Credit Card Processing 101

Credit Card Processing 101 (Chad Ogden, CEO/President)

Over the years I have found credit card processing to be extremely confusing and frustrating. After all of these years, I think I am finally starting to understand why it is this way. Many, many of the businesses that are selling credit card processing are purposely trying to confuse or deceive the merchant and they are doing a really good job. My purpose here is to tell you what I know, in an effort to educate and to help clear up the confusion. I am going to simplify some of the details so that normal people like me can understand the process. If there is something that you find that needs clarification, please let me know.

First, remember that Visa, MC and Discover are handled differently from Amex. I will first use Visa, MC and Discover to explain the process, and then I'll make a comment about Amex.


There are three different charges that are associated with every card processed:

  • Visa/MC/Discover fee
  • Issuing Bank fee
  • Processing fee
Visa/MC/Discover fee:

This fee is not negotiable and is applied to every transaction.

Issuing Bank Fee:

Each card that is issued has a different "discount rate" (or bank fee) that is connected directly to the card that is used. Again this fee is not negotiable and is set by the issuing bank. You will notice that awards cards have higher "discount rates" (fees) than some of the other cards. Each bank publishes exactly what the current rate is for each card.

Processing Fee:

It is this fee that is negotiable and can vary depending on which company you choose to handle your merchant account. It is this part that is the most confusing and you could pay much more than you should if you are not educated on how you are being charged. There are 3 main methods that processors use to come up with processing fees, with multiple variations for each. The 3 general methods are:

  • Interchange Plus
    • Clearly the best, because it is the easiest way to see what the processor is actually charging for their fee: Pricing Models PDF
  • Tiered
    • Easier to hide the charges
    • Can't compare costs processor by processor
    • Often, many misleading offers are made
  • Fixed or Surcharge
    • Easier to hide the charges
    • Can't compare costs processor by processor
    • Often, many misleading offers are made
Interchange Plus Method:

Charging the interchange fee (which is the Issuing Bank Fee) + the Visa/MC/Discover fee, (the two fees that can’t be changed), plus a mark up that goes to the processor. In the current market about 30% of the processors out there will offer Interchange Plus, but even here there are a couple of variations. The ideal method you are looking for will be Interchange Plus where each type of credit card is individually listed on the statement with a very clear interchange rate (NO lumped or combined charges) and then all processor charges are listed completely separate. You will have to get an example of the processor's statement to determine if they are doing Interchange Plus in this way. Of all of the processors, only about 3% of them offer this type of pricing. The number of processors that are willing to disclose their fees in this way is very low because the merchant will know exactly what they are being charged and can easily compare the rates between processors. Sample Interchange Plus Invoice


This is another interesting thing that you should understand. In the US there are only 12 “Direct” Processors but there are over 2,800 companies selling processing. That means that the 12 Direct Processors have 2,800 agent companies (ISO or Independent Sales Organizations) that are out there reselling their product. If you go with an ISO, they are also taking a cut of the processing fee and more than likely hiding the real cost of processing so they can keep their margins up. Some Direct Processors favor their ISO relationships to resell their product (for example, First Data) while others prefer a direct customer relationship (i.e., Heartland). Examples of Direct Processors would be: First Data (largest), Chase PaymentTech, Heartland and Global.

Learn More About Heartland


Pricing is not the only thing to be considered. How long does it take you to get your money? How hard is it to get the money back to customers if you do a refund? Can you easily process a transaction? The overall service record and integrity of the company should also be considered.


American Express is their own bank so they are the issuing bank. If you are a processing less that $500,000 in Amex annually, then the same rules apply about processing fees. Larger companies are processed directly with Amex and bypass these independent processors.

To be honest, as I've been learning more about credit card processing, it has become apparent that it is a slimy business. Hidden fees and murky charges seem to be the norm. It is my hope that by sharing what I have learned here, you can better understand exactly how and what you are being charged, and what other options you may have.

Feel free to contact us if you have any questions about this important topic.

Share this post