Who pays credit card transaction fees? – Layers of a Credit Card Transaction

Who pays credit card transaction fees?

The question of who pays credit card transaction fees is not a simple one. A credit card transaction involves several layers, each with its specific role in ensuring a secure and efficient payment process. Here is an outline of the layers and their associated costs:

1. Cardholder: The cardholder is the customer who initiates the transaction by using their credit card to make a purchase.
2. Merchant: The merchant is the business or individual selling goods or services to the cardholder. They are responsible for processing the transaction through a payment gateway or point-of-sale (POS) system.
3. Payment Gateway: The payment gateway is a service that securely transmits transaction data from the merchant to the payment processor. It encrypts sensitive information, such as credit card numbers, to ensure secure data transmission. Examples of payment gateway providers include Authorize.Net, Stripe, and PayPal. Costs associated with a payment gateway typically include setup fees, monthly fees, and per-transaction fees, which can range from $0.10 to $0.30 or more per transaction.
4. Payment Processor: The payment processor is responsible for managing the transaction between the merchant, the issuing bank, and the card network. They handle authorization, settlement, and the transfer of funds between accounts. Examples of payment processors include Square, First Data, and TSYS. Costs associated with payment processors include a percentage of the transaction amount (e.g., 2.9% + $0.30 per transaction) and may also include setup fees, monthly fees, or other fees depending on the specific processor and plan.
5. Card Brands: Card brands, also known as card networks or card associations, are companies that create and maintain the rules and regulations governing credit card transactions. Examples include Visa, Mastercard, American Express, and Discover. Card brands charge fees called interchange fees, which are paid by the merchant’s acquiring bank (also known as the underwriting bank or merchant bank) to the cardholder’s issuing bank. Interchange fees typically range from 1% to 3% of the transaction amount, depending on the card type and other factors.
6. Acquiring Bank (Underwriting Bank): The acquiring bank is the financial institution that maintains the merchant’s account and receives the funds from the cardholder’s issuing bank. They are responsible for underwriting the merchant account, ensuring compliance with card brand rules, and providing settlement services. Costs associated with the acquiring bank may include fees for merchant account setup, monthly account maintenance, and per-transaction fees, in addition to the interchange fees.
7. Issuing Bank: The issuing bank is the financial institution that issues credit cards to cardholders. They are responsible for verifying the cardholder’s available credit, authorizing the transaction, and transferring funds to the acquiring bank. The issuing bank earns revenue through interest charges, annual fees, and other fees paid by the cardholder, as well as a portion of the interchange fees.

In summary, who pays credit card transaction fees involves multiple layers, including the payment gateway, underwriting bank, processor, and card brands. Each layer incurs costs, which can include setup fees, monthly fees, per-transaction fees, and a percentage of the transaction amount. These fees ultimately impact the overall cost of processing credit card payments for merchants.