Online shops and mobile applications have become an indispensable part of our lives. However, few consider the complexity of the systems that underlie each online purchase. In this blog, I will fly you through how the payment fee system works for online card transactions, taking into account various participants and the transaction process itself.
When the acquiring bank and the issuing bank are the same institution
In the realm of online shopping and card payments, transactions are transmitted through an Internet Payment Gateway (IPG) from the web store to the acquiring bank. The IPG ensures the technical functionality, while the acquiring bank is linked to card schemes (such as American Express, Diners, Mastercard, Visa, and others) that have developed the concept and network for card payments.
When the transaction reaches the acquiring bank, it first verifies whether it’s their own card (which they issued) or a card from another bank. If it’s their own card, it means that the bank is both the acquirer and the issuer of the card. In this case, upon reviewing the customer’s information in their system, the bank promptly approves or declines the transaction. For this service, the issuing bank charges the web merchant a specific fee, usually a percentage of the approved amount. The merchant receives an amount reduced by this fee into their account, not the full amount for which they sold the product or service.
When the acquiring bank and the issuing bank are different institutions
In situations where the acquiring bank and the issuing bank are distinct entities, the transaction flows from the acquiring bank through the card network (such as American Express, Diners, Mastercard, Visa, or others, depending on the card brand) to the issuing bank, which can be located anywhere in the world. The response from the issuing bank (approved or declined) travels back along the same path to the acquiring bank and then, through the Internet Payment Gateway (IPG), to the web store.
For this service, the acquiring bank charges the web merchant a fee, usually a percentage of the approved amount. This fee is higher than the fee for transactions where the same bank serves as both the acquiring and issuing entity. This is because the approval process involves more participants and systems, each of which incurs a portion of the total fee paid by the merchant. To simplify the process for the web store, they enter into an agreement only with the acquiring bank. The agreement defines a fee that covers the entire process—encompassing the acquiring bank’s fee, the issuing bank’s fee, and the card scheme’s fee. These fees are then settled among themselves.
The issuing bank assumes the risk of non-payment, guaranteeing the web store payment if the transaction adheres to card network rules, regardless of whether the buyer or the account owner being charged for the transaction is in a situation without funds. The issuing bank covers various costs, including operational expenses, the risk of fraud, payment delays, and installment payments. The part of the fee related to these aspects is known as the interchange fee. Additionally, card networks retain a certain percentage of the approved amount for the participation of banks in the system facilitating the entire process, and this fee is called the assessment fee.
The IPG fee
The IPG charges a fee to the web merchant for its transaction transfer service. This fee is typically calculated as a percentage of the approved amount but is not deducted from the processed amount; instead, it is billed separately, unless the service provider offers a complete service in a single contract (processing + acquiring).
Managing fees in a webshop may seem intricate, but understanding the flow of transactions and participants in the process can help you better understand how fees are calculated and allocated. Whether you are a webshop owner or a customer, this background information can assist you in making informed decisions during online shopping and business transactions.
Greetings and wishing you a fantastic day!
Edgar