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Charge! What Credit Cards May Cost You

Credit cards are convenient for consumers, but merchants pay a variety of fees for the privilege of accepting plastic. Here's what happens when you follow the money

1. Retailer

Charges made on a MasterCard or Visa are processed through a network of banks and service associations, with each player taking a cut along the way. American Express and Discover own their own networks and generally keep all the fees.

2. Merchant Acquirer

The merchant acquirer signs up merchants to accept cards, routes transactions to the card network, and ultimately pays the merchant. In return, it collects a fee of about 2% of the transaction value, passing most of it on to the credit-card issuing bank. The percentage can vary.

Card present: Sales where a physical card exchanges hands carry the lowest fees, since those sales are at the lowest risk for fraud. Percentage: 2%

Card not present: (mail order, telephone, and Internet) These transactions are at higher risk for fraud, so the fee is usually higher. Percentage: 2.5%

Debit PIN: The use of a Personal Identification Number (PIN) helps keep fraud down, resulting in a lower fee. Percentage: 1.35%

Business cards: These cards typically carry higher fees. Percentage, if the card is not present: 2.85%

Rewards programs: Merchants are typically charged a much higher fee for rewards cards to pay for all those consumer perks. Percentage: 2.5% + 10 cents

Debit signature: When a customer signs for a debit-card purchase rather than using a PIN, the fee is relatively high. Percentage: 2.5%

3. Credit-Card Network

The card network manages the payment flow and is responsible for keeping the network secure. Fee: about 15 cents on a $100 charge.

Amex and Discover credit-card networks: Discover and American Express own their own networks, so they keep the entire transaction fee. American Express: 2.55%, Discover: 1.8%.

4. Issuing Bank

The bank that issued the credit card typically keeps about $1.77 of a $2 fee. Some of that goes to cover fraud—if charges are made on a stolen card, the bank may have to eat the loss.

5. Merchant

The merchant collects the value of the transaction minus the fee, while the consumer pays the entire face value when his/her statement comes in the mail.

Return to the BWSmallBiz December 2009/January 2010 Table of Contents

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