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Card Payments

TL;DR
  • Credit cards cost 2.5-3.5% (interchange + assessments + processor markup)
  • Debit cards are cheaper: regulated banks capped at 0.05% + $0.21 (Durbin Amendment)
  • Prepaid is low risk for merchants (funds pre-loaded) but high compliance burden for issuers
  • Friendly fraud (legitimate cardholder disputes valid purchase) is 40-70% of chargebacks for many merchants
  • Submit Level 2/3 data for B2B transactions to reduce interchange 0.3-0.8%

Card payments remain the dominant payment method in the US, processing trillions of dollars annually. But "cards" is really several distinct products with different economics.

Credit Cards​

When a customer pays with credit, the issuing bank is extending them a loan. The merchant gets paid now; the cardholder pays the bank later (hopefully).

How the money flows:

  1. Cardholder swipes/taps/enters card
  2. Authorization request goes: Merchant → Processor → Network → Issuer
  3. Issuer approves and places hold on credit line
  4. At settlement, issuer funds the transaction to the network
  5. Network settles with acquirer, minus fees
  6. Acquirer deposits to merchant account

Why Credit Cards Are Expensive​

The issuer is taking real risk. They're paying you today for a transaction where they might not collect from the cardholder for 30-60 days (or ever, if the cardholder defaults). Interchange compensates for:

  • Credit risk (cardholders might not pay)
  • Fraud risk (the transaction might be disputed)
  • Float (the issuer fronts the money)
  • Rewards funding (those 2% cash back points come from somewhere)

Note: Numbers below are representative US values as of 2024-2025 and will change over time. Always consult current network rate tables for precise pricing.

Typical Credit Card Interchange​

Card TypeCard-PresentCard-Not-Present
Standard consumer1.51% + $0.101.80% + $0.10
Rewards1.65% + $0.101.95% + $0.10
Premium/Signature2.10% + $0.102.30% + $0.10
Corporate/Business2.50% + $0.102.70% + $0.10

On top of interchange, you pay network assessments (0.13-0.15%) and your processor's markup. Total effective rate for credit cards typically runs 2.5-3.5% for most merchants.

Card-Not-Present Fraud and Friendly Fraud​

CNP transactions (online, phone, mail order) have significantly higher fraud rates than card-present. But not all "fraud" is stolen credentials:

  • Third-party fraud: Stolen card numbers used without cardholder knowledge (the classic fraud scenario)
  • Friendly fraud / first-party misuse: Cardholder makes a legitimate purchase, then disputes it claiming "I didn't make this purchase" or "I didn't receive it." This is a major component of card chargebacks, especially in digital goods, subscriptions, and services where there's no physical delivery proof.

For many e-commerce merchants, friendly fraud represents 40-70% of chargebacks. It's not always intentional ("buyer's remorse" or "forgot I signed up") but the economics hit you the same way.

Debit Cards​

Debit is fundamentally different from credit. The money comes directly from the cardholder's bank account. No loan, no credit risk.

Two Flavors of Debit​

PIN Debit: Customer enters PIN. Transaction routes over debit networks (STAR, NYCE, Pulse, etc.). Generally lowest cost.

Signature Debit: Customer signs (or doesn't, for small transactions). Routes over Visa/Mastercard networks. Slightly higher cost than PIN, but still cheaper than credit.

The Durbin Amendment Effect​

For banks with over $10 billion in assets, debit interchange is capped by federal regulation:

  • Regulated rate: 0.05% + $0.21 (plus up to $0.01 for fraud prevention)

For smaller banks, debit rates are unregulated and higher:

  • Exempt rate: Typically 0.80% + $0.15 for signature debit

This creates a quirk: if your customer uses a debit card from a small credit union, you pay more than if they use a debit card from Chase or Bank of America.

Why Debit Is Cheaper​

  • No credit risk (money is already in the account)
  • Lower fraud rates (PIN verification, real-time account access)
  • Lower dispute rates (harder to claim "I didn't authorize this" when your PIN was used)
  • No rewards to fund (most debit cards don't offer significant rewards)

Prepaid Cards​

Prepaid cards are funded in advance. No credit line, no bank account required. But "prepaid" covers several distinct products with very different risk profiles.

Types of Prepaid​

Closed-loop gift cards (Starbucks, retailer gift cards): Only work at the issuing merchant. No network disputes possible. Disputes handled by merchant policy. Great margin for merchants via "breakage" (unused balances that expire or go forgotten).

Open-loop general purpose reloadable (GPR): Visa/Mastercard branded, works anywhere. Functions like a debit card. Network disputes exist but empirically have lower chargeback rates than credit cards.

Payroll and government disbursement cards: Used for direct deposit to unbanked/underbanked populations. Low fraud and chargebacks, but heavy compliance requirements for issuers.

Corporate prepaid/expense cards: Used for employee expenses, travel. Similar to commercial cards but prefunded.

Risk by Perspective (This Is Important)​

Prepaid risk looks completely different depending on where you sit:

For merchants:

  • Chargeback rates are typically lower than credit cards (often lower than debit too)
  • "I didn't authorize this" disputes are rare once funds are loaded and spent
  • Fraud tends to concentrate at load and cash-out points, not retail spend
  • Bottom line: Prepaid is usually lower risk for merchants than credit

For issuers/program managers:

  • High first-party risk: synthetic identities, fake KYC, mule accounts
  • Exposure on load channels (card-to-card loads, ACH loads that return)
  • Higher operational burden: KYC verification, ongoing monitoring
  • Bottom line: Prepaid programs require significant fraud and compliance infrastructure

For AML/compliance teams:

  • Open-loop GPR is a regulatory focus area
  • Easy to buy with cash, can be layered and moved between accounts
  • Historically used in money-mule chains and smurfing patterns
  • Heavy KYC, load limits, and transaction monitoring requirements
  • Bottom line: High AML/CTF scrutiny regardless of actual fraud rates

The Merchant Takeaway​

If you see prepaid transactions, don't automatically treat them as high-risk. From a merchant chargeback perspective, they're often safer than credit cards. The fraud concerns around prepaid are real, but they're mostly issuer-side and compliance-side problems. Your risk is elevated primarily in cash-out verticals (crypto, gambling, remittance, peer-to-peer marketplaces) where prepaid might be part of a money movement scheme.

Commercial Cards​

Business cards, corporate cards, and purchasing cards have their own interchange categories, usually higher than consumer cards.

Why higher?

  • Larger average transaction sizes
  • Often card-not-present (phone/online orders)
  • Additional features (expense reporting, spending controls)
  • Different fraud patterns

The Level 2/3 Data Opportunity​

If you process significant B2B volume, you can reduce interchange by submitting enhanced transaction data. See the Settlement guide for details, but the short version:

Data LevelAdditional FieldsPotential Savings
Level 1 (Standard)Basic transaction infoBaseline
Level 2Tax amount, customer code, merchant tax ID0.3-0.5%
Level 3Line-item detail, freight, duty0.5-0.8%

For a business doing $500K/year in B2B transactions, proper Level 2/3 data submission could save $2,500-$4,000 annually.

Network Differences​

Visa and Mastercard function similarly as four-party networks (cardholder, issuer, acquirer, merchant). They don't issue cards themselves; they operate the rails.

American Express and Discover are three-party networks. They issue their own cards AND operate the network. This gives them more control but historically meant higher fees.

Practical Differences​

NetworkUS Market ShareTypical InterchangeNotes
Visa~52%Varies by categoryLargest network, most complex rate structure
Mastercard~32%Varies by categoryVery similar to Visa
American Express~7%2.0-3.5%Higher rates, but OptBlue program offers lower rates for small merchants
Discover~4%Similar to Visa/MCOften slightly lower than comparable Visa/MC rates

Should You Accept Amex?​

The old advice was "Amex is too expensive." That's outdated for most merchants. Amex's OptBlue program (for merchants under $1M in Amex volume) offers rates competitive with premium Visa/MC cards. The customers who carry Amex tend to spend more. Refusing Amex usually costs you more in lost sales than you save in fees.

Next Steps​

Understanding card costs?

  1. Review credit vs debit economics - Why credit costs more
  2. Learn the Durbin effect - Regulated vs exempt debit
  3. Check Level 2/3 opportunity - B2B savings

Optimizing card acceptance?

  1. Evaluate Amex acceptance - OptBlue may be worth it
  2. Consider payment method routing - Lower-cost options for B2B
  3. Review auth optimization - Improve approval rates

Understanding card risk?

  1. Know prepaid risk by perspective - Merchant vs issuer view
  2. Understand friendly fraud - 40-70% of chargebacks
  3. Review chargeback prevention - Reduce disputes

See Also​