Merchants pay a percentage of every credit card sale, plus a flat fee per transaction

When you swipe or tap a credit card at checkout, the merchant doesn't keep the full amount you paid. A merchant discount rate — typically between 1.5% and 3.5% of the sale — goes to the card network and the bank that issued your card. On top of that, merchants usually pay a separate flat fee, often 20 to 30 cents per transaction. These costs are why some small businesses offer discounts for cash or set minimum purchase amounts for card payments.

The exact rate depends on what kind of business it is, how they process the card (in person, online, or by phone), and how much volume they do. A grocery store pays a different rate than a restaurant, which pays a different rate than an online retailer. The card networks — Visa, Mastercard, American Express, and Discover — set the base rates, but individual banks negotiate on top of that.

You don't see these charges on your receipt because they happen behind the scenes. But they're real costs that businesses factor into their prices, which is why you sometimes see "cash discount" signs or why online retailers charge shipping fees that seem to cover more than just postage.

Key Takeaways

  • Merchants pay a percentage of each sale (the merchant discount rate) plus a per-transaction fee, totaling roughly 2% to 3.5% of the purchase price for most card types.
  • The card networks set base rates, but the actual cost to a merchant depends on the business type, sales volume, and how the card is processed.
  • Rewards cards and premium cards cost merchants more than basic cards because the issuing bank pays out higher rewards to cardholders.
  • These fees are built into the prices you pay — merchants don't absorb them; they pass them along through higher retail prices.

How the money splits between the card network and the bank

When a merchant pays that 2% to 3.5% rate, it doesn't all go to one place. The largest chunk — usually 1% to 2% — goes to the issuing bank, the bank that gave you your credit card. This is called the interchange fee. The card network (Visa, Mastercard, etc.) takes a smaller cut, typically 0.1% to 0.3%. The merchant's own bank, called the acquiring bank, also takes a small percentage for processing the transaction.

The issuing bank's cut is the biggest piece because that's the bank taking the risk if you don't pay your bill. The bank also funds your rewards — every cash-back percentage or airline mile you earn comes out of that interchange fee. This is why premium cards with higher rewards cost merchants more: the issuing bank needs a bigger cut to pay for your benefits.

The card network's cut is smaller but adds up quickly across millions of transactions. Visa and Mastercard don't lend money or take credit risk; they run the infrastructure that connects merchants, banks, and cardholders.

Why rewards cards cost merchants more than basic cards

A merchant pays more to accept a 2% cash-back card than a card with no rewards. The difference is usually small — maybe an extra 0.2% to 0.5% — but it's real. That extra cost is how your rewards get funded. The issuing bank needs a larger cut of the interchange fee to pay you back.

Premium cards with high rewards (like 3% cash back on certain categories, or airline miles) cost merchants the most. A business card with no rewards costs less. This is one reason some merchants have historically preferred customers to use debit cards or cash — those cost them significantly less to process.

You won't see this difference reflected in your receipt, and merchants can't legally charge you more for using a rewards card. But it's one reason why some small businesses offer cash discounts or why certain merchants have minimum purchase requirements for card payments.

Different rates for different types of businesses

A grocery store, a gas station, a restaurant, and an e-commerce site all pay different merchant rates, even for the same card. The card networks set rates based on the merchant category code — a classification that reflects how risky the business is from the card network's perspective.

Grocery stores and gas stations typically pay lower rates because they're considered lower-risk: the transaction is straightforward, the customer is present, and chargebacks are rare. Restaurants pay more because they have higher chargeback rates and more complex transactions (tips, split checks, delayed charges). Online retailers pay more than in-person merchants because there's no physical card to verify and chargebacks are more common. Subscription services and travel companies pay the highest rates because customers frequently dispute charges.

A merchant's volume also affects their rate. A large chain store negotiates a better rate than a small independent shop because the card networks want their business. But even large merchants can't negotiate below the card networks' base rates — those are set by Visa and Mastercard and apply to everyone in that category.

How merchants process cards and what that costs

The way a merchant processes your card also changes the fee. In-person transactions where the card is physically present cost less because fraud risk is lower. Card-not-present transactions — online, by phone, or by mail — cost more because the merchant can't verify the card is real or that you authorized the charge.

If a merchant uses a payment processor like Square, Stripe, or PayPal, they typically pay an all-in rate that bundles the interchange fee, network fee, and processor's cut into one number. These rates are usually higher than what a large merchant with a direct relationship to a bank would pay, but they're simpler and require less setup.

Some merchants use point-of-sale systems that connect directly to their bank's acquiring system, which can lower costs but requires more technical infrastructure. Small businesses almost always use a payment processor because it's easier and the per-transaction cost is predictable.

Why some merchants push cash or debit instead of credit

You may have noticed signs offering discounts for cash or asking you to use debit instead of credit. This is because debit cards and cash cost merchants significantly less. A debit card transaction might cost 1% or less, and cash costs nothing. A credit card transaction costs 2% to 3.5%.

On a $100 purchase, the difference between cash and a rewards credit card can be $2 to $3. For a small business with thin profit margins, that adds up. Some merchants have tried to pass this cost back to customers by charging a "credit card surcharge," but this is illegal in most states and prohibited by the card networks' rules in others.

The legal workaround is the cash discount: merchants can offer a lower price for cash without violating the rules. They just can't charge extra for credit. This is why you see "$X cash price, $X+0.50 credit price" at some gas stations and small shops.

What happens when a customer disputes a charge

When you file a chargeback — disputing a charge with your credit card company — the merchant faces additional costs. The issuing bank charges the merchant a chargeback fee, typically $15 to $100 per dispute, just for processing it. If the merchant loses the dispute, they also lose the original sale amount plus the fee.

High chargeback rates can push a merchant into a higher fee category or even get them dropped by their payment processor. This is why merchants are motivated to prevent fraud and why they ask for signatures, ID, or address verification — not just to protect themselves, but because chargebacks are expensive.

From your perspective as a cardholder, this is actually a benefit: the chargeback process exists partly because merchants have to pay for it, which creates an incentive for the system to work fairly. But it's another cost built into the merchant's fee structure.

Frequently Asked Questions

Do merchants have to accept all credit cards?

No. Merchants can choose which card networks they accept. Some small businesses accept only Visa and Mastercard, not American Express or Discover, because Amex and Discover typically charge higher rates. However, most merchants accept all four because customers expect it and refusing cards costs them sales.

Can a merchant charge me extra for using a credit card?

In most states, no — card network rules prohibit merchants from charging a surcharge for credit cards. However, merchants can offer a discount for cash or debit. The difference is subtle but legal: a discount for one payment method is allowed; a surcharge for another is not.

Why do online stores charge shipping when in-person stores don't?

Online merchants pay higher credit card processing fees because card-not-present transactions have higher fraud risk. They also have actual shipping costs. The combination means their total cost per sale is higher, so they charge shipping to cover it. In-person retailers build their card processing costs into the shelf price instead.

Do I pay more for using a rewards card?

You don't pay more directly — the price on the shelf is the same. But merchants do pay more to accept a rewards card, and that cost is built into the prices everyone pays. In effect, non-rewards cardholders and cash customers subsidize rewards cardholders slightly.

What's the difference between Visa and Mastercard rates?

Visa and Mastercard set their own interchange rates, and they're usually very similar — within a few basis points of each other. The bigger difference is between card types (rewards vs. basic, premium vs. standard) and merchant categories. Two merchants might pay different rates for the same Visa card depending on their business type and volume.