Breaking down the payments layer cake
There are several players that take fees from every transaction, but this isn’t easily understood by a lot of companies processing payments. On the acquiring side, we have the payments service provider, payment processor, and acquiring bank who work with the merchant.
On the issuing side, we have an issuing processor and bank that issue cards to buyers and release the funds to merchants. In the middle of the payment stack sits the card networks like Visa, Mastercard, American Express, and Discover.
What is included in payment processing fees
Many platforms that process payments think the fees taken off the top of their payments are purely “interchange.” In reality, interchange fees are just one part of a larger fee structure.
The entire payment processing fee is called the Merchant Discount Rate (MDR). This fee is the total amount deducted from each transaction before the merchant is paid. The MDR includes markup, assessments, and interchange.
What is markup in payment processing?
Markup refers to fees paid to the acquiring bank and processor and/or the payment facilitator (PayFac). These fees are sometimes negotiable based on your platform’s processing volume.
What are assessments in payment processing?
Assessment fees are paid directly to the major card networks (Visa, Mastercard, American Express, and Discover). They are usually flat fees or percentage-based and are typically non-negotiable.
What is interchange in payment processing?
Interchange refers to fees paid to the issuing side of the payment stack, specifically the issuing bank. These fees are governed by the card networks and are updated every April and October. Many companies think interchange is non-negotiable, but there are ways to lower these rates, which we’ll explore later on in this guide.
Payment processing fees can be flexible
If you’re used to paying the 2.9% + $0.30 that’s customary for platforms like Stripe or PayPal, which is called a blended rate, you may be surprised to learn that payment processing fees aren’t set in stone or always have to be so high.
Custom fee profiles by platform or even down to the merchant level are possible, depending on factors such as volume, payout schedules, processing levels, compliance settings, and more.
Interchange plus pricing vs blended pricing
With the blended pricing model, you’re paying the same rate no matter what the transaction cost is. You also don’t see how these fees are split between the issuing and acquiring sides of the payment stack. The interchange plus (or IC+) model is more transparent as it separates payment processing rates by interchange and markup fees. Interchange rates are set by the card networks and go to the issuing bank and issuing processor. Markup is the fee that’s paid to your payments provider.
Finix offers both blended and interchange plus pricing models.
Credit card processing fees
Processing fees differ between in-person (card-present) and online purchases (card-not-present) as well as other factors. They also vary by card brand and whether a transaction is subject to regulated interchange rates.
On top of the above processing fees, there’s also assessment fees that are paid to the credit card networks. These fees average around the 0.13 to 0.14% mark (Visa’s fee) but vary slightly between card brands and whether a transaction is debit or credit.
For example, Discover charges 0.13%, and American Express charges 0.16% for all transactions. Mastercard assessment fees start at 0.1375% but there’s a 0.01% increase for purchases greater than $1,000.
Other common payment processing fees to know about
While not an exhaustive list, some other common charges you need to be aware of are Visa’s acquirer processing fee (APF) for business cards (flat rate of $0.0195 per authorization) and the fixed acquirer network fee (FANF), which is a monthly fee based on MCC, number of physical locations, and monthly gross sales volume associated with a merchant’s taxpayer identification number (TIN). Mastercard charges a network access and brand usage (NABU) fee of $0.0195 for each settled transaction.
How are payment processing fees determined?
Since processing fees can be flexible, you might be wondering how they’re determined and how you get in on these lower rates. In a nutshell, it all boils down to the data—the more the merrier! Or in this case, the more data, the lower your rates.
This data comes from the following: Level 2/Level 3 (L2/L3) processing, Address Verification Service (AVS), and merchant category codes (MCCs). Let’s break these down individually.
Level 2 and Level 3 processing
When a customer makes a purchase, the merchant passes the card data on to the payment processor. Any merchant that wants to accept payments must meet Level 1 requirements, which include basic details such as zip code, billing address, card information, and purchase amount.
But if you want a chance at lowering interchange rates, you’ll need to supply more data. That’s where L2 and L3 processing comes in. However, there are certain requirements that must be met to qualify. For example, transactions must be B2B and fall under approved merchant category codes (MCCs).
Each of these levels provides more information on top of the required L1 data. Because you’re supplying more details at the time of purchase, the chance of fraud and disputes are reduced, which can lead to lower interchange fees for qualified transactions.
If you want to learn more about L2/L3 and their requirements, our blog Lowering Payment Processing Rates with Level 2 and Level 3 Processing gives you the full rundown.
Address verification service (AVS)
AVS is a system controlled by issuing banks that verifies whether or not the address a customer enters aligns with the information attached to their card account. This also helps processors and payment facilitators to identify suspicious activity before the transaction is completed.
Merchant Category Codes (MCCs)
A merchant category code or MCC is a four-digit identifier used to classify a company’s industry and to determine whether it’s a high-risk or prohibited business type. An industry with a higher risk profile may also have higher interchange rates.
Risk is determined by numerous factors, including (but not limited to) business type, average chargeback rates within an industry, average transaction value, and whether a business accepts in-person or online payments.
For example, a brick-and-mortar grocery store would be considered a low-risk business as it accepts in-person payments, sells physical goods, and typically has a transaction value less than $500. It's harder to commit fraud when presenting a physical card at checkout, versus an online payment. Similarly, an online retailer that sells goods or services is considered low risk, assuming it doesn’t fall into a high-risk MCC category.
A travel merchant or an infomercial merchant, on the other hand, would be considered high risk as they have a larger number of disputes—especially due to buyer’s remorse—and/or have higher than average prices per transaction. It’s also important to note that not all PayFacs work with high-risk merchants and each has a list of prohibited MCCs that they can’t or won’t work with.
For a full list of MCCs supported and prohibited at Finix, see our Prohibited Sellers and Services documentation.
The price of doing business: Credit card payment fees
Processing fees are a part of accepting payments and no business is exempt. Luckily, some fees are negotiable, such as markup fees, and interchange can be reduced if your platform meets certain requirements. Knowing your options and taking advantage of every opportunity available can go a long way in increasing your savings and earning potential on transactions.