Primer · Payment Processing

Payments: how card processing actually works

The payment industry is full of jargon. Under the jargon is a fairly simple system: a cardholder, a merchant, the bank that issued the card, the bank that sponsored the merchant, and the card network that sits in the middle. Once those five roles are clear, the fees make sense.

How payments work: the five-party flow, in 90 seconds

Understanding how payments work starts with understanding who does what.

A card transaction has five distinct parties:

1. Cardholder. The person who taps, dips or swipes.
2. Merchant. The business accepting the payment.
3. Issuing bank. The cardholder's bank — the one on the card.
4. Acquiring bank. The merchant's bank of record for card processing.
5. Card network. Visa, Mastercard, Discover, or American Express (which operates as both network and issuer).

When the cardholder pays, the merchant's terminal sends the transaction to a processor (like TSYS or Fiserv), which routes it through the card network to the issuing bank. The issuing bank approves or declines, the response comes back up the chain in roughly two seconds, and the receipt prints.

At end-of-day, the merchant's batch is transmitted for settlement. Funds flow from issuer to network to acquirer to merchant, minus the fees each party takes along the way.

Who does what

Role	Who fills it	What they earn
Issuer	Chase, Citi, Capital One, thousands of banks and credit unions	Interchange
Acquirer	Wells Fargo, BofA, Elavon, regional banks	Sponsor fees, portion of markup
Processor	TSYS, Fiserv, Worldpay, Elavon	Authorization and settlement fees
ISO / agent	Independent sales organizations and their agents	Residual share of markup
Card network	Visa, Mastercard, Discover, Amex	Assessment fees

Interchange — the biggest line item

Interchange is the fee the acquirer pays the issuer for each transaction. It is the largest component of total card-processing cost for most merchants. Interchange is set by the card networks in a quarterly-published rate schedule (Visa and Mastercard each have their own), and it varies by dozens of factors: card type (debit, credit, corporate, rewards), how the card was accepted (chip, contactless, keyed), the merchant's business category, and the transaction size. Our interchange categories reference breaks down the most common published rates.

Merchants sometimes assume their processor "charges" them interchange. The processor doesn't. The issuer does. The processor simply passes it through. This distinction matters when a competing sales rep quotes you a tiered rate and implies that lower rates are somehow a favor the processor is doing you. They aren't; the processor cannot set interchange.

Every merchant pays the same interchange. What changes between processors is the markup layered on top. That is the entire pricing conversation, compressed. — Editorial note

Assessments — the card networks' slice

Assessments are what the card networks themselves charge per transaction. The Visa APF (Acquirer Processing Fee), the Mastercard NABU (Network Access and Brand Usage) fee, the Discover Data Usage fee — these appear as small per-transaction charges on top of interchange. They are pass-through, non-negotiable, and change roughly once a year (typically in April).

The markup — where competition happens

Everything that is not interchange and is not assessments is the processor-plus-ISO markup. This is the portion that actually varies between vendors. Three common pricing models expose the markup differently:

• Interchange-plus. The statement shows interchange passed through, assessments passed through, and a clearly stated plus-over-interchange (e.g., "+0.25% + $0.10"). Most transparent model.
• Flat rate. One headline rate for everything (Stripe-style, e.g., 2.9% + $0.30). Simple but potentially expensive for merchants with a heavy debit mix.
• Tiered pricing. Rates split into "qualified," "mid-qualified" and "non-qualified" buckets. Marketed as simple; often hides significant markup because the processor decides which transactions fall into which bucket.

Alternative rails

Beyond traditional card networks, a growing share of payments moves on alternative rails: ACH for recurring billing, RTP (RealTime Payments) and FedNow for near-instant bank-to-bank settlement, and a long tail of closed-loop wallets. These rails have different fee structures, different settlement times and different fraud profiles. The portals covered in our other guides increasingly support ACH at minimum.

Effective-rate calculator

Enter your monthly card volume, an approximate card mix, and your current processing-fee total. The calculator estimates your effective rate and compares it to rough industry benchmarks. This is a starting-point estimate, not a substitute for a real statement analysis.

Calculator assumptions are approximate and based on 2026 industry norms. For an authoritative analysis, share three recent statements with an independent consultant or compare against the published interchange schedule.