Fee Breakdown & Money Flow
Last Updated: 2025-12-18
Status: Complete
This document breaks down the economics of card transactions and explains where every dollar goes.
Money Flow: Where Do the Fees Go?
Example: $100 Credit Card Purchase
┌──────────────────────────────────────────────────────────────────────────┐
│ $100 TRANSACTION BREAKDOWN │
└──────────────────────────────────────────────────────────────────────────┘
Customer pays: $100.00
│
▼
┌─────────────────────────────────────────────────────────────────────────┐
│ FEE BREAKDOWN │
├─────────────────────────────────────────────────────────────────────────┤
│ │
│ ┌────────────────────────────────────────────────────────────────────┐ │
│ │ INTERCHANGE FEE (to Issuer) ~$1.80 (1.8%) │ │
│ │ ───────────────────────────────────────────────────────────────── │ │
│ │ • Set by card networks (Visa/MC) │ │
│ │ • Varies by card type, merchant category, transaction type │ │
│ │ • Largest component of merchant fees │ │
│ │ • Premium rewards cards have HIGHER interchange (up to 3.3%) │ │
│ └────────────────────────────────────────────────────────────────────┘ │
│ │
│ ┌────────────────────────────────────────────────────────────────────┐ │
│ │ ASSESSMENT FEE (to Card Network) ~$0.16 (0.16%) │ │
│ │ ───────────────────────────────────────────────────────────────── │ │
│ │ • Visa/Mastercard's fee for using their network │ │
│ │ • Includes both percentage-based and fixed components │ │
│ │ • Also called "network fee" or "dues and assessments" │ │
│ │ • Non-negotiable, set by networks │ │
│ └────────────────────────────────────────────────────────────────────┘ │
│ │
│ ┌────────────────────────────────────────────────────────────────────┐ │
│ │ ACQUIRER MARKUP (to Acquirer/Processor) ~$0.54 (0.54%) │ │
│ │ ───────────────────────────────────────────────────────────────── │ │
│ │ • Acquirer's profit margin │ │
│ │ • This is the NEGOTIABLE portion │ │
│ │ • May include processor fees if using third-party processor │ │
│ └────────────────────────────────────────────────────────────────────┘ │
│ │
├─────────────────────────────────────────────────────────────────────────┤
│ TOTAL FEES (Merchant Discount Rate): $2.50 (2.5%) │
│ ═══════════════════════════════════════════════════════════════════ │
│ MERCHANT RECEIVES: $97.50 │
└───────────────────────────────────────────────────────────── ────────────┘
Note: Assessment fees include both percentage and fixed components. This is a simplified example.
Interchange Varies Significantly
Interchange is NOT a single rate. It varies by:
| Factor | Lower Interchange | Higher Interchange |
|---|---|---|
| Card type | Basic debit | Premium rewards credit |
| Transaction type | Card-present (chip) | Card-not-present (online) |
| Merchant category | Grocery, utilities | Retail, e-commerce |
| Data quality | Level 2/3 data | Basic data |
Actual Interchange Ranges
| Card Type | Typical Range |
|---|---|
| Regulated debit (Durbin) | 0.05% + $0.22 (capped) |
| Unregulated debit | 0.8% - 1.5% |
| Consumer credit | 1.4% - 2.4% |
| Premium rewards credit | 2.0% - 3.3% |
| Commercial/corporate | 2.5% - 3.5% |
Example: A Chase Sapphire Reserve transaction might have 2.95% interchange, while a regulated debit card from Chase is capped at $0.22 + 0.05%.
Card-Present vs Card-Not-Present
Where and how the card is used affects interchange:
| Transaction Type | Example | Interchange Impact |
|---|---|---|
| Card-present (CP) | Chip inserted, tap-to-pay | Lower (lower fraud risk) |
| Card-not-present (CNP) | E-commerce, phone orders | Higher (higher fraud risk) |
| Keyed-in | Manually typed at terminal | Highest (highest risk) |
Example Interchange Difference (Visa)
- CPS Retail (chip): 1.43% + $0.05
- CPS E-commerce: 1.80% + $0.10
- Standard (non-qualified): 2.30% + $0.10
This is critical for PayFacs building software platforms that primarily process CNP transactions.
Fee Flow Diagram
$100 Transaction
│
▼
┌───────────────────────────────┐
│ CARDHOLDER PAYS $100 │
│ (to Issuing Bank) │
└───────────────┬───────────────┘
│
▼
┌────────────────────────────────────────────────────────────────────────────┐
│ SETTLEMENT PROCESS │
├───────────────── ───────────────────────────────────────────────────────────┤
│ │
│ ISSUER keeps $1.80 │
│ (Interchange Fee) │
│ │ │
│ └──────────▶ Sends $98.20 to Card Network │
│ │ │
│ ▼ │
│ NETWORK keeps $0.16 │
│ (Assessment Fee) │
│ │ │
│ └──────────▶ Sends $98.04 to Acquirer │
│ │ │
│ ▼ │
│ ACQUIRER keeps $0.54 │
│ (Markup/Profit) │
│ │ │
│ └──────────▶ MERCHANT │
│ receives │
│ $97.50 │
└────────────────────────────────────────────────────────────────────────────┘
Understanding Merchant Discount Rate (MDR)
The Merchant Discount Rate is the total fee merchants pay, comprising three components:
MDR Components
┌──────────────────────────────────────────────────────────────────────┐
│ MDR BREAKDOWN (2.5%) │
├──────────────────────────────────────────────────────────────────────┤
│ │
│ ┌─────────────────────────────────────────── ─────────────────────┐ │
│ │ Interchange (1.80%) ███████████████████ 72% │ │
│ └────────────────────────────────────────────────────────────────┘ │
│ │
│ ┌────────────────────────────────────────────────────────────────┐ │
│ │ Assessment (0.16%) ██ 6% │ │
│ └────────────────────────────────────────────────────────────────┘ │
│ │
│ ┌────────────────────────────────────────────────────────────────┐ │
│ │ Acquirer Markup (0.54%) █████ 22% │ │
│ └────────────────────────────────────────────────────────────────┘ │
│ │
└──────────────────────────────────────────────────────────────────────┘
Negotiable vs Non-Negotiable
| Component | Set By | Negotiable? | Typical Range |
|---|---|---|---|
| Interchange | Card networks | No | 1.4% - 3.3% |
| Assessment | Card networks | No | 0.13% - 0.16% |
| Acquirer markup | Acquirer/processor | Yes | 0.1% - 1.5% |
Key insight: Only the acquirer markup is negotiable. Merchants with high volume can negotiate lower markups (0.1%-0.3%), while small businesses may pay 1%+ markups.
Why Premium Rewards Cards Cost More
Premium rewards cards (like Chase Sapphire Reserve, AmEx Platinum) have higher interchange because:
- Funding rewards: Higher interchange (2.5-3.3%) funds the 2-5% cashback/points programs
- Issuer economics: Issuers need to cover the cost of rewards they pay out
- Consumer behavior: Rewards cardholders spend more and prefer their rewards card
- No caps: Unlike the EU/Australia, US has no credit card interchange caps
- Cross-subsidy: Merchants pay more, effectively subsidizing rewards for cardholders
The cycle: Higher interchange → Better rewards → More card usage → Higher interchange. This creates an "interchange arms race" where card issuers compete on rewards funded by merchant fees.
Assessment Fee Details
Assessment fees vary by network and transaction type:
Visa Assessment Fees (2024-2025)
| Component | Rate |
|---|---|
| Base assessment | 0.14% |
| Network access fee | $0.0195 per transaction |
| Credit voucher fee | 0.14% (refunds) |
| International service fee | 0.40% - 1.00% (cross-border) |
Mastercard Assessment Fees (2024-2025)
| Component | Rate |
|---|---|
| Base assessment | 0.1375% |
| Network access fee | $0.0195 per transaction |
| Digital enablement fee | $0.01 per transaction |
| Cross-border assessment | 0.45% - 1.00% |
Note: Rates change periodically. Verify current rates at official network portals.
Interchange Categories
Card networks publish hundreds of interchange categories. Here are key examples:
Visa Interchange Categories (Common Examples)
| Category | Description | Rate + Fixed |
|---|---|---|
| CPS Retail | Card-present, chip/contactless | 1.43% + $0.05 |
| CPS Supermarket | Grocery stores (card-present) | 1.15% + $0.05 |
| CPS Rewards 1 | Rewards card, card-present | 1.65% + $0.10 |
| CPS E-commerce | Online retail | 1.80% + $0.10 |
| CPS Card Not Present | Manual entry | 1.95% + $0.10 |
| Commercial Data Rate 1 | B2B with Level 2 data | 2.10% + $0.10 |
| Standard | Non-qualified transactions | 2.30% + $0.10 |
Mastercard Interchange Categories (Common Examples)
| Category | Description | Rate + Fixed |
|---|---|---|
| Merit 1 | Card-present, chip/contactless | 1.43% + $0.05 |
| Core Value | Basic debit, card-present | 0.95% + $0.05 |
| E-commerce | Online transactions | 1.80% + $0.10 |
| World Elite | Premium cards | 2.20% + $0.10 |
| Standard | Non-qualified | 2.30% + $0.10 |
Transaction Qualification
Not all transactions qualify for the lowest interchange rate. Qualification depends on:
Qualification Factors
┌────────────────────────────────────────────────────────────────────────┐
│ INTERCHANGE QUALIFICATION │
├────────────────────────────────────────────────────────────────────────┤
│ │
│ BEST RATE (Qualified): │
│ ✓ Card-present with chip/contactless │
│ ✓ AVS/CVV match (for CNP) │
│ ✓ Settled within 24 hours │
│ ✓ Correct merchant category code │
│ ✓ All required data present │
│ │
│ MID-TIER RATE (Mid-Qualified): │
│ • Card-present but keyed │
│ • Settled 24-72 hours after auth │
│ • Missing some data fields │
│ │
│ WORST RATE (Non-Qualified): │
│ ✗ Settled >72 hours after auth │
│ ✗ Incorrect MCC │
│ ✗ Missing critical data │
│ ✗ High-risk transaction patterns │
│ │
└────────────────────────────────────────────────────────────────────────┘
Downgrade example: A card-present transaction that should qualify at 1.43% + $0.05 might downgrade to 2.30% + $0.10 if batched late or missing data.
Key Takeaways
- Interchange dominates: 70-80% of total merchant fees go to interchange
- Not all cards cost the same: Premium rewards cards can be 2x more expensive than basic debit
- Card-present is cheaper: CNP transactions have 20-40% higher interchange
- Only markup is negotiable: Interchange and assessment are set by networks
- Qualification matters: Late batching or missing data causes costly downgrades
- Assessment fees add up: Small percentage but affects every transaction
- Cross-subsidy effect: Merchants fund cardholder rewards programs
Related Topics
Four-Party Model Series:
- Four-Party Model Overview - Core concepts and party roles
- Transaction Flows - Authorization, capture, settlement
- Interchange Optimization - Reducing costs through data
- PayFac Position - How PayFacs fit into the model
- Self-Assessment Quiz - Test your understanding
Deep Dives:
- Debit Networks & Routing - Durbin Amendment and debit interchange caps
- Card Network Role - Network economics and rules
References
Official Interchange Rate Documentation
- Visa USA Interchange Reimbursement Fees - Official Visa interchange rate portal
- Mastercard Interchange Programs and Rates - Official Mastercard interchange schedules
Note: Interchange rates change in April and October. Always verify current rates at official network portals.
Continue reading: Interchange Optimization