Payment Fees 101

Understanding your payment fees shouldn’t require a PhD in the payments industry as a whole.

For many merchants, payments are their second highest expense after payroll and a knowledge of the various fees can be a powerful tool to understanding what your business needs! This post will define the types of fees that apply to a card payment, the purpose they serve, and touch on a few of the different fee structures that are common in payments.

Understanding Payment Economics: A Breakdown of Card Fees

The economics of payment processing can seem complicated, often appearing opaque—sometimes by design. There are multiple participants in any transaction and each participant takes a share of the fees. These fees are largely dictated by card networks for credit and debit transactions.

In a future post we’ll go deeper into the 4-Party Model and all the participants in a card transaction.

For now, it’s important to understand that for every card payment involves the Issuing Bank (the cardholder’s bank), Acquiring Bank (the merchant’s bank), and the Network or Scheme (such as Visa and Mastercard). These parties work together to share information and move money, and in turn each receive a portion of the payments fees.

Key Fee Components

• ‍Authorization/Processing Fees:
  These fees are charged by the merchant's gateway for each transaction or refund. These fees are incurred regardless of whether the funds are captured or refunded - meaning even if a merchant cancels a transaction they still pay this fee. This is often a fixed fee, like $0.30.
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• Interchange Fees: These fees are collected by issuing banks (the cardholder’s bank) in exchange for access to their customer base and are often the largest component of payments cost. Instead of negotiating rates individually at an issuing-bank level, card networks set these fees. The rate for interchange fees can vary significantly based on geography, risk, and transaction type. For instance, in the U.S. personal debit interchange is much lower than commercial credit card interchange. You can think of interchange fees as covering an issuing bank’s role as: underwriting and supporting the cardholder, covering risk losses for cardholders in the form of chargebacks, providing rewards, moving funds between parties, and ensuring that the cardholder has the funds to send to the merchant after the transaction is approved.
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• Scheme Fees: These are also fixed fees, assessed by the card brand, or Scheme, of the card being processed. In the US this is often Visa or Mastercard - we’re a bit of a duopoly here. This is only a portion of the total fees in a payment, yet the card networks are often blamed for being the key rent seekers for every processed payment.
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• Acquiring Fees: These fees are charged by the merchant's acquiring bank. They are often a percentage of the dollar value of the transaction, sometimes referred to as markup on the volume of a transaction. This is the payment processor they work with - there is more nuance between acquiring banks and payment processors so for more depth I’d recommend my book *The Field Guide to Global Payments.*
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• Value-added fees: That’s a lot of fees! But wait…there can be more. Other fees include risk fees, scheme products like account updater to automatically update expired cards, or tokenization services. Some payment providers blend these into overall fees, some take a more piecemeal approach to billing for these services.

Fee Structures

There are two common pricing models to know: "blend" and "IC++."
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Blend Pricing combines various fees—interchange, scheme, and acquiring markup—into a single percentage, along with a fixed processing fee. This can look like 3% and $0.30. This structure can be beneficial for smaller merchants, allowing for easier negotiation and predictable costs.

However, larger or more astute merchants may find they are overpaying at scale, especially if their card mix includes many lower-fee debit transactions.
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Enter “Interchange plus plus”, a fee structure where each payment a merchant processes will not cost the same, the actual individual fees for that transaction are passed through. For example, interchange varies widely by card type: a debit card is a cheaper payment for the merchant to accept than a business credit card because they have different interchange rates.

Merchants have to weigh trading the predictability of blended rates with reconciliation complexity and potential cost savings of IC++.

Conclusion

Payment fees are inherently complex given the number of participants in each payment (4, or more!) and the breadth of card types and risk profiles that each transaction can have. There is seemingly “no winning” for merchants: in exchange for easy acceptance, fees are often opaque. The more control a merchant wants into understanding fees comes with a need for expertise to handle the complexity. At Ansa, a large driving force of our mission is that payments are a tool to enable commerce, not confuse merchants, and definitely not torpedo their unit economics.

Ready to take control of your payment fees? A wallet may be the solution for you, reach out below!