How Credit Card Processing Works (Calculate Your True Rate)

By: Ellie Mirman

4 Minute Read

Jun 21, 2018

how credit card processing works

Credit card processing is such a confusing yet lucrative business that a whole industry has sprung up around it. If you're a small business owner trying to operate a restaurant or a store, it can be overwhelming to navigate the world of Interchange rates, merchant fees, and processing terms that can be completely different from credit card processor to credit card processor. But, at the end of the day, what we know is that a certain cut of a business's revenue is going outside of the business.

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Let's take a look at an example of how this works:

  • Purchase dinner for four ($100)
  • $1.87 goes to Issuing Bank
  • $0.13 goes to Card Association
  • $0.30 goes to Acquiring Bank
  • $0.20 goes to Payment Gateway
  • $97.50 ultimately goes to the business

What do each of these organizations do and what fees do they take?

  • Issuing Bank - banks that provide you the card (as represented by the logo on the card other than Visa/Mastercard/etc.). They are responsible for paying the merchant, and then the consumer gets billed monthly. The issuing bank charges the acquiring bank (payment processor) the interchange fee, though this fee is passed along to the merchant.
  • Card Association - organizations that govern the whole process, like Visa and Mastercard, set interchange fees, credit qualification guidelines, and facilitate communication between issuing and acquiring banks. Both the issuing and acquiring banks are registered members of these associations, and the banks pay licensing fees (assessments) to them.
  • Acquiring Bank / Payment Processor - banks that have a relationship with the card associations and ultimately clear the transaction and deposit money into the merchant's account. Before doing so, the processor takes a small cut in the form of a merchant service charge.
  • Payment Gateway - companies that provide the technology (hardware and software) to execute the transaction, transmitting information between the merchant and the payment processor to complete the electronic transaction. Payment gateways receive a distributor fee for this service.

OK that's a lot of fees and hungry mouths to feed, and the complexity doesn't stop there. One of the most challenging parts of the equation - what makes it so difficult for a business owner to understand their true credit card processing rates - is the Interchange rate. Interchange fees are the fees charged by the Issuing Bank, and they vary from card to card as set by the Card Associations. For some perspective on how varied the rates can be from card to card, Mastercard's document outlining the various rates goes on for 12 pages; Visa's goes on for 20.

Another complex piece of the puzzle is that credit card processing rates are often communicated in confusing ways. Many rates include a percentage fee and a per transaction fee (for example, 2.2% + $0.15), and different splits may be better for different businesses depending on the volume and size of transactions. Sometimes there are additional fees (setup fees, compliance fees, monthly fees) on top of that. Sometimes the number quoted to a business is actually an additive fee, as in the case of "Interchange Plus" rates, which represent the fees charged on top of what Interchange will charge based on the card used in a transaction. Some companies are now introducing flat credit card processing rates as a simpler alternative. These companies charge a flat rate (either just a percentage or a percentage plus per transaction fee) regardless of the specific card used. With all of these different options, which rates or deals do you choose for your business?

To more clearly evaluate rates against each other, start by calculating your "true" credit card processing rate. Here's how:

How to Calculate Your "True" Credit Card Processing Rate

What you'll need:

  • 2 monthly credit card statements (consecutive months)
  • Calculator


1. Take the first credit card statement and copy the following numbers:
(a) total transaction volume ($)
(b) total fees charged ($)
(c) total number of transactions
(d) total transaction volume ($) from American Express
(e) total fees charged ($) from American Express
(f) total number of transactions from American Express

2. Calculate your non-American Express transaction volume and fees:
(g) subtract (d) from (a) - this is your Mastercard/Visa/Discover transaction volume
(h) subtract (e) from (b) - this is your Mastercard/Visa/Discover total fees

3. Divide (e) by (d) - this is your American Express effective credit card rate

4. Divide (h) by (g) - this is your Mastercard/Visa/Discover effective credit card rate

Tips & Notes:

  • If the fees on your credit card statement actually correlate to the previous month, get the fees numbers from the second credit card statement.
  • When getting the fees numbers, make sure to include all fees! There should be a line item for this on the credit card statement.
  • American Express rates are calculated separately because they function differently from other card associations.
  • Most credit card processing contracts include different rates for swiped vs. keyed cards, because they have different liability associated with them. Some contracts also have different rates for different size transactions. The calculation above is simplified to a single rate.

Armed with this information, you can better compare rates between your current deal and the potential deals you are considering.

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