How Your Credit Card Processor Scams You

Here’s why.

The problem is that you’re asking the wrong questions. The key to lowering your processing charges is understanding the fundamentals of how credit card processing fees work and then focusing on what’s really negotiable, and it’s not rates.

Defining “Best”

You may think that the “best” credit card processing solution is the one that has the lowest rates, assuming that low rates result in low costs. This is an expensive assumption. Low rates don’t equal low cost. In fact, the opposite is often true.

How is that possible? Processors use several different pricing models to manipulate and conceal the actual components of cost. Processors know that you’ll ask about rates. So they twist their pricing around to make their “rates” appear low, and then find other ways to charge you more.

The sentence below is taken from our processing guide and defines the essence of the best credit card processor for your business. It may not mean much now, but I’ll come back to it throughout this article because it’s crucial to reducing your processing costs:

“The best credit card processor is the one that allows your business to process transactions for as close to the sum of interchange and assessments as possible.”

Now let’s dive into what that sentence means.

The Basics of Credit Card Processing Costs

Despite how pushy sales people make it sound, there’s no magic to credit card processing fees. The fundamentals of fees are really pretty simple once they’re explained without the misleading sales jargon.

Think of it this way: credit card processing is just like any other product or service. There’s a wholesale component of cost, and there’s a retail component of cost. The wholesale component is the same for all processors, and the retail component varies from one processor to the next. At CardFellow, we refer to the retail component as the processor’s markup.

Wholesale Components

Within the wholesale component of processing cost are two things, called interchange and assessments. For simplicity, we can describe interchange as the fee paid to the bank that issues your customer’s credit card, and assessments as the fee paid to the card brand whose logo is on your customer’s card, such as Visa, Mastercard, or Discover.

Interchange and assessments can be complicated, but as we explain in our guide about following the money, you don’t need to be an expert on them because you can’t change them anyway. They’re non-negotiable.

Wholesale processing cost (the sum of interchange and assessments) is the same regardless of which processor you use. The only component of cost that changes among processors is the markup, which is what you pay the processor for its services.


The processor’s markup is the target when looking to lower costs and it’s what you want to focus on when negotiating or shopping for processing services. Remember our sentence from above: “The best credit card processor is the one that allows your business to process transactions for as close to the sum of interchange and assessments as possible.” That is, as close to wholesale as possible. Getting the lowest markup is what will get you the lowest overall cost, because you’ll be paying closer to the sum of interchange and assessments.

Of course, that’s often easier said than done. Processors don’t want you to know their markup, so they go out of their way to conceal it by using one of those manipulative pricing models I mentioned earlier.

Not to worry. Next, I’ll explain how to weave your way through a processor’s pricing web.

The Importance of Pricing Model

The pricing model is the method a processor uses to pass the cost of interchange, assessments, and its markup to your business. It sets the stage for either very expensive or very competitive processing charges.

There are several different types of pricing models that generally fall into two categories, called bundled or interchange-plus.

Bundled Pricing

Bundled pricing is the more opaque and expensive pricing model. As we describe in detail here, bundled pricing allows a processor to hide the actual cost of processing (the sum of interchange and assessments) and mix it with their markup. Instead of billing you based on the real cost of a transaction, the processor makes up its own rates, which are typically referred to as qualified, mid-qualified and non-qualified, and then pays the true cost of processing behind the scenes. The result is shell game that leaves you in the dark.

We’ve outlined how processors do this, and how you can stop it, in our article “(Evil) Tiered Pricing Merchant Account Services.” By charging you based on its own rates, the processor effectively conceals the wholesale cost, which makes it impossible for you to calculate the markup. You can’t “process transactions for as close to the sum of interchange and assessments as possible” if you don’t know what your charges are.

The downfalls of bundled pricing are pretty clear. Luckily, there’s another option: interchange-plus.

Interchange Plus

With interchange-plus pricing (also called pass-through pricing) you can see exactly what you’re paying for interchange and assessments. As we illustrate here, the processor passes the wholesale costs of processing directly to you, and the processor’s markup is billed as a separate line item that is the same regardless of card type or transaction method.

Since the processor charges you the actual cost of processing plus a fixed markup, interchange-plus is completely transparent, making it possible to easily calculate markup. When you can see the markup, you can make sure your processing costs are as close as possible to the sum of interchange and assessments. And as I’ve explained, that’s the key to low processing fees.

Now that you’re starting to learn how credit card processing fees really work, it’s extremely important to point out that interchange-plus does not guarantee competitive processing charges. We say it best in our article that outlines how interchange-plus is not a silver bullet. The ideal pricing model is a big component of competitive pricing, but it’s still just one component.

The Big Picture

It’s a mistake to focus on a particular rate or fee. As you’ve learned from this article, there’s a lot more to processing than just rates, and the more you know, the more likely it is that you’ll be able to secure a truly competitive processing solution. If you need more details, check out the blog at CardFellow for accurate, unbiased information about credit card processing.

We’ve helped thousands of businesses compare credit card processors at CardFellow. It’s free, and it’s easy. Just create a profile to receive instant, competitive quotes from multiple processors. You can put your spreadsheet away because our software gives you all the details of quotes so you can make an apples-to-apples comparison right from your CardFellow account. The average retailer reduces processing costs by 40% when using CardFellow to find a processor.

Remember, the most competitive processor for you is the one that lets your business process transactions for as close to the sum of interchange and assessments as possible. When you’re ready to lower your processing fees once and for all, sign up at CardFellow to find the solution that will truly help you pay as little as possible to take credit cards.