How Payment Processing Fees Work
Understand interchange, markup, pricing models, and what questions to ask before choosing a payment processor.
Payment processing fees are confusing by design. Here's what you actually need to know.
Understanding Interchange: Who Gets What
When a customer swipes their credit card, the money doesn't just go to you. It gets split between several parties. Here's the breakdown:
On a $100 credit card transaction:
- Card-issuing bank gets ~$1.50-$2.20 (this is interchange)
- Visa/Mastercard gets ~$0.10-$0.15 (network assessment fee)
- Payment processor gets their markup (varies widely)
- You get the rest
Interchange is set by the card networks and goes directly to the bank that issued your customer's credit card. This pays for fraud protection, rewards programs, and the bank's risk in extending credit. Every processor pays the same interchange. it's not negotiable.
Here are actual Canadian Visa interchange rates as of 2024:
- Consumer credit cards: ~1.5% + $0.05 (basic cards like Visa Classic)
- Rewards cards: ~1.8-2.2% + $0.10 (cards with cash back or travel points)
- Premium rewards cards: ~2.4-2.6% + $0.10 (Visa Infinite, World Elite Mastercard)
- Commercial/corporate cards: up to 2.6% + $0.10 (business purchasing cards)
- Visa Debit (in-person): ~1.3-1.4% (lower because it's debit, not credit)
The card network (Visa/Mastercard) also takes a small assessment fee (~0.11-0.13%) on top of interchange. Combined, these "base costs" are what every processor must pay.
Key takeaway:
When comparing processors, don't focus on the interchange rate. they all pay the same. Focus on what they charge on top of interchange. That's where they make their money, and where you can save.
Pricing Models Explained (With Real Math)
Flat-Rate Pricing
Example: 2.9% + $0.30 per transaction (Stripe, Square)
You pay the same rate on every transaction, regardless of card type. The processor absorbs the variability in interchange costs and simplifies your billing.
Pros:
- Simple and predictable
- No surprises on your statement
- Easy to calculate margins
Cons:
- You overpay on low-cost cards (e.g., debit)
- Not transparent. you don't see actual interchange
- Hard to compare across processors
Interchange-Plus Pricing
Example: Interchange + 0.2% + $0.06 (Helcim)
You pay actual interchange (which varies by card type) plus a fixed, transparent markup. Your statement shows interchange separately from the processor's fee.
Pros:
- Transparent. you see exactly what you're paying
- Usually cheaper for high-volume businesses
- Only pay actual cost + known markup
Cons:
- More complex statements
- Rates vary by transaction
- Harder to predict exact costs
Flat-Fee (Account-to-Account)
Example: $0.20-$0.50 per transaction (Interac Direct / KONEK)
Bank-to-bank payments bypass card networks entirely. You pay a small flat fee regardless of transaction size.
Pros:
- Extremely cheap for high-value transactions
- Zero chargeback risk
- Simple pricing
Cons:
- Only works for Canadian bank accounts
- Not all customers are familiar with it
- Requires separate implementation
Real-World Cost Comparison
Example: You process $20,000/month
Let's assume your average transaction mix is 70% credit cards, 30% debit, with a typical Canadian merchant mix of regular and rewards cards.
Flat-rate at 2.9% + $0.30:
$20,000 × 2.9% = $580
Plus per-transaction fees (assuming 100 transactions): $30
Total: $610/month
Interchange-plus at avg 1.6% interchange + 0.2% markup:
$20,000 × 1.6% = $320 (actual interchange)
$20,000 × 0.2% = $40 (processor markup)
Plus network fees and per-transaction: ~$30
Total: $390/month
Savings: $220/month = $2,640/year
That's money you're leaving on the table by not switching to transparent interchange-plus pricing.
Note: Actual savings depend on your card mix. If you process lots of premium rewards cards, the gap widens. If mostly debit, it narrows. But for most Canadian businesses, interchange-plus saves significant money at scale.
The "Blended Rate" Trap
Warning: Don't fall for "blended rate" pricing
Some processors quote you a single "blended rate". something like "you'll pay an average of 2.1% across all transactions." Sounds reasonable, right?
Here's the problem: That blended rate is calculated based on an assumed card mix that never matches reality. When you process more premium cards (which customers increasingly use for rewards), your actual rate climbs.
How it actually works:
- Quoted rate: "2.1% blended" (sounds great!)
- Fine print: 1.9% for regular credit, 2.3% for rewards cards, 2.7% for premium cards
- What happens: Your customers increasingly pay with rewards cards (because who doesn't want points?), so your actual rate drifts closer to 2.5%
- Result: You're paying way more than the quoted blended rate
If a processor quotes you a "blended rate," ask them to show you the actual rate-per-card-type breakdown. Better yet, ask for interchange-plus pricing so you know exactly what you're paying.
Cost Comparison by Transaction Size
| Transaction | Flat-Rate (2.9%) | Interchange-Plus (1.9% + 0.15%) | Interac Direct |
|---|---|---|---|
| $20 | $0.58 | $0.41 | $0.50 |
| $100 | $2.90 | $2.05 | $0.50 |
| $500 | $14.50 | $10.25 | $0.50 |
| $1,000 | $29.00 | $20.50 | $0.50 |
Note: Interchange-plus example assumes 1.9% interchange (typical for Visa credit). Actual interchange varies. Flat-rate and Interac Direct fees simplified for comparison.
Watch Out for Additional Fees
Monthly Fees
Some processors charge $10-$50/month. Others are free. Factor this into total cost, especially if you have low volume.
Chargeback Fees
Typically $15-$25 per chargeback, regardless of whether you win. Adds up quickly if you're in a high-dispute category.
International Cards
Extra 1-2% for non-Canadian cards. If you sell internationally, this matters.
PCI Compliance
Some processors charge $5-$20/month for PCI compliance. Others include it free.
5 Questions to Ask Before Signing Up
Don't sign a contract without getting clear answers to these questions. If the sales rep dodges or gives vague answers, that's a red flag.
1. "What is your full fee schedule?"
Don't settle for just the transaction rate. Ask for a document listing all fees: monthly account fees, chargeback fees, PCI compliance, batch fees, statement fees, international card fees, etc. If they won't provide it upfront, walk away.
2. "Is this flat-rate or interchange-plus pricing?"
Understand the pricing model. If interchange-plus, ask what the exact markup percentage is. If flat-rate, ask if it applies to all card types or if premium cards cost more. Don't accept "blended rate" answers. ask for the breakdown.
3. "What do I pay for chargebacks?"
Chargeback fees range from $15-$50 per dispute, and you pay them even if you win the dispute. Ask the exact amount. If you're in a category with higher dispute rates (digital goods, subscriptions), this cost adds up fast.
4. "How long is the contract and what are cancellation terms?"
Avoid multi-year contracts with early termination fees (ETFs). Month-to-month is ideal, especially when you're starting out. If there's a contract, what's the cancellation fee? Some processors charge $500+ to cancel early.
5. "How quickly do I get paid?"
Settlement timing matters for cash flow. Daily deposits? Weekly? 7-day rolling reserve? Some processors hold funds for 30+ days when you're new. Understand when money actually hits your bank account.
Which Pricing Model Should You Choose?
Choose Flat-Rate if...
- You're just starting out and want simple pricing
- You process less than $10K/month
- You value predictability over saving 0.5%
- You don't want to analyze statements
Choose Interchange-Plus if...
- You process $10K+/month and want to optimize costs
- You want transparent pricing
- You're willing to learn how interchange works
- You have high average order values
Add Interac Direct if...
- You have high average order values (over $100)
- You want to eliminate chargeback risk
- Your customers are Canadian
- You're willing to add a second payment option
Frequently Asked Questions
Final Advice
Don't obsess over 0.2% differences in rates. Focus on total cost (fees + your time) and whether the processor's software actually works for your business.
Read the contract. Especially early termination clauses, reserve requirements, and fee increases.
Test the support. Call or chat before signing up. If support is slow now, it'll be slow when you have urgent issues.
Re-evaluate annually. Once you have volume, shop around. Processors will negotiate when you have leverage.