Interchange, Assessments and Markup: Who Gets Each Part of the Fee

When a customer pays $100 with a credit card, you do not receive $100. A few dollars are split among the customer's bank, the card network and your payment processor. The split is easy to understand once you separate the three layers: interchange goes to the issuing bank, assessments go to the card network, and markup goes to the processor or acquirer and its partners. Only the last layer is truly negotiable.

How a card payment moves

Five parties are involved in a typical transaction. The cardholder pays with a card. The merchant accepts it. The acquirer or processor, which holds the merchant relationship, sends the transaction to the card network. The network routes it to the issuer, the bank that gave the cardholder the card, which approves or declines. After approval, the issuer sends the sale amount to the acquirer minus interchange, and the acquirer deposits the sale to the merchant minus its own fees.

Because the merchant never deals with the issuer directly, interchange is invisible at the register. It appears only as a deduction on the statement, sometimes bundled into a single percentage by flat-rate providers.

Layer 1: interchange

Interchange is the largest component for most merchants. It is set by the card network, not by the processor, and published in rate tables that Visa and Mastercard update periodically, typically in spring and fall. Each table assigns a rate, which combines a percentage and a small fixed amount, to each category defined by card product, how the card is accepted, merchant category and data submitted.

Key points:

• Interchange is paid to the issuing bank to fund costs such as fraud losses, servicing, the interest-free period and, on many cards, rewards.
• It is the same for every processor, so a processor claiming to give a better interchange rate is misleading you. They can differ only in the markup they add.
• Rates are lower for card-present transactions and for regulated debit, and higher for rewards, corporate and card-not-present transactions.

Layer 2: network assessments

Assessments are fees the networks charge acquirers, based mostly on volume with some per-transaction or per-authorization components. They are usually small relative to interchange. Under interchange-plus pricing they pass through at cost, and under flat-rate pricing they are already included in the single rate.

Layer 3: processor markup

The markup covers the processor's costs of authorizing, settling, supporting you, handling risk and earning profit. Common forms are:

• A percentage of sales, such as a fraction of a percent.
• A fixed fee per transaction.
• Monthly charges, including statement, gateway, customer support or PCI program fees.
• Annual fees, equipment fees and special fees such as for batch settlement.

Worked example: a $100 sale

These numbers are illustrative to show the arithmetic.

You would receive $97.54, a 2.46% effective rate on that sale. Under a flat-rate plan of, say, 2.9% plus $0.30, you would pay $3.20 on the same sale and the provider would keep the difference between that and its cost. Flat-rate pricing can still be a good choice if you value simplicity and low monthly overhead, but the table shows why a business with larger volume often benefits from seeing the layers separately.

Interchange-plus versus bundled pricing

Interchange-plus shows the layers on your statement, so you can check the markup you agreed to. Bundled pricing such as flat-rate or tiered hides the layers, which makes it harder to find overcharges but easier to budget. See pricing models compared for criteria to choose between them.

Debit cards and the Durbin Amendment

Debit interchange for large issuers, those with $10 billion or more in assets, is capped under Regulation II issued by the Federal Reserve pursuant to the Durbin Amendment of the Dodd-Frank Act. Cards from smaller issuers are exempt and can carry higher rates. The Federal Reserve has proposed and considered changes to the cap and the rule has been challenged in court, so look for the latest figures on the Federal Reserve's website before using a number in planning.

What changes interchange rates over time

The networks revise rate tables, sometimes adding categories for new card products or merchant types. Merchants can see changes show up as variations in statement lines even when the processor did not change anything. When rates change, interchange-plus customers see the change directly while flat-rate customers see none, because the processor absorbs or adjusts it.

Using this to check your statement

1. Find the interchange line items and total them.
2. Find the assessments total.
3. Add up everything else as processor costs.
4. Divide processor costs by sales to get your markup as a percentage, then compare with your contract.

If you use the fee calculator with the processor-controlled percentage and per-transaction fee, you can test what a different markup would save.

When to get help

Interchange tables are long and technical. If your statement shows hundreds of lines and you suspect downgrades, ask an independent statement analyst or accountant to review it. Be wary of anyone who charges a percentage of savings without a written agreement.

Frequently asked questions

Can I negotiate interchange?

Not directly. Very large merchants sometimes negotiate with networks and issuers, but small and mid-size merchants negotiate markup and fees.

Why does the same processor charge different rates on different cards?

Because interchange differs by card type and acceptance method. The processor passes it through under interchange-plus pricing.

What are assessments?

Fees paid to the card network for using its system, usually small relative to interchange.

Sources

• Visa — published U.S. interchange reimbursement fee information
• Mastercard — interchange programs and rates
• Federal Reserve Board — Regulation II debit interchange standards
• Consumer Financial Protection Bureau — overview of the card payment system