Where do Processing Fees Come From? Pt. 1

By John Robinson, of Cocard Synergy

For the really short answer, check out Who Gets Your Merchant Account Fees?

Here’s the plain ‘ol short answer:

Originally these fees were created to cover the cost of processing for your customer’s bank (the “issuing bank ”), and to make small profit for the bank giving you your money (the “acquiring bank”)—hey, they deserve something for their troubles.  Nowadays, these fees also create a secondary profit center for the banks that issued the cards.

(This discussion, by the way, will only be covering Visa and MasterCard.  American Express and Discover are different animals.)

All right.  Ready for a little more detail?

Whenever you accept a credit card from a customer, there are some actual costs for the banks.  First, banks need to provide all sorts of security and fraud prevention, set up systems to see if a customer has enough credit or reported their card stolen, enable alerting when a card isn’t authorized, keep up the networks, staff call centers, transfer funds between issuing and acquiring banks , etc.

The fees break down something like this:

• The issuing bank’s cut is called the “interchange fee.”  Depending on card type, what kind of cardholder information you were able to present, and environment (ie, brick-&-mortar vs. e-commerce), this could cost 1-3% + roughly $0.10 per transaction.
• Visa and MasterCard then need to take their cut, referred to as an “assessment fee”, which is .0925% + $0.0029 for Visa and .095% + $0.005 for MasterCard.  The “pennies” part of the assessment is usually called “Base II” or “Access Fee”.
• The network takes a cut, usually $0.04 to $0.08 a transaction.
• The remainder, which can vary wildly, is usually split between the acquiring bank, and the company servicing your account.  Don’t split hairs here, because sometimes they’re one and the same, but even if not, it’s an agreement between the two that establishes this cut.  However, there is still cost to the acquirer, for settlement and clearing of funds, as well as staff, would otherwise be losses to the bank.

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