Information on Merchant Accounts,
Ecommerce and Credit Card Processing

August 8th, 2006 by Jamie Estep

Merchant Account Fees, Credit Card Interchange – Who are you really paying?

Filed in: Merchant Accounts | 7 comments

When you pay your bill to process credit cards each month, its often unclear as to who exactly the money is going to. There is Visa and MasterCard, some company called a processing bank, the company you are processing with (either a bank or an independent service provider), and finally another bank that issues the customers credit card.

With three and sometimes more companies in the picture, where is your money really going?

Merchant account fees are based on top the credit card interchange system. This system specifies how much is charged for the processing of a credit card. The company who takes the largest cut of your fees is the bank that issued your customers credit card. The price of credit card interchange is a complex system that changes with different business types. But generally speaking, the card issuing bank takes almost 90% of the fees that you pay. After that Visa, MasterCard and the back end processor take about 5%. This 5% is called assessments. Finally, the company that actually provides you with your merchant account gets the remaining 5%. This can be more or less depending on how much your provider marked up your fees, but generally is very low compared to what the card issuing bank gets.

Related Posts:
Cutting the middle-man, who is it best to process with?

7 Responses to “Merchant Account Fees, Credit Card Interchange – Who are you really paying?”

  1. Hemal Sanghvi September 6, 2006 at 7:37 am

    What is the source of this data & information ?

  2. jestep September 6, 2006 at 8:22 am

    This is more or less personal industry knowledge. This obviously doesn’t work dollar for dollar in every case, but looking at it from a simple example:

    Interchange fees go to the card issuing bank.

    Interchange for retail is approx 1.55% for Visa. This completely goes to the card issuer.

    A business would commonly see something like 1.7% as their quoted rate.

    For this example, the Card Issuer is now taking 91% (1.55%/1.7%).

    The processor has their assessment fees which for the sake of simplicity, we’ll say is 10 basis points over interchange or .1%. This means that the processor is getting 5.8%. (.1%/1.7%)

    The remainder 3.2% in this case, goes to the service provider.

  3. hemal sanghvi September 13, 2006 at 8:28 am

    how much does an ISO Get ? i’ve read somewhere that they take 40 cents on a $100 transaction. what is their role in merchant procesiing ?

  4. jestep September 13, 2006 at 9:20 am

    The ISO would be the ‘service provider’ in the case above and would be getting 3.2% of the total amount in that case.

    ISO’s can potentially get 40 cents on a $100 transaction. It totally depends on the rate that they set for their customer, and what they set the transaction fee at. ISO’s often raise the transaction fee a lot to make their processing rate seem more competitive.

    To make $.40 per a $100 transaction they could have a $.25 transaction fee, and be making 15 basis points on the processing fee.

  5. D. Lord September 22, 2006 at 1:21 pm

    We are considering changing credit card processing companies. The new company is offering “Interchange Wholesale Plus 12 basis points”. It was explained as 12 basis points over “wholesale”. However, the representative could not tell me what “wholesale” was at this time. I assume it will vary with the type of transaction but can you give me a “ballpark” figure as to what “wholesale” is running? or… can you give a better explanation of this type of processing offer?

  6. jestep September 22, 2006 at 1:36 pm

    This type of account is commonly called a cost plus account. It \’can\’ be a very low cost way to process.

    Basically your provider has a set rate that they cant go below. This rate applies for all transaction, qualified, mid and non-qualified. What they do is give you a rate at exactly .12% over their cost.

    This does not necessarily mean that it is cheaper than anyone else. Basically you need to know what their cost is before you can determine whether it is actually cheaper than anyone else. Since providers have different contracts with processing banks, there really isn\’t any good way to tell how much they are going to charge. Also, since the fees for keyed entry and swiped are completely different, that is something else I would need to know. If the company you are looking at is a large company there is a better chance that they have a good buy rate.

    If you can post how you intend on actually processing cards, I will try to come up with something for you.

    A few things you should look out for. Check your transaction fee because this is often an area where companies make up any cost from a low processing rate.

  7. Dave Cox December 8, 2006 at 5:49 am

    Now this is interesting. Nobody is mentioning the new manual super-gateways slowly appearing on the scene,

    From what I’ve read they have been set up to use encryption of the same strength as ATM’s but online versions of them and are the last word in PCI compliance.

    One is calling itself the E-Path Credit Card Payment Gateway which may be a bit of an overstatement because it needs you to charge the card manually yourself into your merchant account.

    Still, seems a good way to stop fraud from getting into your merchant account.

    You mention about costs. This is really interesting too. Banks earn money from their merchants falling victim to fraud. I think here in Australia a bank will charge their merchant about $25.00 every time they perform a charge back.

    From what I read e-Path sort of can help eliminate fraud from happening if you use it right. The question is will banks support a newer and safer manual way and be happy about not earning those charge back fees, or will they resist the new systems like e-Path to keep that charge back revenue coming in???