Demystifying Payments Pricing: What You’re Really Paying For

Whenever you accept a credit or debit card payment, several parties take a slice of the pie. Here are the main components of card processing fees:

• Interchange Fees (Wholesale Cost): Interchange fees make up the largest portion of processing costs. These fees are set by the card networks (Visa, Mastercard, etc.) and go to the issuing bank (the bank that issued your customer’s credit card). Interchange is essentially the base cost for using the card network’s infrastructure and guaranteeing payment. Rates vary widely depending on card type and transaction details – there are hundreds of interchange categories based on factors like card brand, rewards level, merchant industry, transaction amount, etc. For example, a premium rewards credit card carries a higher interchange rate than a basic debit card. Interchange is typically charged as a percentage of the sale (e.g. 1.8%) plus a fixed per-transaction amount (e.g. $0.10). These fees are non-negotiable – every processor pays the same interchange rates to the banks​.

• Assessment Fees (Card Network Fees): In addition to interchange, the card networks charge assessment or network fees. These are usually smaller percentages (on the order of 0.13% – 0.15%) applied to each transaction, and sometimes per-item fees of a few cents. Assessment fees go to the card brands (Visa, MasterCard, Discover, Amex) to cover their operating costs​. Like interchange, all merchants pay the same assessment rates; processors simply pass them through to you.

• Processor Markup (Merchant Service Provider Fees): The third component is the payment processor’s own fees for facilitating the transaction. This is the portion you can shop around and negotiate. It often includes a percentage markup on each transaction, per-transaction fees, and possibly monthly fees or support fees. Essentially, this is how the processor (or merchant services provider) makes money for the services they provide (payment gateway, risk management, customer support, etc.). Unlike interchange and assessments which are fixed costs, the markup is the only portion of your fees that is negotiable​. For instance, one processor might charge 0.3% + 10¢ per transaction as their markup, while another might charge 0.5% + 5¢ – those differences directly impact your bottom line.

In summary, whenever you see a processing fee on your bill, it typically comprises interchange + assessment + markup. If you’re on a pass-through pricing plan, these may be listed separately; if not, they might be blended together. But either way, those three components are in there. As one source puts it, “Pass-through fees are a combination of interchange fees, assessment fees and payment processor fees”​. The key for merchants is to understand how much of your total cost is the fixed wholesale (interchange/network) and how much is markup – because markup is where you can potentially save money.

Not all processors bill merchants the same way. The structure of your pricing plan makes a big difference in transparency and cost. Let’s decode the major pricing models:

• Interchange-Plus (Pass-Through Pricing): With interchange-plus (also called cost-plus or pass-through), you pay the actual interchange and assessment fees on each transaction, plus a fixed markup to your processor. For example, your rate might be “Interchange + 0.30% + $0.10.” If a given transaction’s interchange+assessment comes out to 1.8% + $0.10, you’d pay that, plus the markup (0.3% + $0.10 in this example). The benefit of interchange-plus is transparency – you can see exactly what the card networks charged versus what your provider is adding. It’s often lower cost for many businesses, especially those with high volume, because you’re only paying a small fixed markup over the base cost. As Stripe notes, “the interchange plus model often provides greater transparency and lower markup rates since you pay the exact interchange rate plus a small, fixed processor markup”​. Interchange-plus makes it easier to comparison-shop providers (you can directly compare markups) and ensure you’re getting a competitive deal.

• Tiered Pricing: Tiered pricing bundles the various interchange rates into general buckets that the processor sets (often labeled Qualified, Mid-Qualified, and Non-Qualified tiers). The processor assigns each transaction to a tier and charges a fixed rate for that tier. For instance, they might advertise: 1.69% for Qualified, 2.50% for Mid, 3.50% for Non-Qualified. On the surface this seems simple, but the devil is in the details. Processors have leeway to decide which transactions fall into each tier, and they often downgrade many transactions to higher-cost tiers. Qualified might only include basic debit cards, whereas reward cards, business cards, keyed-in transactions, etc., get pushed to Mid or Non-Qualified tiers with higher rates​. The result: you often end up paying much more than the advertised “as low as 1.xx%” rate. Tiered pricing lacks transparency because you can’t easily tell how much of that rate was interchange versus markup. A tier might blend, say, a 1.8% interchange with an extra 1.7% markup and just show it as “3.5% Non-Qualified.” Many experts recommend avoiding tiered plans for this reason – “Tiered pricing... isn’t quite transparent. Merchants can end up paying high fees if they have many non-qualified transactions and processors may even abruptly change their classification criteria.”​. In short, tiered pricing makes it hard to know what you’re really paying for each transaction, and it often ends up more expensive.

• Flat-Rate Pricing: Flat-rate providers charge a single, all-inclusive rate for all transactions, regardless of card type. For example, a payment aggregator might charge 2.9% + $0.30 for every transaction, whether it’s a debit card or a corporate Amex. This model is very simple – you always know the exact percentage you’ll pay. Flat rates can be good for businesses with small volumes or very small transactions (where a fixed $0.30 is more impactful than percentages). Companies like Square and PayPal popularized this with predictable pricing. However, simplicity can come at a cost: the flat rate is usually set high enough to cover even expensive card types, which means you might pay more than necessary on a lot of transactions. Essentially, the processor is averaging out the costs and adding a comfortable margin. If your mix of cards is mostly low-cost debit, you might overpay under flat pricing. Still, many small businesses gladly trade a bit of savings for the ease of one rate.

• Membership or Subscription Pricing: A newer model some providers offer is subscription-based pricing. In this setup, you pay a fixed monthly fee (membership) and then pass-through interchange at cost with no percentage markup. For example, a provider might charge $99 per month and then 0% + $0.08 per transaction (covering just interchange and a small per-item fee). The monthly fee essentially covers the processor’s margins. This model can yield savings for businesses with higher volume – the more you process, the more you benefit from 0% markup. It’s very transparent and aligns the processor’s interest with yours (they make money on the flat fee, not by adding percentage costs). The downside is you pay the membership fee regardless of volume, so it only makes sense if your sales are high enough. Providers like Stax have championed this model (Stax, for instance, charges a flat monthly subscription and “does not charge a fee on top of the standard interchange rates”​).

Which model is best? It depends on your business size and transaction profile. Interchange-plus is generally the most transparent and often lowest cost for mid-to-large businesses, since you only pay a clearly defined markup. Tiered pricing is usually the least favorable for merchants – it’s opaque and often pricey​. Flat rate is simple and can be fine for small or intermittent volumes, but you might outgrow it as your volume increases. Subscription models can offer great savings if your volume justifies the monthly fee.

Importantly, when negotiating with processors, focus first on the pricing model, then the rates. If you’re on a suboptimal model (like tiered), negotiating a slightly lower rate won’t help as much as switching to a better model. As CardFellow advises, “The first step to lower processing costs is to negotiate a favorable pricing model... Without the right pricing model, the rates and fees you negotiate can be manipulated”​. So, get on interchange-plus or a subscription plan if you can; then ensure the markup or fee structure is competitive.

Now that we’ve unpacked the fee components and pricing models, let’s talk about the bottom line: Where can you find savings in your payment processing costs? Here are some tactical ways to identify overcharges and reduce your expenses:

• Examine Your Statement: Take a close look at your merchant account statement or online reporting each month. Break out the total fees into the three buckets – interchange, assessments, and processor markup. Interchange and assessment (network) fees are pass-through; you can’t change those, but you can verify that they match official rates. The markup portion is where to focus. If your provider doesn’t show an itemized breakdown, ask them for one, or consider switching to a provider that offers transparent reporting. Many merchants have been surprised by hidden surcharges or higher-than-expected markups once they dig into the details.

• Compare Effective Rate: Calculate your effective rate by dividing total fees by total volume for the month. For example, if you paid $2,500 in fees on $100,000 of sales, your effective rate is 2.5%. Now compare that to what you thought you were paying. If you’re on a “2.2% plus $0.10” interchange-plus plan, the math might not exactly equal 2.2% due to interchange variations, but it should be in that ballpark. If you’re seeing an effective rate of 3%+ consistently and you don’t sell in a notoriously high-cost category, it’s a flag to investigate and negotiate.

• Know What’s Negotiable: Remember, **interchange fees are set by Visa/Mastercard and “remain the same no matter which processor you choose”​– you cannot negotiate interchange or network assessments. Don’t let a sales rep mislead you into thinking they have a special deal on interchange; they don’t. What you can negotiate is the processor’s markup and ancillary fees. Things like monthly account fees, PCI compliance fees, statement fees, and of course the per-transaction markup are all on the table. If you’re a high-volume merchant, you have more leverage to demand lower markups. Even for smaller businesses, shopping around can often find a better deal.

• Eliminate Junk Fees: Speaking of ancillary fees, scrutinize those as well. Some processors tack on fees for things like PCI non-compliance (which you can avoid by completing your compliance questionnaire), “regulatory fees,” or even monthly minimum fee (charging you if your fees didn’t reach a certain threshold). If you see unexplained fees, ask about them. Often, processors will waive certain fees to keep your business, especially if competitors aren’t charging them.

• Reduce Chargebacks and Fraud: High chargeback ratios can lead to added costs (higher risk pricing or penalties). Invest in fraud prevention tools like AVS (Address Verification Service) and CVV checks, and have solid customer service practices to resolve disputes before they become chargebacks. Lower risk can translate into lower fees, as processors often charge less for transactions deemed lower risk​(for instance, some processors have lower rates for card-present transactions versus keyed, due to fraud risk differences). By keeping chargebacks under control, you not only avoid chargeback fees, but you make your account more appealing for better rates.

• Optimize Card Mix (If Possible): This is a more advanced tactic, but some businesses can steer customers toward lower-cost payment types. For example, debit cards usually have lower interchange than credit cards (especially rewards credit cards). Encouraging PIN debit entry or offering an ACH payment option for large invoices could reduce fees. Of course, you must balance customer experience – you don’t want to make paying inconvenient. But loyalty programs or simple prompts like “We prefer debit for purchases under $50” (if done subtly) might shift your payment mix over time.

• Leverage Level II/III Processing: If you do B2B sales and accept a lot of corporate or purchasing cards, look into providing Level II and Level III data with your transactions. Business and government cards have interchange reductions when additional data (like tax amount, PO number, line item details) is sent with the transaction. Using a payment gateway or processor that supports Level II/III data can automatically lower the interchange fees on those transactions – savings that go straight to your bottom line.

• Consider Different Pricing Models: As discussed, if you’re on an opaque or higher-cost model, switching could yield instant savings. Many merchants have found that moving from a tiered plan to interchange-plus saved them significant money because they were no longer being hit with padded “non-qualified” rates. Transparency often equals savings – when you see exactly what you’re paying, it’s easier to spot high markups and push back.

• Negotiate Periodically: Your processing volume or business profile may change over time. Set a calendar reminder to review and renegotiate your merchant services at least annually. If your volume has grown, ask for a lower rate – you’re bringing in more business, so you deserve better pricing. Even if you haven’t grown, letting your processor know you’re shopping around can prompt them to offer discounts or match offers from competitors. Remember, as one expert advises, the goal is to get your markup as low as possible relative to the fixed costs – an aggressive target might be having the markup be only ~15% of your total fee load ​(with interchange being the other ~85%). Use that as a benchmark in negotiations.

By understanding what you’re really paying for in payment processing, you gain control. Instead of just accepting high fees as a cost of doing business, you can actively manage and reduce them. For example, one merchant discovered they were on a tiered plan where over half their fees were processor markup – they switched to an interchange-plus provider and cut their effective rate from over 3% down to 2.2%, saving thousands per year. Those savings can be reinvested into your business or passed on to customers.

Demystifying your payments pricing means peeling back the layers of fees. Once you do, you’ll likely find opportunities to save. Whether it’s negotiating a lower processor margin, choosing a better pricing model, or optimizing how you accept payments, even small percentage improvements can translate into big dollars for your business. In the world of merchant services, knowledge truly is power – and savings.

Example Scenario

To tie it all together, let’s walk through a quick hypothetical example. Imagine Merchant A processes $50,000 in Visa/Mastercard sales in a month, mostly via online transactions. They are currently on a tiered plan and at month’s end they paid $1,650 in fees (an effective rate of 3.3%). After examining their statement, they realize many transactions were classified as “Mid” or “Non-Qualified” without clarity. Merchant A decides to switch to an interchange-plus plan with a new provider at Interchange + 0.25% + $0.10. The next month, the interchange and assessments on their $50,000 in sales amount to, say, $1,200, and the processor’s markup comes out to $125 – total fees ~$1,325, an effective rate of 2.65%. This simple change saved them $325 in one month, or nearly 20% of their processing costs. Over a year, that’s nearly $4,000 back in their pocket.

Your numbers will vary, but the principles hold. By demystifying your payment pricing and taking action on the findings, you ensure you’re not leaving money on the table. For SMBs and larger businesses alike, that can make a meaningful difference in the bottom line. After all, every dollar saved on fees is a dollar added to your profit.

Remember: You’re paying for interchange (the unavoidable base cost of card acceptance) and for your processor’s services. Focus on minimizing the latter through savvy choice of provider and plan. With the mystery gone, you can treat payment processing like the manageable business expense it truly is – one you have the power to optimize.