Payment Processing: Merchant Accounts, Stripe, Square, and Fees

Every Swipe Costs You Money

Every time a customer pays you with a credit card, debit card, or digital wallet, a slice of that payment goes to the payment processor, the card network, and the issuing bank. These fees typically range from 1.5% to 3.5% per transaction. On $500,000 in annual card revenue, that is $7,500 to $17,500 per year.

Understanding how these fees work and choosing the right processor can save you thousands of dollars annually.

How Payment Processing Actually Works

When a customer swipes, taps, or enters their card number, the payment goes through four parties:

Your customer's bank (issuing bank) — the bank that issued the credit or debit card
The card network (Visa, Mastercard, Amex) — the network that routes the transaction
Your payment processor — the company that handles the transaction on your behalf
Your bank (acquiring bank) — where the funds are deposited

Each party takes a cut. The issuing bank takes the largest share (interchange fee), the card network takes a small assessment fee, and your processor takes a markup on top.

Pricing Models Explained

Flat-Rate Pricing

You pay the same percentage on every transaction regardless of card type. Simple and predictable.

Example: 2.9% + $0.30 per online transaction, 2.6% + $0.10 per in-person transaction.

Best for: Low-volume businesses (under $10,000/month in card sales) and businesses that value simplicity.

Providers: Square, Stripe, PayPal.

Interchange-Plus Pricing

You pay the actual interchange fee (which varies by card type) plus a fixed markup from your processor. More transparent but more complex.

Example: Interchange + 0.3% + $0.10 per transaction.

Best for: Higher-volume businesses (over $10,000/month) where the savings over flat-rate add up.

Providers: Helcim, Payment Depot, most traditional merchant account providers.

Tiered Pricing

Transactions are grouped into tiers (qualified, mid-qualified, non-qualified) with different rates. This sounds simple but often hides the highest costs in the "non-qualified" tier where most premium and corporate cards land.

Best for: No one, honestly. This model is the least transparent and typically the most expensive. Avoid it.

The Major Players Compared

Square

Best for: Brick-and-mortar businesses, pop-up shops, and field service companies that invoice.

Flat-rate: 2.6% + $0.10 (in-person), 2.9% + $0.30 (online), 3.5% + $0.15 (manually keyed)
Free POS system and card reader
No monthly fees on the basic plan
Built-in invoicing, appointments, and inventory
Next-business-day deposits (instant for a fee)

Stripe

Best for: Online businesses, SaaS companies, and anyone needing custom payment integration.

Flat-rate: 2.9% + $0.30 (online), 2.7% + $0.05 (in-person)
Extremely flexible API for custom integrations
Supports subscriptions, marketplace payments, and international transactions
More developer-focused; requires technical setup for advanced features

PayPal

Best for: Businesses that need a trusted name for online payments and want buyer/seller protection.

Flat-rate: 2.99% + $0.49 (standard online), varies by product
Widely recognized and trusted by consumers
Easy setup with no technical knowledge required
Higher fees than competitors for most transaction types

Traditional Merchant Accounts

Best for: High-volume businesses processing over $20,000/month that want the lowest possible rates.

Interchange-plus pricing with negotiable markups
Often require contracts with early termination fees
May charge monthly minimums and statement fees
Lower per-transaction costs at volume

Hidden Fees to Watch For

PCI compliance fees. Some processors charge $10-30/month for PCI compliance. Others include it. Ask.

Chargeback fees. When a customer disputes a charge, you pay a fee ($15-25 typically) regardless of who wins the dispute.

Monthly minimums. Some merchant accounts charge a fee if your monthly processing volume does not meet a minimum threshold.

Early termination fees. Traditional merchant accounts may lock you into a contract with fees of $200-500 for canceling early.

Equipment leases. Never lease a card terminal. The lease costs over its term will far exceed just buying one outright. A good terminal costs $300-600 to purchase.

How to Reduce Your Processing Costs

Encourage debit card and ACH payments. Debit card interchange rates are roughly half of credit card rates. ACH bank transfers cost even less (typically $0.25-1.00 per transaction).

Use chip and tap for in-person payments. Manually keyed transactions have the highest fees because they carry the highest fraud risk.

Negotiate if you have volume. Once you process over $15,000-20,000/month, you have leverage to negotiate better rates.

Pass fees to customers (carefully). Some businesses add a credit card surcharge. This is legal in most states but must be disclosed clearly. Check your state laws.

Review your statements monthly. Look for fee increases, new charges, and rate changes. Processors do not always announce changes prominently.

Bottom Line

Payment processing is a cost of doing business, but it does not have to be an excessive one. Start with Square or Stripe for simplicity. As your volume grows, evaluate interchange-plus pricing. Read every fee schedule, avoid long-term contracts, and review your statements regularly. The difference between a good and bad processing setup can be thousands of dollars per year.