“Paying to pay” is what you would say if you had to define payment processing fees in a single sentence, and while a lot of people find them annoying, they’re actually what keep the payment gateway running. The servers cost a lot to maintain, and charging a small fee or subscription is how payment gateways make money.
But one thing about payment processing fees is the fact that no one understands them. If only there were someone who would explain everything about payment processing fees that businesses need to know.
That’s exactly what we’re going to understand in this article. We’ll drive deep into payment processing fees and understand them from the perspective of businesses.
What Actually Happens During a Digital Payment
But first, before diving deep into payment processing fees, let us understand what actually happens during a digital payment. Now, it’s a tedious process, so the table below would explain it better.
| Step | Who’s Involved | What They Do | Why It Matters for Fees |
| 1. Customer initiates payment | Customer | Enters card/UPI/payment details and confirms the transaction. | The type of payment method affects the fee structure (card, UPI, wallet, etc.). |
| 2. Payment Gateway | Gateway / Payment Platform | Collects payment info securely, encrypts it, and forwards it. | Gateway charges “processing fees” for routing, security, and transaction handling. |
| 3. Payment Processor | Acquirer / Processor | Validates details, checks fraud signals, and sends the request to the card network. | Processors may add their own markup; stronger risk checks can reduce fraud cost. |
| 4. Card Network | Visa, Mastercard, RuPay, etc. | Passes the transaction to the issuing bank and sets interchange + network fee rules. | Card networks charge “scheme fees” and define interchange slabs. |
| 5. Issuing Bank | Customer’s Bank | Approves or declines the transaction based on funds, risk, and card status. | Interchange fees (largest fee component) go to the issuing bank. |
| 6. Authorization Response | Issuing Bank → Network → Processor → Gateway → Merchant | The “approved/declined” message travels back through the chain. | Approval rates impact revenue; declines add hidden operational cost. |
| 7. Settlement | Acquiring Bank & Issuing Bank | Money moves from the issuing bank to the acquiring bank, then to the merchant’s account. | Settlement timelines influence working capital; some providers charge settlement fees. |
Factors That Influence Your Total Payment Cost
Now that we understand what goes around in a payment gateway when a payment is initiated, it’s time to understand the factors that influence the total payment cost. This is to help you pick a payment gateway that is priced reasonably.
Interchange rate
Every time a customer pays with a credit card, the credit card issuer charges the receiving bank an interchange rate. The interchange charge is meant to help the bank that issued the card pay for processing fees and the risk of accepting the sale, as well as any fraudulent transactions that may happen.
Each network sets its own interchange fees, which are different for each issuer. The type of card, the merchant’s level of risk, and how the merchant takes the payment (swipe, online, or entering it in at a terminal) all affect the interchange rate.
Merchant account provider fee
A firm needs to connect the credit card network to a merchant account in order to accept credit card payments. A business can take credit card payments using a merchant account. The merchant account provider then puts the funds into the merchant’s bank account on a regular basis.
Depending on the type of business and the number of transactions, the merchant account provider charges a minor fee on top of the interchange fee. It may charge a monthly maintenance fee and a fee for transactions that customers challenge in addition to the per-transaction fee.
How the card is processed
The amount of payment processing fees will also depend on how the card is handled. Customers can pay in-store by swiping their card, over the phone, online, and other ways, and each of these comes with its own element of risk.
Payments made by swiping a card at the register are safer, thus they cost less. Online and phone transactions are riskier because criminals might use stolen or lost cards to buy things, which means they have to pay processing costs.
Types of Fees Included in Payment Processing Fees
Now, let’s take a look at the type of fees that are present in the payment processing fees, and help you understand exactly what you’re paying for. The table below explains the fees a lot better.
| Pricing Model | How It Works | Who It’s Best For | Pros | Cons |
| 1. Flat Fees | Same fee for every transaction, no matter the card type or channel. Usually a % + small fixed fee. | New/small businesses with low volume. | Simple, predictable, easy bookkeeping. | Often more expensive as volume grows; hides true interchange costs. |
| 2. Interchange Plus Pricing | Processor charges actual interchange + a fixed markup (e.g., 0.5% + 15¢). | Growing or high-volume businesses. | Transparent, fair, scalable pricing. | More complex to read and reconcile with statements. |
| 3. Tiered Fees | Transactions are grouped into qualified, mid-qualified, and non-qualified tiers based on risk. | Businesses with mixed payment types that want simple buckets. | Easy to understand at the surface level. | Opaque; processor decides tier; often higher and unpredictable fees. |
Questions Every Business Should Ask Before Finalising a Provider
Now, before you go and finalise a provider, there are some questions you should ask the sales team. The questions are:
- What’s included in your MDR or per-transaction rate?
- What components are pass-through vs. mark-up?
- What are your approval rates across payment methods?
- How do you handle peak traffic or latency?
- What are your settlement timelines?
- How does your platform handle chargebacks and disputes?
- What does your reconciliation/reporting dashboard offer?
- Are there any minimum commitments or penalties?
- How do your fees change as volume grows?
- What kind of support is available during incidents?
The answer to these questions would answer everything you need to know, and you can decide accordingly.
Conclusion
So there you have it, as a businessman, you are now aware what goes into your payment processing fees, the factors that influence them and the questions you should be asking before finalising. These small decisions can make a big impact on your business in the long run.
