Costs in payments – part 2: different contributors of costs

25/07/2024

Learn about the different contributors of costs in the payment industry and factors in the category

By Marco Conte

Welcome to part 2 of our ongoing series on costs in payments! Previously we talked about different pricing models in the payment industry and factors to consider when deciding between interchange ++ and blended fees. Now let’s take a deep dive into the different categories of payment costs and its complications by breaking down different factors and relationships within the category.

The importance of fee transparency

Effective payment management begins with transparency into the multitude of costs and understatement of how fees are charged and calculated. Payment service providers (PSPs) typically deduct fees from expected payouts to merchant bank accounts. These payouts follow specific cycles depending on settlement times and merchants usually receive payments on a T+1 basis. However, for certain industries and risk profiles, payouts can be delayed by a week or more.

Some costs cannot be calculated daily and PSPs may run adjustments periodically. This means that costs unrelated to a specific settlement batch may be applied to determined payouts but costs from previously processed transactions in other batches will also be counted. This complexity arises because fees related to card scheme transaction programs need to be calculated based on the way transactions are processed.

Different Fee Types

Processing Fees

Processing fees are paid for payment gateway services. Often, merchants use stand-alone payment gateways that do not offer acquiring services, requiring them to pay these fees separately. This is common when using payment orchestration platforms, stand-alone fraud prevention solutions, or stand-alone 3DS authentication servers.

Processing fees can vary depending on transaction volumes and the number of events expected each month. Pricing can range from a few cents to 0.25-0.30 USD per request for small merchants. Additional processing fees may apply based on different transaction types, the use of card or scheme tokenization services, reporting and reconciliation needs.

As part of the processing fees there will be an acquirer premium or a so-called merchant services fee. Acquirers will apply different variable margins depending on the industry of the merchant and the risk profile associated.

Interchange Fees

In a previous blog post, we discussed interchange fees. Now, let’s delve deeper into their distribution and influencing factors.

Interchange fees are driven by rules set by card schemes and local regulators. In Europe, these fees have been capped since December 2015 following European regulation. There are hundreds of unique interchange rates based on various factors, such as:

Card Network: Interchange fees and programs are determined by credit card networks with specific rules depending on industries and countries.
Credit Card vs. Debit Card: Interchange fees for debit cards are much lower than for credit cards due to the lower risk associated with debit cards.
Type of Sale: Transaction location and method significantly impact interchange rates. Card-present (CP) transactions, such as in-store purchases, have lower rates than card-not-present (CNP) transactions, such as online sales, due to higher fraud risks associated with CNP transactions.
Type of Card Program: The customer’s card type, such as a rewards card or corporate purchasing card, also affects interchange rates. Cards with added perks cost banks money, resulting in higher interchange fees.

For cards in Europe (EEA), the costs are as follows:

0.20% for card-present debit cards
0.30% for card-present credit cards
1.15% for card-not-present debit cards
1.50% for card-not-present credit cards

For commercial cards the costs can vary:

1.25% – 1.90% for Mastercard commercial cards
1.30% – 1.90% for Visa commercial cards

More details about applicable interchange fees in Europe can be found here:

In the United States, transactions are differentiated under the federal reserve regulation for Debit Card Interchange Fees and Routing. According to federal reserve data from 2022, 61.2% of total transactions are regulated with a fixed interchange rate: $0.21 plus 0.05% of the transaction value, plus a $0.01 fraud-prevention adjustment, if eligible.

For credit cards, interchange fees vary based on merchant category codes, merchant volume thresholds, and card types. For example, Visa applies the following:

Debit unregulated cards: 0.65% – 1.90% + a fixed fee between $0.15 and $0.25
Credit cards: 1% – 3%, depending on the card product

Mastercard applies:

Debit unregulated cards: 0.19% – 1.90% + a fixed fee of $0.15 – $0.53
Credit cards: 1.15% – 3.15% + fixed fees, depending on the card and industry types

Card schemes offer different interchange fees based on the volume of transactions processed by a merchant, applying various thresholds accordingly.

For more detailed information about the different types of interchange fees applied by the card schemes, Visa and Mastercard have the lists published for consultation:

Scheme fees

Unlike interchange fees, a single fee charged by issuers on a specific payment, card schemes charge different variations of scheme fees on a single payment. Scheme fees are grouped in categories based on how they are being charged.

We can look at two main high-level groups:

Scheme fees applied on a specific payment transaction and settled against it – the majority of fees will be under this category. These would be based on the transaction processing type, card product and some acquirer thresholds. See an example here from Worldpay.
Scheme fees calculated on aggregated sets of transactions. Under this group we have non-transactional scheme fees, calculated based on volume tiers or the relationship with other transactions, or penalty fees due to non-compliance with scheme rules and requirements.

Non-transactional scheme fees can especially be tricky for businesses as those are not immediately visible and possibly be delayed by a month or longer. Some examples of common non-transactional scheme fees are:

Visa System Integrity Fee:

This monthly fee consists of two parts, the Visa Excessive Retry Fee and the Visa Data Quality Fee. Visa charges 0.10 – 0.25 USD per transaction retries when declines are related to these reason code groups:

Category 1 – Issuer will never approve. For example: lost or stolen cards.
Category 2 – Issuer cannot approve at this time. For example: insufficient funds. The limit is 15 retries in 30 days.
Category 3 – Issuer cannot approve with these details. For example: invalid account number, incorrect Card Verification Value (CVV or CVV2), or incorrect expiration date. The limit is 15 retries in 30 days.
Category 4 – Generic response codes. While the great majority of declines fall into the above categories, issuers may use some special codes on an ad-hoc basis.The limit is 15 retries in 30 days.

Mastercard TPE Excessive Authorizations Fee & Merchant Advice Code:

The Mastercard Transaction Processing Excellence (TPE) Excessive Authorizations Fee is a monthly fee charged for excessive account testing of a single Payment Account Number (PAN) on the same MID within 24 hours and within a 30-day window. The maximum number of retries within 30 days is 35, and 10 within 24 hours. Any additional attempt will be charged $0.50.

The Merchant Advice Code Transaction Processing Excellence program is a monthly fee designed to reduce unnecessary authorization declines. The fee introduced on Card-Not-Present (CNP) authorization requests decline with a MAC value of 03 (do not try again) or 21 (customer canceled the recurring agreement.), where in the past 30 days a transaction on the same card, at the same merchant, and with the same transaction amount also decline with a MAC value of 03 or 21.

3D Secure Fee:

This is based on monthly reporting on authentication requests at the Merchant ID (MID) level. Acquirers cannot always fully detect the transactions that have been sent to a 3DS authentication; in some cases those can be executed on third-party 3DS servers. 3D Secure fee are in the range of a few cents.

Chargeback fees

Chargebacks can happen for various reasons ranging from disputes to service-related reasons and fraudulent card instances. Costs for chargebacks can be very high, starting from a few dollars to hundreds. We will talk more about it in one of our next blog posts.

Therefore, it’s crucial for businesses to understand what impacts costs in chargeback calculations. Often merchants get charged a flat fee per single chargeback case from their acquirers, but there are several other components and fees applied by the schemes that can affect associated costs. Some examples of charges that acquirers have to bear for chargebacks are:

Chargeback responde fees: These can vary depending on the response time for a dispute, for example Visa charges from $1.05 to $2.15 (depending on when a response is provided).
Late acceptance fees: These are cases where a merchant takes liability for the chargeback but replies with certain delay, Visa would charge $0.75.
Dispute image fess: These are applied each time a merchant responds to a chargeback by sending an issuer documentation (images). Visa charges $1.50 and Mastercard charges $0.20.
No authorization chargeback fees: These types of chargebacks are received if the merchant does not have valid issuer authorization for the posting of that transaction. Mastercard would charge $25.
Arbitration fees: These are charged when merchants and issuers cannot agree during a dispute cycle and the network card scheme committee has to intervene. When a merchant loses such a case, a $500 fee would be applied by Visa and $420 by Mastercard.

Understanding costs

Understanding the cost of payments is fundamental for any business accepting digital payments and has a relevant share of card payments. Due to its complex nature and different variables involved, having cost governance, forecasting, and full control can become very challenging and businesses can run the risk of having suboptimal setups.

Knowledge and data-driven decisions are key, but not all companies are in a position where granular details and information are available and have access to tools for payment professionals.

At Congrify we spend a big portion of our time understanding and decoding the costs of payments while utilizing reverse engineering models to predict and validate the right application of fees charged to merchants.

If you want to learn more about costs in payments, how to access comprehensive data, and utilize the right processes, reach out to our team today!

Disclosure: The information and example of pricing provided reflect publicly available information or information known at the time of the publication of this blogpost. For a detailed understanding of your payment costs and fees we invite you to engage with your payment service provider or acquirer.