HomeFinanceHow Do Banks Calculate Transaction Fees on Your Credit Card?

How Do Banks Calculate Transaction Fees on Your Credit Card?

How Do Banks Calculate Transaction Fees on Your Credit Card?

It’s no secret. Financial institutions collect a credit card processing fee when you swipe your Visa or Mastercard. And transaction fees vary depending on the type of merchant account you have. While many things go into calculating transaction fees, six prominent factors determine the overall price.

Merchant Discount Rate (MDR)

The MDR is an interchange fee charged by card issuers to merchants. The higher the MDR, the more expensive it is for merchants to accept that type of credit card. As such, some merchants may charge you extra to use this type of credit card.

Percentage of Sale

The processing fee is usually charged as a percentage of the total purchase amount, with the percentage rate varying by company. Depending on which credit card processor you use, you may also be charged interchange and/or penalty fees.

Swiped v. Keyed Transactions

For swiped transactions, the fee is usually 1.5% of the purchase price plus $0.10. For keyed transactions, the cost can vary depending on how much information you provide and whether or not your credit card company has an agreement with the merchant’s bank.

Keyed transaction fees typically run 2.75% of your purchase plus $0.20, and charges incur whenever a merchant key-enters card information or asks you to sign for your purchase. In addition, many banks charge an extra monthly fee just for being a customer—no matter how little you use your card.

Annual Fees

The amount of the transaction is one factor in determining the fee. The type of credit card users use can also impact the fee. For example, other fees may be associated with processing a transaction, such as a processing fee or chargeback fee.

Chargeback Fees

Merchants may have to pay a chargeback fee when a customer with a credit card disputes a charge. The fee is typically around $15-30.

Factors that impact the Chargeback Fee Amount:

  1. Fraudulent transactions,
  2. Late or non-payment of your credit card bill,
  3. Unauthorized use of your account information,
  4. There’s been a change in address,
  5. There’s been an unauthorized transaction on your account,
  6. You have more than one card linked to your account that you don’t authorize another person to use
  7. You call the credit card company to dispute a charge.

Chargebacks can be severe for businesses because they result in financial loss, damaged reputation, and lost profits. If you want to avoid this risk altogether, it’s best to avoid accepting credit cards by going strictly cash only for transactions.

Currency Conversion Rates

Exchange rates will fluctuate over time. This fluctuation is due to the base currency, the conversion rate to the destination currency, and the cost of exchanging one unit of foreign currency for one unit of that base currency.

According to experts at SoFi, “Average credit card processing fees can range anywhere from 1.40% to 4.35%.” The critical thing to remember is that you will be charged a fee for every purchase that you make with your credit card.

I am Content Writer . I write Technology , Personal Finance, banking, investment, and insurance related content for top clients including Kotak Mahindra Bank, Edelweiss, ICICI BANK and IDFC FIRST Bank. Linkedin


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