Credit Card Processing

How credit card processing actually works

The fee stack: interchange, assessments, and processor markup

Every card transaction a merchant accepts pays three layers of fees, in order of size:

• Interchange is the largest layer. Interchange is set by the card networks (Visa, Mastercard, Discover, Amex) and varies by card type, merchant category, and transaction type — typically the largest single component of the merchant's total cost. Interchange is paid to the card-issuing bank; the networks keep assessments separately. Neither component is negotiable with the processor.
• Assessments are smaller fees paid to the card networks themselves (Visa, Mastercard, etc.). They are also not negotiable.
• Processor markup is the only meaningfully negotiable component — quoted in basis points and cents above interchange and assessments. competitive interchange-plus pricing for qualified merchants can run as low as interchange + 0.20% (20 basis points) plus a small per-transaction fee; higher-volume merchants with a clean processing history have real leverage to negotiate down to that level. This is what a merchant can actually shop on. Two processors offering the same headline rate can have markups that differ materially — interchange and assessments are identical across all processors for the same transaction, so any difference in price is the processor’s margin.

The all-in rate a merchant pays per transaction is the sum of all three. On a typical card-present credit transaction, the merchant ends up paying somewhere in the 1.5% to 3.5% range.

Pricing models — interchange-plus, tiered, and flat-rate

How that fee stack is presented to the merchant depends on the processor’s pricing model. Three common pricing models: interchange-plus (most transparent), tiered or qualified/mid-qualified/non-qualified (least transparent), and flat-rate (simplest but often more expensive at scale).

• Interchange-plus states the markup explicitly — for example, “interchange + 20 basis points + $0.10 per transaction.” The interchange piece varies by card and transaction type, but it is shown plainly on the statement, and the markup is the same regardless. For most established merchants, this is the only model that lets the operator know what is actually being paid.
• Tiered pricing sorts transactions into qualified, mid-qualified, and non-qualified buckets at the processor’s discretion. The merchant sees three rates on the statement and very little visibility into which bucket a transaction landed in or why. Tiered pricing almost always favors the processor — transactions get bumped into higher-cost buckets in ways that the merchant cannot easily audit.
• Flat-rate (Stripe, Square, PayPal-style) charges a single stated rate — e.g., 2.6% + 10 cents — that covers all the components together. Simple, predictable, and at low volume often cheaper than the bundled cost of a traditional account. At meaningful volume, flat-rate pricing is usually beat by interchange-plus by enough basis points to matter on annual P&L.

How low can the markup actually go? On the competitive end, interchange-plus pricing for qualified merchants can run as low as interchange + 0.20% (20 basis points) plus a small per-transaction fee. That is not a teaser number — it is a level that higher-volume merchants with a clean processing history have real leverage to negotiate to. Volume and a clean history are the leverage; the merchant who knows the floor exists is the one who asks for it.

The other fees that change the total cost

A processor’s headline rate is only one input. Common additional charges include:

• PCI compliance fees. PCI-DSS compliance is required of every merchant accepting cards; processors typically charge a monthly or annual PCI fee, with non-compliance fees if attestation is not maintained.
• Gateway, batch, and statement fees charged per month or per transaction — small individually, material annually.
• Monthly minimums that the merchant pays regardless of volume.
• Equipment leases. A leased card terminal at $40 to $80 per month over a 48-month non-cancelable lease can quietly cost more than the same terminal would have at a one-time outright purchase price. Equipment leases also typically survive a processor switch.
• Chargebacks. Chargeback fees typically run $15 to $25 per dispute, plus the loss of the underlying transaction if the merchant loses the dispute; excessive chargebacks (commonly above 1% of transactions) trigger reserves and account review.
• Early-termination fees built into the processor agreement — a real cost when evaluating a switch.

Who pays the processing fee — traditional, cash discount, dual pricing, and surcharging

A processor’s rate determines the cost of accepting cards. A separate decision determines who absorbs that cost — the merchant, or the customer who chose to pay by card. Four models dominate, and the difference between them is as much legal and reputational as it is financial.

Traditional pricing

The merchant absorbs the cost of processing and posts a single price that applies regardless of payment method. This is the cleanest model for customer goodwill — there is no checkout surprise and nothing to disclose — and it concentrates the entire incentive on one lever: negotiating the processor markup down. For most consumer-facing businesses competing on experience, traditional pricing is still the default.

Cash discount programs

The posted price is the card price, and customers who pay by cash receive a discount at the register. This framing is federally protected: Cash discounts are federally protected: the Truth in Lending Act (15 U.S.C. § 1666f), as amended by the Cash Discount Act of 1981, expressly permits a seller to offer a discount to customers who pay by cash, check, or similar means rather than by card. The protected structure is a discount off a posted card price — not a surcharge added to it. The legal framing chosen determines which rules apply. Cash discount programs require clear signage and uniform application to every customer, and they fit low-ticket, high-cash businesses best — gas stations, convenience stores, and restaurants, where a meaningful share of customers will pay cash to capture the discount.

Dual pricing

Both prices — the cash price and the card price — are displayed side by side at the point of sale, and the customer chooses. Dual pricing can be structured as either a discount or a surcharge, and the legal framing chosen determines which set of rules applies: a discount-framed program leans on the cash discount protections, while a surcharge-framed program is bound by the network surcharge rules below. Its advantage is transparency — the customer sees both numbers before deciding, so there is no surprise added at checkout.

Surcharging

An explicit fee is added to credit card transactions to recover the processing cost. The network rules are specific: Under Visa and Mastercard rules adopted after the 2013 settlement, credit card surcharges are capped at the lesser of 3% or the merchant's effective cost of acceptance, and may be applied to credit cards only — never to debit or prepaid cards. Surcharging requires at least 30 days' advance written notice to the card networks and the merchant's acquirer before starting, plus point-of-sale disclosure to customers and itemization of the surcharge as a separate line on the receipt. On top of that, State law adds a layer on top of the network rules and continues to shift through litigation; Connecticut and Massachusetts have been notable holdouts restricting credit card surcharging, but merchants must confirm current state law before rolling out — do not rely on any static list.

Surcharging carries the steepest customer-perception tradeoff of the four models — an added line on the receipt reads very differently than a discount for paying cash, even when the economics are identical. It fits B2B, high-ticket, and utility or government billing, where customers expect a card fee and price sensitivity is lower. It fits poorly in competitive consumer retail, where the perceived penalty can cost more in lost sales than it recovers in fees.

There is a gap between the published rule and what the market actually does, and it is worth understanding plainly. The 3% cap applies specifically to surcharge-framed programs under the Visa and Mastercard rules. In practice, high-risk merchant programs often pass 6% to 7% total to the customer. That happens two ways. Most often it is done through cash-discount or dual-pricing framing — which is legally a discount off the card price rather than an added fee, and so is not bound by the surcharge cap at all. Less often it is done through a surcharge program that simply exceeds the cap, which risks network enforcement if the program is audited. Neither is presented here as a recommendation; it is what the market does. The point is that the legal framing determines which rules apply — so a merchant offered a program that passes more than 3% to customers should ask the processor exactly which legal structure it uses, and confirm that the program is compliant under that structure before signing.

How to choose

The honest analysis is not “how much do I save” in isolation — it is the processing savings weighed against the expected loss of goodwill and sales when customers see the cost moved onto them. The compliance overhead is real for all three customer-pays models: signage, uniform application, point-of-sale disclosure, and ongoing attention to rules that keep changing. Before rolling out cash discount, dual pricing, or surcharging, confirm the current state law and the current card-network rules with a processor or an attorney — the legal landscape has shifted significantly since 2013, and what was permitted last year may not be permitted in your state today.

Who pays the most attention to processing pays the least

• Any business accepting card payments — processing is effectively universal infrastructure, so the question is structure and price, not whether to have it
• Operators willing to negotiate interchange-plus pricing instead of accepting a tiered processor's default rate buckets
• Higher-volume merchants where even a 25 to 50 basis point difference in processor markup translates to material annual savings
• Businesses willing to read the full fee schedule — gateway, batch, PCI, statement, monthly minimum — not just the headline rate

How PMF fits in

Premium Merchant Funding, which publishes this site, places merchant accounts and reviews processing statements alongside its other commercial finance work. If you are looking at a new merchant account, comparing a new processor proposal against your current statement, or trying to understand a tiered statement you cannot make sense of, PMF can walk through the fee stack on real numbers — and tell you honestly when the switch is worth it and when the apparent savings disappear once total cost is summed.