Merchants pay a percentage of each transaction plus a flat fee to accept credit cards

When you swipe or tap a credit card at checkout, the merchant does not receive the full amount you paid. A merchant discount rate — typically between 1.5% and 3.5% of the transaction value — goes to the card network and the bank that issued your card. On top of that percentage, merchants usually pay a flat fee per transaction, often 20 to 30 cents. These costs come out of the merchant's revenue, not from you as the cardholder.

The exact amount a merchant pays depends on the type of card used, the merchant's industry, their sales volume, and the payment processor they contract with. A small coffee shop accepting a rewards card might pay 2.9% plus 30 cents per transaction. A large grocery chain accepting a basic debit card might negotiate down to 1.5% plus 15 cents. The merchant has no control over what you choose to pay with — they absorb whatever rate applies to that card type.

These fees are the reason some merchants set minimum purchase amounts for card payments, offer cash discounts, or add a surcharge for credit cards (where state law permits). The fees also explain why merchants push customers toward debit cards or direct payment methods: the cost to process them is lower.

Key Takeaways

  • Merchants pay a percentage of the sale (1.5% to 3.5%) plus a per-transaction fee (typically 20 to 30 cents) every time a customer uses a credit card.
  • The merchant discount rate varies by card type, industry, and the merchant's negotiating power with their payment processor.
  • Rewards cards and premium cards cost merchants more to process than basic or debit cards.
  • Merchants cannot pass the full cost to cardholders in most states, but they can set minimum purchase amounts or offer cash discounts.
  • Payment processors, card networks, and issuing banks all take a cut of the merchant discount rate.

How the merchant discount rate breaks down

The percentage a merchant pays is split among three parties: the card network (Visa, Mastercard, American Express, Discover), the issuing bank (the bank that gave you the card), and the payment processor (the company that handles the transaction for the merchant). The issuing bank typically takes the largest share, often 70% to 80% of the total rate. The card network takes a smaller percentage, and the processor keeps the remainder.

For example, if a merchant pays 2.5% on a $100 Visa transaction, that $2.50 might break down as $1.75 to the issuing bank, $0.50 to Visa, and $0.25 to the processor. The merchant never sees a detailed receipt showing this split — they see only the total fee charged by their processor.

The issuing bank's cut is called interchange, and it is set by the card networks, not negotiated between the merchant and the bank. Interchange rates are published and change periodically. Merchants cannot negotiate interchange down, though they can sometimes negotiate the processor's markup or the flat per-transaction fee.

Why rates differ by card type

A basic credit card costs less to process than a rewards card. Rewards cards carry higher interchange because the issuing bank pays out cash back, points, or travel benefits to cardholders, and that cost gets passed to merchants. A card offering 2% cash back will have a higher interchange rate than a card offering no rewards.

Premium cards — those with annual fees and high-end benefits — cost merchants the most. A business card or luxury travel card might carry an interchange rate of 2.5% or higher, while a basic card might be 1.5%. American Express cards typically cost merchants more than Visa or Mastercard because American Express sets its own rates and does not allow merchants to negotiate as much.

Debit cards cost less than credit cards because there is no credit risk and no rewards program to fund. A debit card transaction might cost a merchant 1% or less. This is why some merchants prefer debit payments and why they sometimes offer a discount for cash or debit.

What merchants negotiate and what they cannot

Merchants cannot negotiate interchange rates — those are set by the card networks and are the same for all merchants in a given industry. What merchants can negotiate is the processor's markup and the flat per-transaction fee. A large merchant with high sales volume has more leverage to negotiate these costs down than a small business.

A small merchant might accept a processor's standard offer of 2.9% plus 30 cents. A large chain might negotiate the same processor down to 2.2% plus 15 cents. The difference comes from the processor's willingness to accept lower margins in exchange for higher volume.

Merchants also choose their payment processor based partly on total cost. Some processors specialize in high-volume retail and offer lower rates. Others focus on online or subscription businesses and price accordingly. A merchant can switch processors if they find a better rate, though switching involves some setup time and cost.

How merchant fees affect prices you pay

Merchants factor processing costs into their pricing. A retailer that pays 2.5% in fees on every credit card sale will set prices higher than a retailer that pays 1.5%. The cost does not disappear — it gets built into the price of goods and services. This means all customers, including those who pay cash, effectively subsidize the cost of credit card processing.

In states where it is legal, some merchants add a surcharge to credit card purchases to offset the fee. This surcharge is typically 2% to 4% and appears at checkout. Other merchants offer a discount for cash or debit instead, which is legal everywhere. Both approaches make the cost of credit card processing visible to the customer.

Merchants in industries with thin margins — grocery stores, gas stations, restaurants — are hit hardest by processing fees. A grocery store operating on a 2% profit margin cannot absorb a 2.5% processing fee without raising prices or reducing staff. This is why some grocery stores set minimum purchase amounts for card payments or offer loyalty programs that reward cash or debit use.

Fees for online and card-not-present transactions

Online merchants and merchants who take card details over the phone pay higher rates than in-person merchants. A card-not-present transaction carries more fraud risk because the merchant cannot verify the cardholder's identity in person. Interchange rates for online purchases are typically 0.3% to 0.5% higher than for in-person transactions.

Merchants also pay for fraud protection and chargeback handling. If a customer disputes a charge or claims fraud, the merchant may have to refund the customer and pay a chargeback fee to the processor, usually $15 to $100 per dispute. Merchants with high chargeback rates may see their processing fees increase or face termination by their processor.

Subscription and recurring billing merchants also pay higher rates because of the increased fraud and chargeback risk. A merchant processing monthly subscription payments might pay 0.5% more than a merchant processing one-time purchases.

What has changed in merchant fees over time

Interchange rates have generally risen over the past two decades, particularly as rewards programs have become more generous. When cash back and points were rare, interchange was lower. As issuers began offering 1%, 2%, and even 3% cash back, they raised interchange to cover that cost, which raised merchant fees.

The 2008 financial crisis and the Dodd-Frank Act led to a temporary cap on debit card interchange, which lowered fees for debit transactions but did not affect credit card rates. Since then, credit card interchange has continued to rise in line with rewards offerings.

The shift to contactless and mobile payments (Apple Pay, Google Pay) has not significantly changed merchant fees. The rate structure remains the same whether the card is physically present or transmitted digitally. However, some payment processors offer lower rates for certain payment methods as a competitive advantage.

Frequently Asked Questions

Can a merchant refuse to accept a specific credit card?

Yes. A merchant can refuse any card brand or type, though most accept all major networks because customers expect it. Some merchants refuse American Express because its rates are higher. A merchant cannot refuse a card based on the cardholder's identity or protected characteristics, but they can refuse based on the card itself.

Why do some merchants charge a fee for credit card payments?

Merchants charge a surcharge (where legal) to offset the processing cost. A 3% surcharge on a $100 purchase recovers roughly the merchant's cost to process that card. Surcharges are legal in most states but capped at the merchant's actual processing cost. A few states prohibit surcharges entirely.

Do debit cards cost merchants less than credit cards?

Yes. Debit card interchange is typically 0.5% to 1%, compared to 1.5% to 3.5% for credit cards. This is why some merchants offer a discount for debit or cash. The lower cost reflects lower fraud risk and the absence of a rewards program to fund.

Who sets the interchange rate?

The card networks — Visa, Mastercard, American Express, and Discover — set interchange rates. Merchants cannot negotiate these rates. The issuing bank receives most of the interchange but does not set the rate itself. Merchants can only negotiate the processor's markup on top of interchange.

Does a merchant's size affect what they pay in fees?

Yes. Large merchants with high sales volume can negotiate lower processor markups and per-transaction fees. Interchange rates remain the same regardless of size, but a big-box retailer might negotiate the total fee down to 1.8% while a small shop pays 2.9% for the same card type.