Payments Economics

Interchange is the fee paid by the acquiring bank to the issuing bank on every card transaction — set by Visa and Mastercard, not your PSP. MDR (Merchant Discount Rate) is the total fee your PSP charges you, which bundles interchange + scheme fees + the acquirer's own margin. Interchange is the largest single component, typically 0.2–2.0% depending on card type and geography. The practical implication: when a PSP quotes you a flat MDR, you cannot see how much is interchange (fixed, passed through at cost) versus acquirer margin (negotiable). Interchange-plus pricing makes this visible — you pay interchange at cost and a separate transparent markup.

A PSP statement typically contains: interchange (paid to card issuer, varies by card type and market); scheme fees (paid to Visa/Mastercard, covers authorisation, clearing, scheme membership — typically 0.05–0.20%); acquirer margin (the PSP's revenue, typically 0.1–0.5% on blended pricing); FX markup (on cross-currency transactions, typically 1–3% embedded in the conversion rate); and ancillary fees (chargebacks, refunds, monthly account fees, 3DS fees). Most flat-rate PSP pricing bundles these opaquely. The line items that are actually negotiable: acquirer margin, FX spread, and ancillary fee structure. Interchange and scheme fees are non-negotiable — they are set by Visa and Mastercard.

Scheme fees are charged by Visa and Mastercard for using their network infrastructure — authorisation processing, fraud data services, network access, and brand licensing. They were historically small (0.05–0.10%) and are now typically 0.10–0.20% with additional per-transaction components. They have risen consistently because scheme fee structures are opaque, not directly regulated (unlike interchange in the EU/UK/Australia), and Visa and Mastercard have added new fee categories (cross-border fees, digital enablement fees, token service fees) that are difficult for merchants to challenge individually. Understanding your scheme fees requires requesting a full processing statement breakdown — most PSPs do not surface these separately.

A rolling reserve is a percentage of your processing volume withheld by the PSP as security against chargebacks and fraud losses — typically 5–10% of gross volume, held for 90–180 days before release. It is used most aggressively for high-risk merchants (travel, subscriptions, digital goods) or new merchants without processing history. Key contract evaluation points: the reserve percentage, the holding period, the release schedule (rolling means it releases in tranches as the holding period elapses), and the conditions under which the PSP can increase or freeze the reserve. A frozen reserve during high-volume periods can create significant working capital strain — operators should model the reserve's cash impact before signing.

When a cardholder pays in a different currency than your settlement currency, the PSP converts the transaction at a rate that typically includes a 1–3% markup above mid-market. This is often the single largest variable fee for operators with international volume. The markup is rarely disclosed explicitly — it is embedded in the quoted exchange rate. To measure it: compare the PSP's quoted conversion rate against the mid-market rate (ECB reference rate for EUR, Bloomberg for others) on the same transaction. For operators with significant cross-border volume, negotiating a transparent FX spread (e.g., 'mid-market + 0.5%') rather than accepting a bundled PSP rate is worth pursuing at volume above roughly $500K monthly in cross-currency transactions.