Payment processing fees explained

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Lauren Craig
October 5, 2023
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Payment processing fees explained

In most cases, merchants simply accept the fees their processor is charging and offset those high transaction costs as a necessary evil of accepting online payments.  It works, you get your deposits, all is good. And you are right all is good, BUT….. can you be doing a better job at controlling these costs? To understand where you can control payment processing costs, you need to understand all the pieces that make up the payment processing price you are paying.  

What are the main payment processing fees?

There are 3 (sometimes 4) pieces to the equation:  Interchange, Assessment, Payment Processor fees, and sometimes, Shopping Cart fees.

1. Interchange Fee

Interchange is the main share of your cost and is the amount of money that will go back to the card issuing bank (the bank that issued the consumer’s card). Each bank takes a calculated risk on granting a consumer a credit card and they offset that risk by charging the merchant that accepts the card. Unfortunately, it’s the cost of doing business in the retail world.  

In the US, there are about 300+ different interchange rates which are publicly available, like the current rates for Visa and Mastercard. Globally, there are many more rates and will differ depending on geography.

It is worth knowing that rates vary greatly depending on several factors. This includes the type of card that is being processed (debit cards, credit cards, or corporate cards), the status of the card (rewards card, premium, or reloadable debit card), industry type, and transaction amount. The rates can range from .05% + $0.10 to 3.10% + $0.22. It’s your payment processor’s job to collect and pay these fees on your behalf.

2. Assessment fee

Assessments are the fees that the card associations (Visa, Mastercard, American Express, and Discover) will take right off the top of every order. The associations take this fee for the “privilege” of accepting their brands, a cost of doing business. The associations are most certainly a for-profit enterprise and they will always take their small piece, generally in the 0.12-0.15% range. These fees are updated and modified twice a year in April and October.

3. Payment processing fee

The third part of the payment processing cost equation is what your processor will charge for processing your transactions. As a merchant, it's very difficult and time-consuming to connect directly to the card associations, which is why the majority of merchants use an intermediary known as a payment processor, like This part of the equation is the only place where a merchant may have a chance to negotiate. Payment processors have wide-ranging fee structure options which will vary depending on what you sell, how you sell, the viability of your business, your average order value, your refund rate, your chargeback rate, and other factors. Each of these variables can have an impact on your rates.

How do payment processing fees work?

As described above, merchants are typically charged three fees for payment processing. Together, these fees make up what is called the Merchant Discount Rate (MDR), the total cost of taking a card payment. 

The MDR can be anything between 1% and 3% depending on how much is charged by each party in the transaction: the banks, the card network, and the processor. 

The bulk of your MDR (around 70% to 80%) consists of the interchange and assessment fees, sometimes called the base rate. The rest (20% to 30%) is made up of the processor fees. 

What fees are associated with credit card processing?

We’ve explained the main fees involved in payment processing, but what additional fees are associated with credit card processing?

Merchant service charges

The merchant service charge (MSC), a transaction fee charged on every payment, makes up the largest proportion of your overall card processing fees. 

The rate depends on the type of card used for the payment, but is roughly:

  • Debit cards - 0.25% to 0.6%
  • Credit cards - 0.3% to 0.9%
  • Commercial credit cards - 1.5% to 2.5%

Payment gateway fees

Online businesses require a payment gateway, which captures and transmits card details, in order to be able to accept card payments. Gateway providers can charge merchants a flat monthly rate for the use of their service (between £10 and £20) or take a percentage of each transaction (between 6p and 10p).

Authorization fees

Authorization fees are charged on top of each transaction to cover the cost of verifying the cardholder and authorizing the merchant to take the payment. Authorization fees are usually very small: between 1p and 6p per transaction. 

Terminal fees

Terminal fees will only apply if you take card present (in-person) payments. You can either hire a terminal or buy one outright, and there are three types: countertop terminals, portable terminals, mobile terminals. Mobile terminals, such as Zettle or Square, can be bought outright for as little as £20. 

Per transaction fees

Per-transaction fees is just a broad term to describe the collection of fees you pay every time you need to process an electronic transaction. It can encompass many of the fees listed above and can be defined as a percentage of the value of each sale you make. 

Shopping cart fees

If you use a shopping cart or similar e-commerce software, like Shopify or Magento, they will sometimes charge merchants an additional fee for using their services that allow you to integrate to a payment processor with no coding effort and no heavy lifting on your part.  You simply use their cart to connect to the processor by entering in your production credentials.

In today’s mobile and online payments world, there are two popular pricing options payment processing companies offer to merchants. Which pricing model is right for you and your business depends on a variety of factors. These can include everything from your average ticket price, your target demographic, whether you are selling B2C or B2B, how much information you require from the customer upon checkout, and how much information you as a business owner wish to know about your transaction fees.

How are payment processing fees determined?

Countless factors play into the overall cost of your payment processing fees, some that you have the power to reduce and others that are non-negotiable. Here are a few of the main ones:

  • Card type - fees vary between card types. For example, credit cards, business cards, and rewards cards all have different interchange rates
  • Card network - different networks also charge different fees to merchants
  • Card present vs card-not-present - CNP transactions incur higher fees because there is an increased risk of fraud when the cardholder is not physically present to be verified 
  • Merchant category code (MCC) - the four digit MCC identifies your business type. Riskier business types, such as travel-based companies, have higher interchange fees to account for the increased chance of chargebacks 
  • Data level - businesses that can meet level 2 or level 3 data requirements can qualify for lower interchange rates. You can only qualify if you meet the transaction thresholds set by your card network 
  • Business size - larger businesses often have more leverage to negotiate lower fees with banks and card networks 
  • Refund rate and chargeback rate - aside from the penalties or fees incurred, a high refund or chargeback rate could indicate to your payment providers that you’re a risky merchant and cause them to increase your processing fees to account for this risk

Examples of payment pricing models

To determine which payment path is right for you, consider the pros and cons of each pricing model to see which one best fits your business bandwidth, aligns with how your customers like to pay, and which one will help you reach your revenue goals. Knowing these basics will allow you to make better decisions about which processing model is right for your business. 


In the tiered pricing model, transactions are grouped into different tiers, and each tier has its own fixed rate. Typically, there are three tiers: qualified, mid-qualified, and non-qualified tiers.

  • Qualified - the lowest and most favorable rate for the merchant. Used for swiped or card present transactions where the risk of fraud is low
  • Mid-Qualified - usually includes CNP transactions, such as online or phone payments. The rate for this tier is higher than the qualified tier because the risk is higher
  • Non-Qualified - used for transactions that carry the most risk, non-qualified is the highest rate tier. For example, corporate or international cards, or transactions that don’t meet the requirements for the other two tiers


  • Simple - instead of dealing with a wide variety of rates, you’re presented with just a few rates based on the tier your transactions fall into
  • Predictable - because there are only a few rates to consider, you might find it easier to estimate your payment processing costs, at least in the short term
  • Ease of comparison - since most tiered pricing models have the same three-tier structure (qualified, mid-qualified, and non-qualified), it might be easier for you to compare rates between different providers


  • Not transparent - you might not know which tier a particular transaction will fall into until after it's processed, making it harder to predict costs accurately
  • Can be more expensive - Because the criteria for each tier can be broad and often at the processor's discretion, you might end up paying higher rates for transactions that could have been less expensive under a different pricing model. Equally, tiered pricing can become less cost-effective for larger businesses with high transaction volumes or those that process a wide variety of card types
  • Criteria can vary - different processors may have different criteria for their tiers, making it challenging for you to compare rates accurately across providers


In the flat pricing model, the processor charges a single fixed percentage rate for all transactions, regardless of the card type or how the transaction is processed. In some cases, the flat-rate may also include a small per-transaction fee.

Merchants know exactly what they will be charged for each transaction, making it easier to budget for payment processing expenses. This makes it particularly popular with small businesses and those with lower transaction volumes, as it offers predictable costs without the need to understand complex fee structures.


  • Simple - flat-rate pricing is easy to understand, helping you to quickly calculate your payment processing costs
  • Predictable - you can more accurately budget for your payment processing expenses, as you know the exact rate you’ll be charged for each transaction
  • Transparency - there are no hidden fees or complex tiered structures to decipher
  • Convenience - ideal for small businesses or those with lower transaction volumes, as it offers a simple, straightforward solution without the need for negotiation


  • Potentially higher costs - while flat-rate pricing can be cost-effective for some businesses, it may be more expensive for others, especially those with higher transaction volumes or those that primarily process lower-risk transactions
  • Lack of flexibility - flat-rate pricing doesn't take into account the specific details of each transaction, such as card type or processing method, which could result in paying a higher rate than necessary for some transactions
  • Not ideal for large businesses - larger businesses with high transaction volumes may find other pricing models, such as interchange-plus pricing, to be more cost-effective

Discounted or  “Blended” Pricing

Many payment processing companies offer merchants a discounted or “blended” pricing model. Blended rates take the Interchange rates, card association fees, processor fees, and gateway fees and lump them all into one overall rate. These rates are set for every transaction, no matter what type of card is used to make the purchase and the associated interchange rate. Whether the card is credit or debit, Visa, American Express, Mastercard, Discover, rewards or non-rewards, you are guaranteed to be charged the flat rate that the processing company has set for you. These rates typically range from 2.3%-2.9% + $0.30 per transaction, depending on the volume of online sales your company is processing each month.


  • Simplicity – As the name implies, blended pricing combines all processing costs into a single price. You will not have any transparency into the actual hard costs you accrued, but can safely estimate what you will have to pay in transaction costs for a given level of sales.
  • Offset High Interchange Rates – Blended rates can be a good fit if your products have a high average ticket value and have a large percentage of Amex and rewards cards sales. These conditions can often create higher interchange rates, so a blended cost may actually end up cheaper than the transaction cost, in which case the provider can raise the blended rate.
  • Good for Startups If you are just starting a business and don’t have the time and resources to investigate and reconcile credit card processing and interchange rates, blended rates provide a simple and easy solution while you get your business up and running, allowing you to focus your attention on other parts of your operation.


  • No Transparency into Transaction Fees Typical consumer credit card interchange rates average 1.83% while debit card interchange rates can range from 0.05%-0.60%. If a small percentage of your customers are using debit cards, your payment processor can be making anywhere from 1-2% per transaction of the 2.9% rate that you’re being charged, for instance.
  • Large Number of Transactions and Low Ticket ValuesBlended rates also charge a $0.30 per transaction fee. If your company is conducting a large number of transactions and selling a relatively inexpensive product for $20 or less, $0.30 can increase your total transaction fees substantially.
  • Limited Flexibility on Pricing Companies that offer blended pricing may start with a standard 2.9% + $0.30 per transaction. In order to obtain their Enterprise rates, you have to be at a much higher sales volume with minimums as high as $10M dollars in online monthly sales. These rates often can only be negotiated to 2.3%-2.7% + $0.10 -$0.30.
  • Hidden Fees – There can often be hidden monthly gateway fees, set-up costs, or PCI compliance fees that are buried in contracts.

Interchange ++ or “Pass-through” Pricing

The alternative to the blended pricing model is Interchange ++ pricing. Numerous payment processors offer merchants Interchange ++ pricing, which is also known as “pass-through” pricing. It standardizes the commission collected by the card associations, like Visa and Mastercard. With Interchange++ your payment processor will separate each fee you are being charged and then add a premium for their gateway and/or acquirer and processor capabilities. The final rate will be different for every transaction and is a sum of three parts:

  1. Interchange Fee – This is a fee set by Visa and Mastercard and paid to the issuing bank (the bank on your credit or debit card).
  2. Card Association Fee (Dues and Assessments) – This is the fee charged by the Card Associations, like Visa and Mastercard, for using their network.
  3. Processor/Gateway Fee – These are the fees charged by your acquirer, PayFac or payment processor. This is to cover the technology costs of providing the gateway technology to the merchant. They also own the merchant relationship, is your single point of contact regarding PCI compliance, chargebacks, adhering to Visa and Mastercard's rules and regulations, and your connection to the payment association. The average fees charged can range from 0.10%-0.40% + $0.20 depending on which payments company you work with and your total online sales.


  • Complete Transparency into Transaction Fees – You know exactly who is making what on every transaction running through your platform.
  • Lower Total Transaction Rates – With average interchange rates for credit cards of 1.81%, average card association rates of 0.11%, and average Processor/Gateway Fees of 0.10%-0.40% + $0.20, your total transaction rate for a consumer credit card would come out to 2.02%-2.32% + $0.20 per transaction versus the typical blended rate of 2.9% + $0.30. The difference can amount to huge cost savings over a period of time, especially for large enterprise businesses.
  • Flexible Pricing – Companies offering merchants Interchange ++ pricing are often willing to work with merchants to tailor pricing to their specific needs. They are often willing to negotiate the 0.10%-0.40% processor fee if you sell an expensive item, or lower the $0.20 per transaction fee if your product is relatively cheaper to reduce your all-in rate.


  • High Interchange Rates – American Express and status cards can have interchange rates that average above 2.0% consistently. So if you sell a product with a high average ticket value, consumers are more likely to use their Amex or rewards cards where the interchange rates are above 2.0%.
  • Varying Rates per Transaction – With different interchange and card association fees for each transaction, the total processing fee rate for every purchase will be different.

Understanding payment processing fees for international transactions

International transactions typically incur higher payment processing fees than domestic transactions, due to the costs of currency conversion, cross-border processing, and the increased risk of fraud. 

Here are some factors that influence payment processing fees for international transactions:

  • Currency conversion - when a transaction involves different currencies, the card issuer can charge a foreign transaction fee and the payment processor can charge a currency conversion fee on the same payment. Some merchants offer dynamic currency conversion, allowing customers to see prices and make payments in their home currency. DCC services come with additional fees, which can be charged to the merchant or passed on to the customer
  • Markup for increased risk - all your expected fees for payment processing, including interchange and assessment fees, are typically higher for international transactions as there is an increased risk of fraud and failed payments
  • Fees for non-domestic cards - all the major card networks charge an additional fee for payments taken from cards issued by non-domestic banks. This fee covers the cost of handling transactions between different countries with varying regulations and banking systems. For example, Visa charges an international service assessment (ISA) fee of between 0.8% and 1.2% (depending on whether the payment is settled in the customer’s home currency or not), as well as an international acquirer fee (IAF) of 0.45%. Mastercard charges an international cross-border fee of 0.40% and an acquirer program support fee of 0.55%

How can you reduce payment processing fees?

As detailed above, while there is room for maneuver on some aspects of your payment processing fees, many are non-negotiable. However, there are some strategies you can implement to help reduce these fees:

  • Shop around - compare different payment processors and their fee structures. Don't hesitate to negotiate with processors for better rates, especially if you have a high transaction volume or a good track record of low chargebacks
  • Understand the pricing models - take the time to learn how the various pricing models, including tiered pricing, flat-rate pricing, interchange-plus, interchange ++, and discounted pricing will influence your transactions costs. Opt for a model that best suits your business size, type, and transaction volume
  • Prevent chargebacks - chargebacks can be costly and increase your perceived risk as a merchant, which can result in higher fees. Take steps to reduce chargebacks by providing accurate product descriptions, offering excellent customer service, and verifying suspicious transactions
  • Optimize for international transactions - if you frequently take international payments, consider using a payment processor that specializes in cross-border transactions or offers competitive international rates
  • Implement fraud prevention measures - fraud prevention tools like tokenization, encryption, and 3D Secure (3DS) authentication reduce the risk of fraud, which can lead to higher processing fees
  • Make sure you’re the correct MCC - an incorrect classification can result in higher fees or even the wrong fee structure being applied

Review your merchants bank statements - it’s good practice to regularly review your statements to identify any unusual fees or changes in your rates. That way you can act quickly if there are any issues that could be making your processing fees unnecessarily high

Optimize your payment processing with makes it easy to optimize your payment processing by implementing many of the measures outlined above. 

Firstly, we specialize in international payment processing, with local acquiring that lowers your costs by processing your customers payments in their local markets. We also allow you to offer the most popular payment methods in every region and to process in more than 150 currencies. 

Secondly, we employ robust fraud prevention measures, including 3DS and machine learning, which helps you block suspicious activity to limit your perceived risk to your providers. 

Finally, you can take advantage of a wealth of actionable payments data to continually optimize your operations. 

Contact us today to speak with a payments expert.

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October 5, 2023 2:16
October 5, 2023 4:23