Understanding The Game Of Credit Card Processing

Today, I want to lift the veil of mystery that covers the processing industry. There’s a lot going on behind the scenes that most merchants don’t know about and are deliberately kept in the dark.

The main reason it’s so difficult to find any information on how your rates are calculated is on purpose. Credit card processors purposely withhold as much information as possible so a business has no idea how much they are being charged.

Well fortunate for you, we’re going to reveal the secrets of how credit card processing works.

The players in payment processing

To understand the game of processing, you need to know the players.

There are a variety of players in the industry and they all want a piece of your pie. So let me introduce the key figures who control the industry.

Credit Card Associations (Card Brands)

These are the companies that develop the credit card system. Card Associations include the likes of Visa, MasterCard, and American Express. These companies create the rules for the industry.

Card Issuing Banks

These are the financial institutions that issue the physical cards. Some card brands handle this internally such as American Express.


Institution the provides a Merchant with a Merchant Account. The Acquirer handles acceptance and payment of credit card transaction to the merchant’s bank account.

Merchant Services Provider(MSP)/Independent Sales Organization(ISO)

Most merchant accounts are set up with an MSP/ISO. MSP’s/ISO’s establish the rate structures and fees that will be charged to the Merchant.


They provide the connectivity for Merchants to authorize and settle card transactions through the appropriate payment network. Transactions require a Front End (Auth/Capture) and a Back-End (Settlement/Acquisition).

Payment Gateways

Gateways connect the Merchant to the bank or processor that is acting as the front-end connection to the Card Associations.

Credit card rate structures

Note: The card brands follow a rate structure called interchange. This “Interchange” is the rate that the card brands charge regardless of what Pricing structure you are on or who you are processing with.

This is the “HARD” cost of processing a credit card transaction. Interchange has hundreds of different rates, fees, and assessments. The different rate structures you encounter all must reference Interchange in one way or another.

Tiered pricing

In tiered pricing, instead of paying hundreds of different rates, the interchange rates are divided up into tiers or “Buckets.”

Every transaction you run will fall into one of these typically 3 or 4 buckets.

These buckets are typically labeled Qualified, Mid-Qualified, and Non-Qualified. Additional tiers or Buckets may be added as well.

The general idea of Tiered pricing is to make statements simpler and easier to read, however, in reality, it reduces transparency and many times results in a bad deal for your business.

In Tiered pricing, a qualified or “teaser” rate is usually used as the selling point of this type of rate structure.

For example, a sales rep for an ISO may tell you that you will get 1.69% on all qualified cards. What they sometimes leave out is that the mid-qualified bump is something like an additional 0.81% and the Non-Qualified Bump is something like 1.55%.

Tiered pricing typically also has a per transaction fee of around $0.25/transaction.

If you run card not present transactions, most all your volume processed will be downgraded to the Non-Qualified rate meaning that you pay the 1.69% qualified rate plus the 1.55% non-qualified lowered discount rate plus the $0.25 per transaction so a total of 3.24% and $0.25.

Now this might not sound too bad, but consider if the transaction being processed was a Visa CPS Rewards Card not present consumer credit card the Interchange rate of which is 1.95% and $0.10 per transaction, then you are paying over 1.25% and $0.15 extra in fees over the actual cost of the transaction.

Again, these rate examples are just a generalization of how tiered pricing works and may not be the same rates as you have when you are on a tiered program.

Another issue with Tiered pricing is that you have no way to know how much your processor is making on your account, and what types of cards you are accepting and what their actual cost is.

Yet another issue we’ve encountered with Tiered pricing is that different MSP’s categorize each of the different tiers differently, which means even if you have the same quotes for tiered pricing one MSP’s quote could potentially cost you a lot more monthly.

Tiered pricing can be a benefit in some situations such as a business that does very low volume and wants more of the transactional volume to reduce monthly minimums on an account.

Interchange Plus Pricing

Interchange plus pricing is our preferred rate structure.

On interchange plus, the actual interchange rate is passed through, and a discount rate (margin) is added to it. Let’s take that same transaction information from the example in Tiered pricing for a Visa CPS rewards card not present consumer credit.

Say your interchange-plus plan is Interchange plus 50 basis points and $0.10 per transaction. Your total cost for the transaction would be the interchange charge of 1.95% and $0.10 and the discount rate of 0.5% and $0.10 totaling 2.45% and $0.20 which is quite a bit less than the 3.24% and $0.25 per transaction that it cost in the Tiered pricing example.

Yes, if the discount added to the Interchange plus rate structure is too high, it can be a bad system also, so make sure you are working with a company that is not trying to take advantage of you.

If you are paying more than 1% over interchange on an interchange plus pricing structure, odds are you are paying too much.

The drawback to Interchange plus for some businesses is the fact that there are hundreds of rates on Interchange and you don’t know what rate you will be paying until you see your statement to see what Interchange classification the transactions come through as.

What you do know is that you pay the same percentage over interchange for every transaction.

With this method, you don’t have to wonder how much your processor is making on your account, you can see it on every statement.

Some bad processing platforms will do something called “padding interchange” this is very difficult to spot on a statement which is why they do it, but a comparison against an interchange table can help to detect it.

Flat Rate Pricing

This pricing method is quite standard in the mobile processing environment. Think about Square for example; they do a model of flat-rate pricing, 2.75% for swiped transactions, and 3.5% and $0.19 for keyed transactions.

This makes for simple to read statements, as there are only 1 or 2 fees to look at, swiped volume and keyed in amount.

The issue with Flat rate pricing is a similar issue to Tiered pricing. To not lose money, the processor needs to set the flat rate high enough to cover the types of card transactions.

That means that many cards will get charged a much higher rate than what their true interchange cost is. The amount of markup varies with each card type that is processed, and you as a Merchant have no idea what the markup over interchange is for each transaction.

In some cases, you could be paying as much as 2.5% over the cost of a transaction and potentially even more. This pricing structure typically benefits businesses that have a small average ticket, or a company that needs to know exactly what percentage they will pay for each transaction.

Cash Discount Pricing

This is a unique pricing structure. With cash discount, you are charging your customers for your processing fees.

This pricing structure requires that you advertise that your prices as marked include a cash discount and that any payment with a credit card has X amount of surcharge (can be up to 4%).

Some business owners like the idea of not paying for credit card processing, however, you need to consider how this affects your business. For example:

  • What are your competitors doing?
  • How do your prices compare?
  • Will increasing your prices affect the amount of business you will do?

Here is an example of how this system works. Say a customer comes in and purchases an item that is priced at $100.

The store clerk asks the customer if they are taking advantage of the cash discount program. If they say that they are and pay with cash they pay $100. If they want to pay with a credit card, the store clerk pushes a button on the terminal, and the terminal adds a 4% surcharge bringing the total to $104 which gets charged to the card.

When the terminal batch settlement is run, the merchant gets the original $100 and $4 goes to the processor to cover credit card fees.

Billback and Enhanced Billback

Just don’t do it, seriously don’t. This is one of the most confusing and shady pricing structures available today. To understand this pricing structure just think of the name, billback.

You will be billed back for things that you weren’t billed for initially. Say the processor quotes you a 1.9% flat rate for all of your transactions for the month. If you know anything about interchange you know that not all transactions come in less than 1.9%.

So how do they make up the difference? Next month they look back to see what the rates did qualify at and charge you the difference on the next month’s statement. So, you need 2 months of statements to see what your actual effective rate is for one month.

Typically, the processor will have a set markup over the interchange cost as well, making this pricing structure an odd combination of flat rate plus interchange plus. This pricing structure is not a good fit for any merchants.

Important things to keep in mind

Is your head spinning? Mine was too when I first started working with the guys.

There’s a lot of ways your business can go wrong with payment processing companies. Keeping all these items I listed above in mind will give you a chance of success.

Unsure if you’re getting a fair rate? Upload your processing statement and we’ll do a free rate analysis! If we can’t beat your current rates, we’ll give you a $250 gift card.

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