Skip to main content

Money Flow & Fees

On this page
Prerequisites

Before understanding money flow, understand:

Money doesn't flow directly from cardholder to merchant. It cascades through multiple parties, with each taking a cut.

The Players​

Cardholder: The person who swiped their card. Their bank account or credit line is the ultimate source of funds.

Issuing Bank (Issuer): The bank that gave the cardholder their card. Chase, Citi, your local credit union. They take on the risk of extending credit to the cardholder.

Card Network: Visa, Mastercard, American Express, Discover. They operate the rails that connect issuers and acquirers. They set the rules and take a small fee on every transaction.

Acquiring Bank (Acquirer): The bank that has a relationship with the merchant. They take on the risk of the merchant not fulfilling orders or going out of business.

Payment Processor: Often sits between the merchant and acquirer, handling the technical side of submitting transactions. Sometimes the processor and acquirer are the same company.

Merchant: You. The business that sold something.

The Flow for a $100 Purchase​

Let's trace exactly what happens:

At Authorization:

  • Cardholder's available credit/balance reduced by $100 (hold)
  • No money moves yet

At Settlement:

StepFromToAmountRunning Total to Merchant
1IssuerNetwork$100.00-
2Network keeps assessment fee--$0.14-
3NetworkAcquirer$99.86-
4Acquirer pays interchange to Issuer--$1.80-
5Acquirer keeps their fee--$0.10-
6Processor keeps their fee--$0.20-
7Net to merchant--$97.76

Actual amounts vary significantly based on card type, merchant category, and negotiated rates.

Note: In practice, the network nets interchange between issuers and acquirers in its own settlement run. In many modern PSPs (Stripe, Adyen, Square), the acquirer and processor are the same legal entity.

Where Do the Fees Go?​

Interchange (~70-90% of total fees)​

This is the big one. It goes to the issuing bank as compensation for:

  • Fronting the money (especially for credit cards, where the issuer pays the merchant before collecting from the cardholder)
  • Taking on fraud risk
  • Providing cardholder rewards programs
  • Funding the cost of issuing cards

Per Visa's Core Rules: "Interchange Reimbursement Fees help to make electronic payments possible by enabling Visa to expand Card holding and use."

Interchange varies wildly based on:

  • Card type (debit vs credit vs premium rewards)
  • Transaction type (card-present vs card-not-present)
  • Merchant category (grocery stores pay less than jewelry stores)
  • How the transaction was processed (chip vs swipe vs keyed)

See Interchange for detailed rate tables and Interchange Optimization for cost reduction strategies.

Network/Assessment Fees (~5-10% of total fees)​

Goes to Visa, Mastercard, etc. for operating the network. Usually around 0.13-0.15% of the transaction.

Processor/Acquirer Markup (~5-20% of total fees)​

This is the negotiable part. Your processor adds their margin on top of interchange and assessments. This is where shopping around can save you money. See Processor Fees Guide.

Net Settlement vs Gross Settlement​

Most merchants receive net settlement, where your deposit is the total sales minus all fees minus any chargebacks or refunds from that batch.

This means your bank deposit is not equal to your sales total. If you sold $10,000 today, you might see $9,720 deposited. The $280 difference is fees, and possibly chargebacks being deducted.

Some larger merchants negotiate gross settlement, where the full transaction amount is deposited and fees are invoiced separately (usually monthly). This is easier for accounting but requires good cash management to ensure you have funds available when the fee invoice comes due.

Why Settlement Gets Complicated​

Interchange Variation​

Interchange rates aren't uniform. A $100 purchase might cost $1.50 in fees (regulated debit at a grocery store) or $3.50 (rewards credit card, keyed manually at a jewelry store).

Chargebacks Complicate Everything​

Chargebacks are the wild card in settlement. A chargeback can arrive weeks or months after the original transaction settled, and it reverses the funds.

DayEvent
Day 1Customer purchases $500 item
Day 3You receive $485 (settlement minus fees)
Day 30Customer disputes charge with their bank
Day 32Issuer files chargeback
Day 33$500 is deducted from your next settlement

Notice you're out $500, not $485. You don't get your fees back. And you've probably already spent the $485.

Multi-Currency Settlement​

International transactions add another layer. Exchange rate fluctuations between authorization and settlement can work for or against you. Most processors lock the rate at authorization, but not all. See FX and Settlement and Going Global.

Hidden Fees​

The payment processing industry has a transparency problem. Merchants routinely pay 30-50% more than they should, and they don't realize it until someone audits their statements. See Reading Statements to learn how to spot overcharges.

Next Steps​

See Also​