Understanding Merchant Fees and How to Improve Your Bottom Line


The payment processing industry has a reputation for being unnecessarily complex and confusing. How do you know what the best credit card fees are? Which companies offer the best rates? Is one particular pricing model more advantageous for e-commerce versus brick-and-mortar businesses? 

As a business leader, you probably don't want to become a processing fee expert, but you do want to understand enough to make sure your merchant processing operations are rock solid. Understanding how merchant fees work will help you avoid needless expenses so that you can get the best credit card processing rates, improve your operations, and grow your business.

In this article, we’ll cover what merchant fees are, how they work, and how working with an embedded finance provider can help you make the most out of these pesky costs. 


What Are Merchant Fees? 

Merchant fees are just one part of merchant payment processing, which is how businesses process and complete debit and credit card payments. They are transaction fees that a merchant (seller) pays to a card issuer when a customer makes a debit or credit purchase for a product or service. Credit card companies and other card issuers charge these fees to cover handling costs, which can change depending on the payment method that the customer uses. 

Card issuers are typically financial institutions such as Bank of America, Citibank, Capital One, and Chase. They partner with credit card companies such as Mastercard, Visa, American Express, and Discover. At the point of sale, a payment processor will then carry out the merchant’s card transactions. All of these parties determine the transaction fees they’ll impose on the merchant for handling a card transaction.

The major credit card issuers — Mastercard, Visa, American Express, and Discover — all have different average processing fees

  • Visa: 1.43–2.4%
  • Mastercard: 1.55–2.6%
  • American Express: 2.5–3.5%
  • Discover: 1.56–2.3% 

While those figures might seem reasonable, they can quickly add up if you have high sales volume. What’s more, according to a report published in May 2021 by the Board of Governors of the Federal Reserve System, merchants absorbed 56.3% of losses from fraudulent transactions reported by covered issuers, up from 52.8% in 2017. 

A lack of understanding about how merchant fees work not only leaves businesses vulnerable to unfavorable rates but also greater digital risk

However, embedded finance is changing all that. Embedded finance is what allows any company, in any industry, the chance to provide financial services to customers — including embedded virtual accounts, payment processing, and branded cards

When you offer embedded finance services, you eliminate the need for traditional banks and cut out the middleman.


Common Pricing Models for Merchant Fees

There are several pricing models major card issuers use to charge merchant fees. One way to tighten up merchant fee processes is to get familiar with these pricing models to determine which one works best for your company.


Flat-rate Pricing 

As the name suggests, all transactions fall under one flat or fixed rate under this pricing model. This is a favorite for small business owners who are still finding their bearings and want some certainty when it comes to fixed costs. 

However, large companies also benefit from transparent pricing and cost savings on large sales volume. With flat-rate pricing, there's little room for surprise as every transaction fee will cost the same. 

Because flat rate pricing is fixed, it's easy to understand and means one less thing for business leaders to worry about. But as with most things, flat-rate pricing has a downside. Its simple and predictable nature often masks hidden interchange rate and processor markup.


Interchange-plus Pricing 

This pricing model is made up of two parts — the fee set by the card networks and a fixed markup determined by the card processor. You take the interchange cost from the card company (Visa, Mastercard, etc.) and tack on a percentage fee by the card processor. There are several factors that determine these interchange fees — card type, transaction type, and business type. 

For example, debit cards tend to carry lower interchange fees than credit cards because they present lower risk. However, businesses in the travel space have higher fees because of the “pre-pay nature” of many businesses that represent a greater risk for card issuers. The breakdown that allows you to see how much you’re paying for every transaction makes interchange-plus pricing one of the most transparent pricing models around, although it can get a bit confusing.


Tiered Pricing 

Sometimes called bundled pricing, tiered pricing gets a little more complicated as it’s broken down into three additional layers: qualified, mid-qualified, and non-qualified. Each of these layers has its own pricing. 

For instance, qualified transactions are seen as low-risk and include card-present and PIN-supported payments. Mid-qualified transactions encompass rewards and cash-back cards. Lastly, non-qualified cards include card-not-present and e-commerce transactions. 

Tiered pricing is heavily disputed because the processor sets the tiers and determines how to classify each transaction, all with little to no regulatory body or industry oversight. There's a correlation between pricing tiers and transactions costs. Qualified transactions have lower processor charges while non-qualified transactions have higher processor charges.


Merchant Fees You Should Know

Before you can optimize your payment processing, you must be aware of additional fees. These include: 

  • Interchange fees: Interchange fees are transactional fees a merchant must pay every time a customer uses a card (debit, prepaid, or credit) or an eWallet.
  • Chargeback fees: A chargeback is the return of funds used to process a credit or debit transaction. These additional fees are charged to the merchant if a customer disputes a transaction or claims fraud. Multiple chargebacks will negatively impact your bottom line and reputation.
  • Monthly fees: These are recurring fees you pay to access the merchant processing service. Some are monthly subscription fees that can have monthly minimum requirements. 
  • Closing account fees or termination fees: As the name suggests, these are fees meant to deter merchants from terminating an account with card processors. The fees can range from $200 to over $5,000. 
  • Annual fees: These are supplemental yearly fees for the maintenance of your merchant account.

​​How Embedded Finance Can Reduce Merchant Fees

There are a handful of real-world examples of how using a full-suite embedded finance partner can help you get competitive rates, reduce costs, and even offset the fees with interchange revenue. 


Competitive Rates 

The world of merchant fees is murky at best, and it’s not easy to understand how these fees work, or how to secure the best rates. That’s why having a trusted embedded finance partner is important. They can work with you to ensure the most competitive rates, while also helping to avoid unnecessary fee and rate hikes. 

In addition to good rates, a top-tier embedded finance partner will offer transparent onboarding. This means your business will have a dedicated person to walk your team through the details and help provide a better understanding of the various fee structures to determine what will work best for your brand’s needs. 


Reduce Costs Associated With Fraud 

When you consider that the average retailer in the U.S. has nearly 1,800 fraud attempts every month, it becomes very clear that reducing fraud is critical. Not only do these fraudulent attempts put business and customer data at risk, it also drives up chargeback costs that can add up to millions of dollars in fees annually. 

By having an embedded finance partner equipped with state-of-the-art data and risk management tools, not only will sensitive data stay safe, but your business can also dramatically reduce the number of chargeback costs associated with disputed charges. 


Ensure PCI Compliance 

A payment gateway is a type of technology used by merchants to accept credit card and debit card transactions from customers. Once a transaction is approved, the payment gateway pushes the funds from your customers' credit card to your merchant account. 

Payment card industry (PCI) compliance is a set of criteria sanctioned by the credit card industry to ensure that customer data is safe. A PCI-compliant payment gateway ensures tokenization and encryption are implemented as well as adherence to all other PCI requirements. 

Alviere’s security and compliance uses powerful fraud and risk management tools to protect your company’s and your customer’s data 24/7.


Turn Interchange Fees Into Interchange Revenue

If you’re a large business that sells goods, there’s no escaping the merchant fees associated with payment processing. Your business pays these merchant fees (interchange fees) every time a customer makes a purchase online or uses any form of card like credit, debit, or prepaid. However, when partnering with a full-suite embedded finance partner, there are tools your business can utilize to help offset these costs.

One tool a company can implement is issuing branded cards. For this example, let’s say Nike wants to offset the interchange fees they have to pay from their millions of online and in-store sales. If Nike issued their own branded debit or credit card (and offered incentives for customers to use when making purchases), Nike would be able to recapture a large percentage of the interchange fees as a new form of revenue. 

How exactly would Nike be able to recapture interchange fees as a new form of revenue? You can read about the details of interchange revenue, but for the sake of this article, the TL;DR version is pretty simple: In the past, the only companies that could issue credit and debit cards were traditional banks like Chase and Bank of America or a local credit union. These banks receive the lion's share of the interchange fees that merchants end up paying. 

However, one of the benefits of using a multi-service embedded finance partner is that it empowers big brands like Nike to issue their own cards. And as the card issuer, Nike would be the one collecting the interchange revenue – not Chase or Bank of America. 

For a brand like Nike, which sells a majority of its products online and in their own stores, capturing these fees could add up to hundreds of millions of dollars in new revenue annually. 


Unlock More Than Just Merchant Fees With Embedded Finance

There's no way for any large corporation to avoid paying merchant fees when doing business online, or accepting cards and digital payments. However, with the right embedded finance partner like Alviere, enterprises can set themselves up to reduce costs while also finding innovative new ways to drive revenue through the interchange. 

Whether you’re looking to expand the financial services your enterprise already offers, or you’re curious about the new opportunities to increase customer value, it’s important to find a service partner that can accommodate your growing needs. 

At Alviere, our complete embedded finance platform integrates seamlessly with your company’s current infrastructure. Our robust embedded finance allows your business to get the best rates while also protecting your sensitive data with the most sophisticated security on the market. Contact us today to find out how we can help you.

Written by Alviere