Payment processors make money primarily by taking a small cut of every card transaction a merchant accepts. That cut, often called a markup, sits on top of other fees baked into the cost of processing a payment. But transaction fees are just the starting point. Processors also generate revenue from monthly software subscriptions, hardware sales, currency conversion spreads, and a range of administrative charges that most merchants never scrutinize closely.
The Anatomy of a Transaction Fee
Every time you swipe, tap, or enter a card number online, multiple parties take a slice of the sale price. The total fee a merchant pays typically falls between 1.5% and 3.5% of the transaction, and it breaks down into three layers.
Interchange fees are the largest piece. These go to the bank that issued the customer’s card (the “issuing bank”), not to the processor. Card networks like Visa and Mastercard set interchange rates, which vary by card type, industry, and how the transaction is processed. Visa interchange rates range from 0.05% + $0.22 on the low end to 2.40% + $0.10 on the high end. Mastercard rates span a similar range, topping out around 1.76% + $0.20. American Express interchange can run as high as 3.15% + $0.10, which is why some merchants hesitate to accept Amex.
Assessment fees go to the card network itself. These are typically small, often a fraction of a percent, and are non-negotiable.
The processor’s markup is the only portion the payment processor actually keeps. This is where the processor makes its money on each transaction. Depending on the pricing model, the markup might be a fixed percentage, a per-transaction flat fee, or both. The markup is also the only part of the fee that’s negotiable between the merchant and the processor.
How Pricing Models Affect Processor Profits
Processors don’t all charge their markup the same way. The pricing model determines how transparent the fees are and, in some cases, how much profit the processor can quietly extract.
Flat-rate pricing bundles everything into one simple rate. Lightspeed, for example, charges 2.6% + $0.10 for in-person transactions and 2.9% + $0.30 for online transactions. Square and Stripe use similar structures. Because the interchange fee varies by card type but the merchant pays the same rate regardless, processors profit more on transactions with low interchange (like debit cards) and less on those with high interchange (like premium rewards credit cards). For the merchant, the tradeoff is simplicity and predictable costs.
Interchange-plus pricing passes the actual interchange fee through to the merchant, then adds a separate, visible markup. This is the most transparent model because the merchant’s statement shows exactly what went to the issuing bank and what went to the processor. The processor’s margin is smaller per transaction, but the model attracts higher-volume merchants who generate more total revenue.
Tiered pricing groups transactions into categories, usually called qualified, mid-qualified, and non-qualified, each with its own rate. Processors that use this model often advertise the low “qualified” rate to attract merchants, then classify most transactions under the more expensive tiers. Because the processor decides which tier a transaction falls into, and those criteria are rarely disclosed, this model tends to be the most profitable for the processor and the least transparent for the merchant.
Subscription pricing flips the model further. The merchant pays a monthly membership fee and gets lower per-transaction costs in return. Interchange still passes through, but the processor’s markup drops to a small flat fee per transaction, sometimes just a few cents. The processor’s revenue shifts from percentage-based to subscription-based, which creates steadier, more predictable income.
Monthly Software and Platform Fees
Transaction fees are no longer the only meaningful revenue line for most processors. Many now operate as full business platforms, charging monthly subscriptions for software that handles everything from inventory management to invoicing.
Square charges nothing for its basic plan but offers a Plus tier at $49 per month and a Premium tier at $149 per month. Shopify Payments is bundled into Shopify’s e-commerce plans, which run from $39 to $399 per month. PayPal offers a free standard tier but charges $5 for its Payments Advanced plan and $30 for Payments Pro. Chase Payment Solutions charges $9.95 and up for e-commerce capabilities. Finix starts at $79 per month.
These subscription fees add up to reliable recurring revenue that doesn’t fluctuate with transaction volume. For processors, this is strategically valuable because it smooths out income during slow sales periods and increases the total lifetime value of each merchant relationship. It also makes merchants less likely to switch providers, since they’d lose access to integrated tools they depend on daily.
Hardware and Point-of-Sale Equipment
Processors that serve brick-and-mortar businesses sell physical hardware: countertop terminals, handheld card readers, barcode scanners, receipt printers, and full point-of-sale (POS) systems. Some offer a basic card reader for free to get merchants onto their platform, then charge for more capable equipment. Square, for instance, gives away a simple mobile card reader but sells its countertop and register hardware at a premium.
There’s significant overlap between payment processing companies and POS system providers. By selling or leasing hardware, processors create another revenue stream while also locking merchants into their ecosystem. A merchant using a processor’s proprietary terminal is far less likely to switch to a competitor than one using a generic card reader.
Cross-Border and Currency Conversion Fees
International transactions are one of the most profitable areas for payment processors. When a customer in one country pays a merchant in another, several additional fees come into play on top of standard processing costs.
Cross-border transaction fees typically run 0.5% to 1% of the transaction value. Cross-border processing fees add another 1% to 2%. And then there’s currency conversion, which is often the biggest and least visible charge. Instead of listing an explicit fee, many processors offer an exchange rate that’s worse than the actual mid-market rate. That gap between the real rate and the rate the merchant or customer receives is the processor’s profit, commonly a markup of 2% to 4% above the true exchange rate.
Because the markup is embedded in the exchange rate rather than shown as a separate line item, many merchants and customers never realize how much they’re paying. A $10,000 cross-border sale could easily generate $200 to $400 in currency conversion profit for the processor alone, before any other fees are applied.
Administrative and Compliance Charges
Processors collect a range of smaller fees that individually seem minor but collectively represent meaningful revenue, especially across thousands of merchant accounts.
Chargeback fees are charged when a customer disputes a transaction and the processor has to investigate and reverse the payment. These penalties typically range from $15 to $100 per dispute, regardless of whether the merchant wins or loses the case.
PCI compliance fees relate to the Payment Card Industry Data Security Standard, a set of security requirements that any business accepting card payments must follow. Some processors charge a monthly PCI compliance fee, and others charge a “non-compliance” fee to merchants who haven’t completed their annual security questionnaire. These fees are usually small individually, but they add up across multiple accounts and regions.
Gateway fees apply to online transactions and cover the cost of the secure connection between a merchant’s website and the processing network. These are often billed monthly or per transaction.
Other common charges include statement fees, batch processing fees (charged each time a merchant settles the day’s transactions), account setup fees, and early termination fees for merchants locked into contracts. Not every processor charges all of these, but the ones that do treat them as steady supplemental income.
Integrated Services and Add-Ons
Modern processors increasingly make money by becoming the financial operating system for small businesses. Beyond payments and POS software, they sell payroll services, business lending, invoicing tools, loyalty programs, marketing features, and analytics dashboards. Square, for example, offers payroll as a paid add-on that integrates directly with its payment platform.
Some processors also offer merchant cash advances or short-term lending products, using a merchant’s transaction history to underwrite the loan and automatically deducting repayment from future card sales. The effective cost of these advances can be high, which makes them a lucrative product for the processor.
Each of these add-ons generates its own revenue while deepening the merchant’s dependence on the platform. The more services a business uses through a single processor, the harder and more disruptive it becomes to leave, which protects the processor’s core transaction fee income over the long term.