Understanding Your Payment Costs
Every time a customer pays you with a card, multiple companies take a cut before the money reaches your bank account. Understanding who gets what, and what you can actually control, is the first step to reducing your costs.
- Three layers of fees: interchange (card networks), assessments (Visa/Mastercard), and processor markup
- Only processor markup is negotiable. The rest is set by the card networks
- Your effective rate (total fees ÷ total volume) is the only number that matters
- Most SMBs overpay by 0.3-0.5% because of hidden fees and uncompetitive pricing
On this page
Where Your Money Goes
When you charge a customer $100, here's roughly how fees break down for a typical e-commerce transaction:
| Fee Layer | Who Gets It | Typical Amount | Can You Negotiate? |
|---|---|---|---|
| Interchange | Customer's bank (issuer) | $1.80 - $2.50 | No, set by Visa/Mastercard |
| Assessments | Card networks (Visa/Mastercard) | $0.13 - $0.15 | No, set by networks |
| Processor markup | Your processor | $0.15 - $0.50 | Yes |
| Total | $2.08 - $3.15 |
The key insight: interchange is the biggest chunk, and you can't negotiate it. But you can control which interchange rate applies to your transactions, and you can negotiate your processor's markup.
Why Different Cards Cost You Different Amounts
Not all cards are created equal. A basic debit card costs you much less to accept than a premium rewards credit card:
| Card Type | Typical Interchange | Why |
|---|---|---|
| Regulated debit (US) | 0.05% + $0.21 (capped) | US banks >$10B assets, limited by Durbin Amendment |
| Interac debit (Canada) | ~$0.05-$0.10 flat | Canadian debit network, flat fee per transaction |
| Standard credit | 1.50% + $0.10 | Basic cards, no rewards |
| Rewards credit | 1.80% + $0.10 | You're funding someone's airline miles |
| Corporate/business | 2.50% + $0.10 | Higher risk, more rewards |
You can't tell your customers what card to use. But knowing this explains why your effective rate fluctuates month to month. A month with more corporate card orders costs you more.
The Three Pricing Models (Know Which One You're On)
Flat rate (Stripe, Square, PayPal)
- You pay the same rate for every transaction (e.g., 2.9% + $0.30)
- Simple and predictable
- You overpay on cheap cards (debit) and underpay on expensive cards (corporate)
- Best for: businesses under $20K/month who value simplicity
Interchange-plus (most traditional processors)
- You pay the actual interchange + a fixed markup
- Your rate varies by card type, but the markup is consistent
- Most transparent and usually cheapest
- Best for: businesses over $20K/month who want the lowest cost
Tiered/bundled (avoid)
- Your processor groups transactions into "qualified" (low rate), "mid-qualified" (medium), and "non-qualified" (high)
- The "qualified" rate looks great in sales pitches, but most transactions end up in more expensive tiers
- Least transparent, almost always the most expensive
- Best for: nobody, really
Tiered pricing was designed to make fee comparison impossible. A processor advertising "1.69% qualified rate" might result in a 3.5% effective rate because most transactions get downgraded. Get an interchange-plus or flat-rate quote and compare.
Hidden Costs Most Merchants Miss
Beyond processing fees, these costs add up:
Chargeback fees: $15-25 per dispute, plus you lose the transaction amount. Five chargebacks a month at $100 average = $575-625 lost.
Refund processing fees: Most processors keep the processing fee when you refund. A $100 refund costs you ~$3 in non-refunded fees.
Non-compliance fees: PCI non-compliance fees of $10-150/month are pure waste. Fill out your compliance questionnaire to eliminate them.
Reserve holds: If your processor holds a percentage of your deposits as a reserve, that's money you can't use. Typical reserves are 5-10% of volume, held for 6 months.
Currency conversion: International transactions often include a 1% markup on top of the exchange rate.
Your First Cost Audit
Do this right now (15 minutes):
1. Pull last month's processor statement
2. Find total fees charged: $_____
3. Find total volume processed: $_____
4. Calculate effective rate: fees ÷ volume × 100 = ____%
5. Compare to benchmarks:
□ In-person: 1.8-2.3% is healthy
□ E-commerce: 2.5-3.2% is healthy
□ High-risk: 3.0-4.5% is healthy
6. If above the healthy range, identify:
□ Any junk fees (PCI non-compliance, statement fee)?
□ Are you on tiered pricing?
□ Has the rate been creeping up month-over-month?
How Much Could You Save?
| Current Monthly Volume | If You're Overpaying By | Annual Savings From Fixing |
|---|---|---|
| $25,000/mo | 0.3% | $900/year |
| $50,000/mo | 0.3% | $1,800/year |
| $100,000/mo | 0.3% | $3,600/year |
| $250,000/mo | 0.3% | $9,000/year |
At low volumes, the savings may not justify switching processors (migration is a headache). At $50K+/month, even a small rate improvement adds up quickly. See Processor Comparison for current rates across 50+ processors to benchmark where you stand.