Commissions in fintech: what you pay for as a merchant

When you start accepting payments on your website or in your app, you sign an agreement with a payment service provider.  Your partner handles the entire payment process and charges a certain percentage of the transaction amount for this service. This commission is the basis of any fintech company’s earnings. For some, it’s fixed, for others, it’s individual for each merchant. Some pay more, some pay less – but how’s the commission calculated? Behind this seemingly simple figure lies the complex economics of several players: the bank’s and payment networks’ ‘margin’, risk assessment, infrastructure maintenance, etc. The bill_line team is online to explain what you’re actually paying for and why it’s important. 

Decomposing the merchant commission

The merchant commission (merchant service charge or simply MSC) is a general fee the merchant pays for processing card payments. It’s not simply a figment of the commercial department’s imagination, but rather the result of a complex sum of several parts. Let’s take a look at them one by one.  

#1 – Interchange
This is the most important part of the cost. Interchange is the fee the acquiring bank (the one that accepts payments) pays to the issuing bank (the one that issued the card). High interchange is beneficial to banks (it ensures low card issuance fees, cashbacks and loyalty programmes), while low interchange is beneficial to businesses, because in this case they pay less for online acquiring.  

Interchange fees are set by international payment systems (Visa, Mastercard) in cooperation with the state regulators, and they can change rates depending on the card type, country, type of transaction (debit, credit) and other factors. 

According to research, interchange fees often account for the lion’s share of MSC. For example, JPMorgan notes this can be up to ~90% of the total fee you pay – but the average fee still accounts for 40-50%.  

This is important: the buyer does not ‘see’ these fees because they are already included in the cost of your goods. 

#2 – Network fees
These’re commissions paid to Visa/Mastercard for using their infrastructure: authorisation, clearing, settlements etc.

They usually make up a much smaller share than interchange fees, but rising network fees are a real problem in some regions. For example, a EU report on the introduction of interchange fee regulation states some of the savings were ‘eaten up’ by increased network fees. 

#3 – Provider/integrator margin
This is the amount the PSP receives after paying interchange and network fees. In addition to frequent profits, it covers transaction processing, analytics, risk, personnel costs, and technological infrastructure maintenance. 

Now the merchant commission your fintech partner receives doesn’t seem so big, does it? But we’ll break that down too. 

Read also: everything you need to know about regulations for accepting payments in the EU

What exactly does a provider/fintech company do? 

When you, as a merchant, enter into an agreement with a fintech company, part of the commission you pay covers not just the ‘transaction processing’ but a series of real operations and risks: 

• Authorisation and verification:the provider submits an authorisation request to the payment network and the issuing bank for each payment. This requires infrastructure, APIs, and servers, which cost money to maintain. 
• Clearing and settlement: after successful authorisation, the provider or acquiring bank transfers the transaction to the network, where it’s cleared and then settled – roughly speaking, transferring money from the issuer to the merchant through several intermediaries. 
• Settlement (funds transfer): the provider arranges payments to the merchant’s current account, often in less than a few days (depending on the terms of the relevant agreement);
• Fraud management and risks: part of the commission goes to anti-fraud, transaction verification, chargebacks and risk reserves;
• Security and certifications: payment providers spend money to comply with security standards (e.g. PCI DSS), ensure data encryption and protect infrastructure;
• Support and reporting: includes transaction processing, reporting, merchant interfaces, consulting, customer support. 

Everything that remains after that is our profit, thanks to which the business exists and develops.  

But why doesn’t the commission drop down, even if the interchange rate falls? 

Even with interchange regulation, the total commission for merchants doesn’t decrease as much as expected – although it should. The short answer is that the market regulates itself, and a reduction in interchange won’t reduce the costs of fintech businesses – which means they and other participants will raise tariffs to avoid losses. How exactly? 

Increase in acquiring fees
The EY and Copenhagen Economics study we mentioned at the beginning says acquirers increased their margins after interchange restrictions in the EU. That’s why part of the savings went not to merchants but remained with them.  

Increase in network fees
Some payment systems increased their network fees, which compensated for the reduction in interchange fees. This is confirmed by data from the European Central Bank.

Commission is linked to merchant’s business size
Fintech earns money on the number of transactions. That’s why the more transactions there are per month, the lower the commission. Small and medium-sized merchants will have to pay a higher commission.  

Regulatory costs
Providers and banks are forced to invest in compliance with new rules, reporting, and transparency, and they pass on some of these costs to the commission. 

bill_line approach

The swiss-knife approach we’ve developed in the bill_line cultivates an individual approach to each merchant. We don’t have a unified commission for all merchants, because every business is unique.  

That’s why we carefully study the business of a new merchant when developing an offer for them. We ask questions, trying to understand the specifics, taking into account not only turnover and the number of transactions, but also dozens of other parameters.

An individual commission allows us to achieve a balance between profit and service level – standards we as a full-fledged technical integrator, simply can’t lower.