Payment Processing
Every card swipe triggers a cascade of fees, approvals, and settlement steps involving up to seven different entities. Most operators only see the final rate on their statement — and don't know which parts are negotiable. This page explains the mechanics clearly.
On This Page
How a Card Payment Works
When a customer taps their card at your terminal, a transaction flows through multiple systems in under two seconds:
- 1. Authorization — Your terminal sends the transaction to your acquirer/processor
- 2. Network routing — The processor routes it through Visa or Mastercard to the issuing bank
- 3. Approval/Decline — The issuer checks the cardholder's account and returns a response
- 4. Capture — At end of day (or batch close), authorized transactions are submitted for settlement
- 5. Clearing — The card network exchanges transaction data between acquirer and issuer
- 6. Settlement — Funds move from the issuing bank, through the network, to your acquiring bank
- 7. Deposit — Your processor deposits net funds (minus fees) to your bank account
The Fee Layers
Your processing statement shows one blended rate, but it's actually three stacked fees:
- Interchange (~1.5–2.5%) — Paid to the cardholder's issuing bank. Set by Visa/Mastercard. Not negotiable.
- Assessment fees (~0.13–0.15%) — Paid to the card network (Visa/Mastercard themselves). Not negotiable.
- Processor markup (0.1–1%+) — Paid to your payment processor. This is the only negotiable part.
What Is Interchange
Interchange is the largest component of card processing fees — typically 60–70% of your total rate. It's paid to the bank that issued the customer's card.
Interchange rates vary by: card type (credit vs debit), rewards level (basic vs premium rewards cards), business category (MCC code), and transaction type (card-present vs card-not-present).
A basic debit card might have an interchange rate of 0.8%. A premium travel rewards credit card might be 2.4%. You have no control over which card customers present — but you can optimize which transaction types you accept and how.
Processor Markup — the Negotiable Part
The processor markup is what your payment processor (Square, Stripe, Clover, Heartland, First Data, etc.) charges on top of interchange and assessments.
On a flat-rate model (Stripe at 2.9% + $0.30), the markup is baked into a single rate. On an interchange-plus model, the markup is listed separately (e.g., 'interchange + 0.25% + $0.10').
Interchange-plus pricing is almost always better for established businesses processing over $10,000/month. If you're on a flat rate and processing over $15k/month, you're likely overpaying.
Processor markups are negotiable at volume. Over $50k/month, most processors will negotiate. Before negotiating, you need to know your current effective rate — divide total processing fees by total volume processed.
Chargebacks Explained
A chargeback occurs when a cardholder disputes a charge with their bank instead of requesting a refund from the merchant directly. The issuing bank can forcibly reverse the transaction.
From the merchant's perspective: funds are debited immediately upon dispute, a chargeback fee is assessed ($15–$100), and you have a limited window to respond with evidence.
Chargeback prevention is about documentation and process: signed authorizations, clear refund policies, delivery confirmation, and prompt customer service responses reduce dispute rates significantly.
- Dispute reason codes tell you why — friendly fraud, item not received, unauthorized, etc.
- Win rates on disputes with good documentation: 30–60% depending on category
- High chargeback rates (over 1%) trigger processor warnings and potential account termination
- Chargeback monitoring programs exist at 0.65% (Visa) and 1% (Mastercard) thresholds
Frequently Asked Questions
A gateway is the software that securely captures and transmits card data. A processor is the entity that routes and settles transactions. Many companies (Stripe, Square) combine both functions. Some setups use a separate gateway (Authorize.net) with a backend processor (TSYS, First Data).
Divide your total processing fees (from your statement) by your total dollar volume processed. That's your effective rate. Compare it to interchange-plus benchmarks for your business type. If you're over 2.5% on mostly card-present transactions, you're likely overpaying.
In most US states, yes — surcharging is legal but regulated. You must disclose the surcharge clearly at point of sale. Rules vary by state and card network. Debit cards cannot be surcharged under Visa/Mastercard rules. Cash discount programs are a common alternative.
Document everything. For card-not-present: get signed authorization, save IP + device data, confirm delivery. Respond to every dispute within the window with organized evidence. Use a processor that provides chargeback alerts (Ethoca, Verifi) so you can resolve disputes before they escalate.
Still have questions? Text PJ.
Real human, San Diego. No pitch — just a straight answer on what makes sense for your situation.