Historically, payments has been seen as a cost center, not a profit center. But today, ambitious software platforms are figuring out ways to generate more revenue by taking control of their payments stack. It starts by understanding how credit card and debit card processing fees work.Do you really understand interchange?
Even if you know a lot about payments, there’s a good chance you’ve been misusing the term “interchange.” Interchange is just one of three components of the total cost of processing a card payment. All three components, taken together, are called the Merchant Discount Rate (MDR). Often, “interchange” is incorrectly used to describe either the entire MDR or all the components set by the card networks (i.e., Interchange and Assessments).
Let’s use the Payments Layer Cake below to break down the MDR. Each layer of the Payments Layer Cake represents a type of financial institution that must interact with the other layers for a transaction to make it from the cardholder (the buyer) to the merchant (the business). Here are the three components of the merchant discount rate:
- Markup paid to the acquiring bank, acquiring processor, and/or payment facilitator
- Assessments paid to the card networks (i.e., Visa, Mastercard, American Express, Discover)
- Interchange paid to the issuing bank and issuing processor but set by the card networks
The MAI Model: Understanding the different types card processing fees
To help remember the three different types of fees that make up the Merchant Discount Rate (MDR), we propose a simple mnemonic device: MAI, which stands for Markup, Assessments, and Interchange. Interchange and Assessments are considered the “Base Cost” to process transactions. This base cost is usually the largest portion of credit card processing fees, averaging about 70-80% of the expense, with Markup taking about 20-30% of the expense.
Let’s explore each type of fee in more detail.
Markup (aka processor fees)
Markup is split amongst all of the entities on the acquiring side of a transaction. This could be a payment service provider (such as a gateway or payment facilitator), an acquiring processor, and/or an acquiring bank. Markup fees vary by entity and are often negotiable while Assessments and Interchange are not.
Markup fees can be either:
- Percentage of the transaction (ex: .10%)
- Fixed fee per transaction (ex: $.10)
- Both (ex: .10% and $.10)
Assessment Fees (aka dues and assessments)
Assessment fees, also known as dues and assessments or simply assessments, are a collection of fees paid to the card network. Unlike Markup, Assessments are not negotiable but can change (up or down) and are reviewed by the networks twice a year. Assessments are also set by the card networks and are therefore the same for all processors.
There are per-transaction, monthly, and quarterly assessment fees charged by the networks. An example of monthly assessment fees are Visa’s FANF (Fixed Access Network Fee) and Mastercard’s NABU (Mastercard Network Access Brand Usage) fees.
While not standard across all card networks, Assessments typically consist of a percentage fee, a flat fee, and a card network fee (e.g., a cross-border transaction fee) and are often paid on a per transaction basis for the ability to process transactions on a network’s rails.
For example, Assessment fees for a Visa Rewards card could look like this:
.13% (required % of transaction volume) + .01 (required transaction fee) + $4.00 (optional location fee)
Interchange (aka issuing bank fees)
Issuing bank fees (Interchange) are paid to the issuing side of the Payments Layer Cake. These fees are ultimately paid by the merchant to the issuing bank (e.g. Capital One, Chase, Bank of America, etc.) and then shared with the issuing processor and card program manager. Interchange is set by each card network and is non-negotiable. The fee usually consists of a per transaction processing percentage (assessed on the gross merchant value) and per transaction fee. Twice a year, these rates are reviewed and can be changed by the card networks.
For example, the interchange fee for a Discover Rewards card could be: 1.710% (processing percentage) + $.10 (per transaction fee). These fees are charged per transaction.
Certain variables can affect the Interchange fee; this list is not exhaustive:
- Card type (e.g. debit card or credit card)
- Card network (Mastercard, Visa, Discover, and etc.)
- Transaction type (e.g. card not present vs. card present)
- Merchant category code (MCC). Businesses with certain MCC’s may qualify for lower interchange rates that can lead to lower credit card processing charges
- Level 2/3 data. Businesses can pass along additional line-item data for certain business and government transactions to qualify for lower interchange rates.
Understanding the MAI model (markup, assessment and interchange) is the first step in demystifying payments for your business. SaaS platforms are taking ownership of their payments through Finix and rethinking their fee structures to drive revenue from their payments. Learn more about earning revenue from your payments with Finix.