If you are accepting credit cards, you are already paying for one of these two pricing models. The real question is whether you are on the right one for your business. Flat rate pricing is simple. You pay one fixed percentage and usually a small per transaction fee regardless of what card your customer uses. Debit card, basic credit card, premium rewards card, it does not matter. The rate stays the same. That simplicity is why many small businesses choose it. You do not have to think about interchange categories, card mix, or wholesale costs. You just know your rate. The benefit of flat rate pricing is predictability. Your statements are easier to understand. Your math is straightforward. If you are a newer business, a seasonal business, or doing lower monthly volume, that clarity can feel worth it. You can budget easily and move on. The downside is that flat rate pricing is blended. Some cards cost less at the interchange level and some cost more. With flat rate, the provider averages those costs and builds in enough margin to protect themselves. That means when a customer uses a low cost debit card, you may be paying more than the actual underlying cost. Over time, especially as volume increases, that gap can become meaningful. Interchange plus pricing separates things. You pay the actual interchange cost for each transaction, plus a fixed markup from your processor. If interchange is low on a debit card, your total cost is lower. If interchange is higher on a premium rewards card, your cost reflects that. The processor earns a consistent markup on top of whatever interchange applies. The advantage here is transparency. You can see what the true wholesale cost is and what your processor is making. For businesses doing steady volume, especially retail stores, restaurants, service providers, and established operations, interchange plus often results in lower overall costs over time. It rewards businesses that have a healthy mix of debit and standard credit cards. The trade off is that your effective rate can fluctuate month to month. If more customers use high end rewards cards one month, your average rate goes up. If more debit cards are used the next month, it goes down. It requires a little more understanding, but it usually aligns more closely with real transaction risk and cost. So which is better? If you are processing lower volume and value simplicity above all else, flat rate may make sense. If you are growing, processing consistent volume, or want more control and visibility into your fees, interchange plus is typically the stronger long term option. The key is not guessing. The right model depends on your average ticket size, monthly volume, industry, and how your customers pay. Looking at real data is the only way to know for sure. If you want clarity and a real breakdown of what fits your business, hire Makes Good Cents. They can review your current statements, show you exactly where your money is going, and recommend a pricing structure that supports your growth instead of quietly cutting into your margins. Payment processing should work for you, not against you.
f you have ever looked at your merchant statement and felt like interchange was written in another language, you are not alone. It is one of the most misunderstood parts of payment processing, yet it is also the largest portion of what most businesses pay when they accept cards. Let’s simplify it. Interchange is a fee that goes to the bank that issued your customer’s card. Not your processor. Not your POS company. The customer’s bank. When someone pays you with a credit or debit card, their bank is either extending credit or releasing funds on their behalf. Interchange compensates that bank for the risk, fraud protection, infrastructure, and cardholder benefits tied to that transaction. Your processor does not create interchange rates. The card networks publish them, and every processor in the country pays the same base interchange costs. So why does it feel like rates are all over the place? Because interchange is not one number. It changes depending on the card used and how the transaction is processed. For example, a basic debit card usually has a much lower interchange rate than a premium rewards credit card. Rewards cards fund airline miles, cash back, hotel points, and other perks. Those benefits are not free. Part of the funding comes from interchange. So when a customer pulls out a high end travel card, that transaction typically costs more than if they used a standard debit card. How the card is run also matters. When a card is tapped or inserted in person, it is considered lower risk. The chip technology reduces fraud. Lower risk usually means lower interchange. When a card is keyed in manually or processed online, it is considered higher risk because fraud is more likely in card not present environments. Higher risk transactions generally carry higher interchange rates. You can see how this creates variation. You might process two transactions for the exact same dollar amount, yet they cost you different amounts in fees simply because the customer used a different type of card or payment method. Now let’s talk about how this shows up in your pricing model. With interchange plus pricing, you pay the true interchange cost for each transaction, plus a fixed markup from your processor. For example, if interchange is 1.80 percent on a transaction and your processor charges 0.30 percent on top, you pay 2.10 percent plus any per transaction fee. If interchange on another transaction is 0.80 percent, you pay 0.80 percent plus the same 0.30 percent markup. The advantage here is transparency. You can see what the actual cost of the card was and what your processor is earning. Your overall rate may change month to month depending on your card mix, but the structure is clear. Flat rate pricing works differently. Instead of passing through the actual interchange cost, the provider charges one blended rate for everything. You might pay 2.6 percent plus 10 cents no matter what type of card is used. That makes statements simple and predictable, but it also means that when a low cost debit card is used, you may be paying more than the underlying interchange would have required. The provider builds in enough margin to cover higher cost transactions and still protect their revenue. Neither model is automatically right or wrong. It depends on your volume, average ticket size, and customer card mix. The key difference is transparency. Interchange plus shows you the wholesale cost and the markup. Flat rate hides the moving parts in exchange for simplicity. When business owners feel confused about interchange, it is usually because no one has explained that there are multiple entities getting paid in every transaction. The issuing bank receives interchange. The card network collects assessment fees. The processor earns its markup. Once you understand that structure, the statement starts to make more sense. Interchange is not a mystery fee. It is the foundational cost of participating in the card network system. The more you understand how it works, the better questions you can ask, and the more confident you can be that your pricing structure actually fits your business.
If you own a small business, you probably accept credit cards every day. Customers tap, swipe, or insert their card and within seconds the transaction is approved. A day or two later, money shows up in your bank account. It feels simple. Understanding how payment processing really works helps you understand what you are paying for, why fees exist, and where your money actually goes between the tap and your bank deposit. Let’s break it down in plain English. Step 1: The Customer Taps Their Card A transaction starts when a customer: Taps a contactless card or phone Inserts a chip card Swipes a magnetic stripe Enters card details online At that moment, your point of sale system, payment terminal, or website captures the card information and the transaction amount. That information has to travel securely across multiple systems in just a few seconds. Step 2: The Payment Gateway Sends the Information If the transaction is online, or if you use a modern cloud based POS system, a payment gateway is involved. Think of the gateway as a secure digital tunnel. Its job is to: Encrypt the customer’s card data Transmit it securely Send it to the processor for approval For eCommerce, the gateway is critical because there is no physical terminal. Even in many in store systems, the gateway function is built into your software. You pay gateway fees for security, encryption, compliance tools, and connectivity. Step 3: The Payment Processor Routes the Transaction Now the encrypted data reaches the payment processor . The processor is the traffic controller of the transaction. It does not lend money. It does not issue cards. It moves data between the right parties. Here is what the processor does: Sends the transaction to the appropriate card network, such as Visa or Mastercard Routes it to the customer’s issuing bank Waits for approval or decline Sends that response back to your terminal All of this happens in seconds. You are paying processing fees because the processor maintains the infrastructure, compliance, security standards, fraud monitoring systems, and banking relationships that make this possible. Step 4: The Issuing Bank Approves or Declines The issuing bank is the bank that gave your customer their credit or debit card. When the transaction request arrives, the issuing bank checks: Is the card valid Is there enough available credit or funds Does anything look fraudulent Is the transaction within normal behavior If everything checks out, the bank sends back an approval code. If not, it declines the transaction. If approved, the funds are now “authorized,” but not yet deposited into your account. This is an important distinction. Authorization is not the same as funding. Step 5: The Acquiring Bank Represents You On your side of the transaction is the acquiring bank , sometimes called the merchant bank. This is the financial institution that sponsors your merchant account. It: Allows you to accept credit cards Takes on risk related to chargebacks and fraud Settles funds into your business bank account Your acquiring bank works closely with your processor, and in many setups, they are deeply integrated. When you sign up for merchant services, you are technically entering into an agreement supported by an acquiring bank. Step 6: Interchange Fees Are Assessed Now let’s talk about what you are actually paying for. One of the biggest components of your cost is interchange . Interchange fees are set by the card networks, not your processor. They are paid to the issuing bank, not your processing company. Interchange covers: The risk of lending credit Fraud protection Rewards programs Operational costs of issuing banks Different cards have different interchange rates. A basic debit card will cost less than a premium rewards credit card. Corporate cards and travel rewards cards usually cost more. This is why your processing fees vary by transaction type. Step 7: The Card Network Takes Its Assessment In addition to interchange, the card networks themselves, such as Visa and Mastercard, charge assessment fees. These are smaller percentages that support the network infrastructure, brand, and global acceptance system. So at this point, the transaction fee stack includes: Interchange, paid to the issuing bank Assessment fees, paid to the card network Processor markup, paid to your processing provider Possibly gateway fees When business owners see a 2.5 percent to 3.5 percent rate, it is actually multiple entities getting paid. Step 8: Batch Settlement Happens At the end of the business day, your POS system “batches” transactions. Batching means all approved transactions are submitted for final settlement. During settlement: The issuing bank transfers funds to the acquiring bank Interchange and assessment fees are deducted The processor takes its markup The remaining funds are prepared for deposit This process usually takes one to two business days, depending on your funding schedule. Some providers offer next day or even same day funding, but that depends on your setup and risk profile. Step 9: Funds Hit Your Bank Account After settlement clears, your acquiring bank deposits the net amount into your business bank account. If you processed $10,000 in card sales and your effective rate was 2.9 percent, you might see around $9,710 deposited, depending on your pricing model. You are not paying one single company 2.9 percent. You are paying a network of: Issuing banks Card brands Acquiring banks Processors Gateway providers Each plays a role in making that tap feel instant and reliable. Understanding Pricing Models Not all pricing structures are created equal. Here are the common models small businesses see. Interchange Plus Pricing This model separates: Interchange Assessments Processor markup For example, you might pay: Interchange + 0.30 percent + 10 cents This model is typically more transparent because you can see what portion is true cost versus markup. Flat Rate Pricing Flat rate pricing might look like: 2.6 percent + 10 cents per transaction This simplifies billing, but it blends all costs together. For some businesses it is convenient. For higher volume merchants, it can be more expensive. Tiered Pricing Tiered pricing groups transactions into categories such as: Qualified Mid qualified Non qualified This model can be less transparent because you may not always know why a transaction fell into a higher tier. Understanding which model you are on is critical to understanding what you are paying for. Why Fees Vary Month to Month Business owners often ask why their effective rate changes from one month to another. Common reasons include: More rewards cards used that month Higher percentage of keyed in transactions More corporate cards Increased chargebacks Changes in ticket size Card present transactions are generally cheaper than card not present transactions. Online and manually entered payments carry higher fraud risk, which increases interchange. What You Are Really Paying For It is easy to think of processing fees as just a cost of doing business. But when you break it down, you are paying for: Global banking infrastructure Real time fraud screening Data encryption and PCI compliance Access to billions of cardholders Fast settlement into your bank account Dispute and chargeback handling systems Without that infrastructure, you would not be able to accept credit cards in seconds from customers around the world. Funding Timelines Explained Funding is not random. It follows a structured flow. Typical timeline: Day 0: Customer pays Day 0: Authorization happens instantly Day 0 evening: Transactions batch Day 1: Settlement begins Day 1 or 2: Funds deposited Some providers hold funds longer if: You are a new merchant You are in a higher risk industry You have excessive chargebacks Your transaction size suddenly spikes Understanding this helps you plan cash flow more effectively. Chargebacks and Risk If a customer disputes a charge, the issuing bank pulls the funds back temporarily. The acquiring bank notifies you and gives you a chance to respond. If you lose the dispute: The funds are permanently removed You may pay a chargeback fee This is part of the risk the acquiring bank manages. Excessive chargebacks can increase your costs or even result in account termination. The Big Picture When a customer taps their card, it feels like magic. In reality, the transaction travels through: Your POS or website A payment gateway A payment processor A card network The issuing bank Back through the network To your acquiring bank Into your business bank account All in a matter of seconds for approval, and one to two days for funding. Understanding this ecosystem empowers you as a business owner. Instead of just asking what your rate is, you can ask: What pricing model am I on What is the processor markup How fast is funding How are chargebacks handled What technology and reporting tools are included Payment processing is not just a fee. It is a financial infrastructure service that enables modern commerce. The more you understand how it works, the more confident you can be in choosing the right partner and making sure you are paying for real value, not just a number on a statement.
