's main revenue from credit cards. The payment processor (the company that runs the terminal or online checkout) takes a smaller cut, typically 10% to 20%. The card network (Visa, Mastercard, American Express, Discover) takes the smallest piece, usually 5% to 10%.
Interchange rates are set by the card networks and vary by card type. A rewards card might have a 2.5% interchange rate, while a basic card might be 1.5%. A business card or premium travel card can run 3% or higher. The merchant has no say in these rates — they are published and non-negotiable. What merchants can negotiate is the processor's markup on top of the interchange, which is where payment processors compete for business.
Why rewards cards cost merchants more
When you earn cash back, points, or airline miles on a credit card purchase, the merchant is paying for that reward. The card issuer funds the rewards program from the interchange fee it receives. A card offering 2% cash back has a higher interchange rate than a card offering no rewards, so the merchant's cost goes up.
This is one reason merchants sometimes discourage high-reward cards or set purchase minimums. They are absorbing the cost of your rewards. Some merchants have tried to pass this cost directly to customers by charging more for credit card purchases than cash, though this practice is restricted in some states and by some card networks.
How merchant size and industry affect the fees they pay
A large retailer like Target or Walmart negotiates rates based on their sales volume and low risk. They might pay 1.5% to 1.8% on most transactions. A small independent bookstore or boutique, processing far fewer transactions, typically pays 2.5% to 3.5%. The payment processor charges more to small merchants because the fixed costs of processing are spread across fewer sales.
Industry matters too. Restaurants and gas stations pay higher rates — often 2.8% to 3.5% — because they have higher fraud and chargeback rates. Grocery stores and pharmacies pay lower rates because they are lower-risk. Online merchants typically pay more than in-person merchants. A merchant in a high-risk category might pay double what a supermarket pays for the same card type.
The difference between interchange, assessment fees, and processing markups
The merchant discount rate includes three separate charges. Interchange is the fee paid to the card issuer and is set by the card network. Assessment fees are charged by the card network itself (Visa, Mastercard, etc.) and are usually 0.1% to 0.15% of the transaction. Processing markup is what the payment processor adds on top of interchange and assessment to cover their own costs and profit.
A merchant's invoice from their payment processor will often break these out separately, though many small merchants see only the combined rate. Understanding the split matters if a merchant is shopping for a new processor — they can negotiate the processing markup but not the interchange or assessment fees, which are fixed by the networks.
Why some merchants refuse certain cards or set minimums
A merchant who refuses American Express or requires a $10 minimum for credit cards is making a cost decision. American Express typically charges merchants 2.5% to 3.5% because Amex keeps a larger share of the fee than Visa or Mastercard do. A $5 coffee sale with a 3% Amex fee costs the merchant $0.15 plus the per-transaction fee — potentially $0.40 to $0.50 total, which is 8% to 10% of the sale price.
Minimum purchase requirements are one way merchants try to make small credit card sales profitable. A $10 minimum means the merchant loses less on the percentage fee. Some merchants offer a discount for cash (typically 2% to 3%) to offset the credit card cost. A few states and card networks restrict these practices, so the rules vary by location and card type.
What merchants do to manage these costs
Merchants manage credit card fees in several ways. Some negotiate with their payment processor for a lower markup, especially if they process high volume or have low fraud. Others use a tiered pricing model where they charge different rates for different card types — basic cards cost less than rewards cards. Some switch processors periodically to find better rates.
Larger merchants sometimes join purchasing groups or networks that negotiate rates on their behalf. Small merchants often have less leverage and end up paying standard rates. A few merchants have moved to cash-only or mobile payment systems to avoid card fees entirely, though this limits their customer base. Most accept that credit card fees are a cost of doing business and factor them into their prices.
Frequently Asked Questions
Can a merchant refuse to take my credit card?
Yes. A merchant can refuse any card type or require a minimum purchase amount, with some exceptions. American Express, Discover, and most Visa/Mastercard networks allow merchants to set minimums or refuse cards. Some states restrict these practices, and some card networks have their own rules, so the answer depends on your location and the card type.
Why do some online stores charge more for credit cards than others?
Online merchants pay higher processing fees than in-person merchants because fraud risk is higher and chargebacks are more common. A merchant processing $1 million in online sales might pay 2.9% plus fees, while an in-person retailer processing the same amount might pay 1.9%. These costs get passed to customers through higher prices or surcharges.
Do debit cards cost merchants less than credit cards?
Yes, usually. Debit card interchange rates are typically 0.5% to 1%, much lower than credit cards. This is why some merchants encourage debit over credit. However, debit cards still have per-transaction fees, so the total cost is lower but not zero.
Who sets the interchange rate — the merchant's bank or the card network?
The card network (Visa, Mastercard, American Express, Discover) sets interchange rates. Merchants cannot negotiate these rates. What they can negotiate is the payment processor's markup on top of the interchange, which varies by processor and merchant size.
Does a merchant pay the fee if a customer disputes the charge?
No. If a customer disputes a charge and the merchant loses the dispute (a chargeback), the merchant refunds the customer and also pays a chargeback fee to the card issuer, typically $15 to $100. The merchant loses both the sale and pays an additional penalty.