For small and medium-sized businesses, it’s important to understand the basics of payment processing—including how the process works, what fees you are responsible for, and where the associated costs originate. In this article, we’ll explore everything merchants need to know about pass-through fees.
TL;DR
- Pass-through fees are a combination of interchange fees, assessment fees and payment processor fees that can be bundled together or itemized on the monthly statement and charged to the merchant—and depending on the payment processor sometimes with an additional service fee added.
- There are several pricing structures used for card processing fees, and merchants should be thorough in their research when assessing a payment processing partner to ensure the fee structure isn’t overly costly.
- Because credit card processing fees will vary by both the type of card used and the pricing structure of the payment processor, it’s important to control costs where you can—which is often in the service provider you choose.
What are Pass-Through Fees?
With many parties involved with payment processing, it can be complex to understand how it all works. For credit card processing, there are several parties involved in the transaction, as well as several transaction fee types. Simply put, pass-through fees are the combination of transaction fees enacted by the payment processor, and the issuing bank for the payment card, which includes interchange rates and assessment fees. Keep reading for more information about how pass-through fees are broken down and assessed.
What are the card processing fee types and who charges them?
Transaction processing fees are defined into three categories, interchange, assessment and payment processor fees.
Interchange fees are usually the majority of payment processing fees and are paid to the financial institution that manages the customer’s payment card. These are standard fees paid for the convenience of accepting that specific payment method. Interchange fees vary by the card issuers and card type and can range from 0.5% to around 2.5%, plus a flat rate of anywhere from 5¢ to about 20¢ per transaction. For example, an American Express reward card or corporate credit card will typically have a higher interchange rate when compared to a Visa debit card.
Assessment fees are paid to the card networks your business accepts, so this includes Visa, Mastercard, Discover, Amex, and any other type of card accepted by your business.
Payment processor fees are paid to your payment service provider which manages the inner workings of completing the payment from the cardholder to the merchant account. The fee structure will vary depending on your payment processor and is frequently a percentage of the transaction amount. Worth noting, the amount charged as a percentage of the transaction amount can be charged with or without a cap, so it’s critical to read the fine print.
Additionally, some payment processors will charge an interchange markup—a fee paid to the processor on top of the minimum paid to the financial institution.
Stax uses a subscription pricing model and does not charge a fee on top of the standard interchange rates. Instead, merchants pay a flat monthly fee and the direct cost of the interchange rate for transactions. Because payment processor fees are highly variable depending on your service provider, we’ll dive more into pricing models later in this article
In summary, pass-through fees are a combination of interchange fees, assessment fees and payment processor fees that can be bundled together or itemized on the monthly statement and charged to the merchant—and depending on the payment processor sometimes with an additional service fee added.
Pricing Models for Pass-Through Fees
There are several pricing structures used for card processing fees, and merchants should be thorough in their research when assessing a payment processing partner to ensure the fee structure isn’t overly costly. Pass-through pricing models for debit card and credit card transactions include interchange-plus, flat rate, tiered rate, and subscription pricing.
Interchange-plus pricing is when payment processors charge an additional percentage on top of the interchange fees for each transaction. Since the interchange rates vary based on card type, there is no real way to predict the amount you would pay each month.
Flat rate pricing charges the same processing fee percentage no matter the card being used. Because a flat rate is charged, that percentage needs to be more than the cards with the highest interchange rate. One example of this is Square, which charges 2.6% plus 10 cents per transaction, no matter the card type. However, many cards have a much lower interchange rate, which can be as low as 0.5% for debit cards—meaning flat rate pricing can actually cost significantly more than other pricing models depending on the cards most frequently used.
Tiered rate pricing is the most expensive pricing model. With tiered pricing, cards are charged different amounts based on the tier they are placed in by the payment processor. Though these tiers are determined by the processor, frequently, the payment processor will put the most popular cards in a higher tier—meaning the merchant pays more based on the will of their payment processor.
Finally, we have subscription rate pricing—often the most cost-effective option for businesses. With subscription rate pricing, merchants pay a monthly membership and do not incur additional charges from the interchange rates. Stax uses a subscription pricing model with a 0% markup on direct-cost interchange and no hidden fees.
How much a business pays for pass-through fees truly depends on the payment processor and the pricing structure. While some transaction fees cannot be avoided, the cost per transaction will still be variable depending on the type of card used. What can be controlled are the payment processor fees and any markup on the interchange.
How Can Merchants Lower or Avoid Pass-Through Fees?
One of the most important things a merchant can do is to research the pricing models of their prospective payment processor service provider. Because credit card processing fees will vary by both the type of card used and the pricing structure of the payment processor, it’s important to control costs where you can—which is often in the service provider you choose.
With Stax, pass-through charges are lower than many other service providers that charge interchange markups or use other pricing structures which can lead to a higher cost per transaction. Not only does our flat-rate subscription pricing start at just $99 per month, it includes free POS terminals or mobile readers, surcharging capabilities, dashboards and analytics, invoicing, and the ability to accept all forms of payment.
When assessing your payment processing service provider, businesses should consider how interchange and assessment fees are charged by paying close attention to the fee structure. Some payment processors will create overly complex fee structures which end up costing the business more that don’t show up until the merchant statement is provided after a billing cycle is complete. For any business, your payment processor is a vital part of your business, and the pass-through rate plays a big factor in your bottom line.
Ready to learn how Stax can support your business with reliable, cost-effective payment processing? Contact us to learn how our leading technology, award-winning customer support team, and subscription-style pricing model will level up your business. Request a consultation today.
FAQs about Pass-through fees
Q: What are pass-through fees?
Pass-through fees are a combination of transaction fees, which are assessed by the credit card’s payment processor and issuing bank. These fees often comprise interchange rates and assessment fees.
Q: Who charges pass-through fees?
Pass-through fees are typically charged by three parties – the financial institution that manages the customer’s payment card (interchange fees), the card networks your business accepts (assessment fees), and the payment service provider managing the payment transaction (payment processor fees).
Q: What are interchange fees in the context of pass-through fees?
Interchange fees form a significant part of payment processing fees. They are standard fees paid for the convenience of accepting a specific payment method and are charged by the financial institution managing the customer’s payment card. The rates vary based on the card issuers and the type of the card.
Q: Can pass-through fees be avoided or reduced?
Pass-through fees can be significantly reduced by carefully researching your prospective payment processing service providers and their pricing models. Opting for a provider like Stax, which has flat-rate subscription pricing, can lower pass-through charges.
Q: What are the different pricing models for pass-through fees?
The common pricing models for pass-through fees include interchange-plus, flat rate, tiered rate, and subscription pricing. Each pricing model has its own advantages and disadvantages and should be chosen based on the business’s unique requirements.
Q: How much does a mid-sized business usually pay for pass-through fees?
The amount a business pays for pass-through fees depends on various factors, such as the payment processor, the pricing model chosen, and the type of cards used for transactions. Hence, it can significantly vary.
Q: What happens if a business doesn’t pay pass-through fees?
The consequences of not paying pass-through fees can be severe and might disrupt the business’s ability to process card payments, impacting revenue and customer experience.
Q: What are the benefits and drawbacks of pass-through fees?
While pass-through fees increase the cost of transactions for businesses, they also enable companies to accept a variety of payment methods, thereby improving customer convenience and potentially boosting sales.
Q: Why are some pass-through fees higher than others?
Some pass-through fees are higher than others because they include additional charges such as an interchange markup—a fee paid to the processor on top of the minimum paid to the financial institution.
Q: How do assessment fees contribute to pass-through fees?
Assessment fees form a part of pass-through fees and are paid to the card networks that your business accepts. These can include Visa, Mastercard, Discover, Amex, and other accepted card types.
