The Economics of Payment Processing: A Complete Breakdown

A restaurant chain processing €12 million annually through cards pays €156,000 in processing fees. They accept it as “cost of doing business.”

But when you break down where that €156,000 actually goes - who gets paid, why they get paid, and whether those costs are justified - the economics look very different.

Payment processing isn’t opaque because it needs to be. It’s opaque because opacity benefits the incumbents. When merchants understand the actual economics, they start asking harder questions about whether they’re paying for value or for market power.

Here’s the complete breakdown of payment processing economics - what everything costs, who gets paid, and why alternative infrastructure changes the equation.

The Players in Traditional Card Payment Processing

Every card transaction involves multiple parties, each taking a cut:

1. The Customer’s Bank (Issuing Bank)

Role: Issues the card, maintains customer’s account, bears fraud risk
Revenue: Interchange fee (largest component of merchant cost)

2. The Card Network (Visa, Mastercard)

Role: Routes transaction between banks, maintains network infrastructure, sets rules
Revenue: Assessment fees, network fees

3. The Acquiring Bank (Merchant’s Bank)

Role: Settles funds to merchant, bears some fraud and credit risk
Revenue: Acquirer markup on top of interchange + network fees

4. The Payment Gateway

Role: Technical infrastructure connecting merchant’s checkout to payment processor
Revenue: Monthly fees + per-transaction fees

5. The Payment Processor

Role: Handles transaction routing, fraud screening, compliance, reporting
Revenue: Processing fees (often bundled with gateway)

Some companies combine roles (processor + gateway, acquirer + processor), but the fee components remain.

The key insight: Each party optimizes for their own revenue. Nobody optimizes for merchant’s total cost.

Complete Cost Breakdown: €100 Card Transaction in Europe

Let’s trace a €100 transaction through the system and see where the money goes.

Large Merchant (High Volume, Negotiated Rates)

Interchange fee: €0.20-0.30

Regulated in Europe (0.2% for debit, 0.3% for credit)
Goes to issuing bank
Meant to cover fraud risk, processing costs, cardholder benefits

Card network assessment: €0.10-0.15

Goes to Visa/Mastercard
Covers network infrastructure, authorization routing, settlement
Non-negotiable (set by card networks)

Payment gateway fee: €0.15-0.25

Technical infrastructure connecting checkout to processor
Often flat fee per transaction + monthly subscription
Some variation based on features (fraud tools, reporting, multi-currency)

Payment processor fee: €0.15-0.25

Transaction routing, fraud screening, compliance, reconciliation
May include gateway in bundled pricing
Some negotiation possible at high volumes

Acquirer markup: €0.10-0.20

Risk premium for settling funds to merchant
Profit margin for acquiring bank
Varies significantly based on merchant risk profile and negotiating power

Total merchant cost: €0.80-1.25 (0.8-1.25%)

Settlement timing: 2-3 business days to merchant’s account

Small/Medium Merchant (Standard Rates)

Interchange fee: €0.20-0.30 (same as large merchant - regulated)

Card network assessment: €0.10-0.15 (same as large merchant - non-negotiable)

Payment gateway fee: €0.30-0.50

Higher per-transaction cost (lower volume, less negotiating power)
May include monthly minimum fees

Payment processor fee: €0.30-0.50

Standard rates (no volume discounts)
May include setup fees, compliance fees, PCI fees

Acquirer markup: €0.20-0.50

Higher risk premium (less transaction history, smaller merchant)
Less negotiating leverage
May include monthly account fees

Total merchant cost: €1.00-2.50 (1.0-2.5%)

Settlement timing: 2-3 business days (or longer for new/high-risk merchants)

The merchant size premium: Small merchants pay 25-100% more in effective rates for identical infrastructure, purely due to market power dynamics.

Why Card Processing Costs What It Costs

Let’s examine whether these costs are justified:

Interchange Fees: €0.20-0.30 per €100

Stated purpose:

Cover issuing bank’s fraud risk
Fund card infrastructure
Pay for cardholder benefits (rewards, cashback)

Reality check:
Actual fraud losses: 0.05-0.15% of volume (€0.05-0.15 per €100)
Infrastructure cost: Near zero per transaction (fixed costs amortized)
Cardholder benefits: Funded by merchant fees (merchants pay for customer rewards)

Verdict: Interchange fees are 2-6x higher than actual costs. The rest is profit. European regulation capped them at 0.2-0.3%. In the US, they’re 1.5-3% (unregulated).

Card Network Fees: €0.10-0.15 per €100

Stated purpose:

Maintain network infrastructure
Route authorizations between thousands of banks
Ensure settlement integrity

Reality check:
Authorization routing: Automated, minimal marginal cost per transaction
Network infrastructure: Built decades ago, depreciated
Innovation investment: Minimal (core protocol unchanged since 1980s)

Comparison: SEPA bank-to-bank transfers route between banks for €0.02-0.05 per transaction. Card networks charge 3-5x more for similar routing.

Verdict: Network fees reflect pricing power, not infrastructure costs.

Payment Gateway/Processor: €0.30-0.75 per €100

Stated purpose:

Technical infrastructure (APIs, checkout integration)
Fraud prevention tools
PCI compliance management
Reconciliation and reporting

Reality check:
Technical infrastructure: Mostly fixed costs (building the API once, running servers)
Fraud tools: Many merchants need additional third-party fraud prevention anyway
PCI compliance: Required because card data is transmitted (wouldn’t be needed for tokenless payments)
Reconciliation: Automated systems processing millions of transactions

Comparison: Modern fintech APIs (banking, identity verification, data access) charge €0.01-0.10 per call. Payment APIs charge 3-30x more for similar infrastructure complexity.

Verdict: Some cost justified for actual services, but pricing reflects market concentration more than costs.

Acquirer Markup: €0.10-0.50 per €100

Stated purpose:

Credit risk (advancing funds before settlement)
Chargeback risk
Compliance and monitoring

Reality check:
Credit risk: Minimal for most merchants (2-3 day advance, diversified portfolio)
Chargeback risk: Passed back to merchant in most cases
Compliance: Largely automated

Verdict: This is mostly margin. Necessary in card ecosystem, but not inherent to electronic payments.

The Real Cost of Moving Money Between Banks

Let’s compare card payment costs to what it actually costs to move money electronically:

SEPA Instant Bank Transfer (Europe)

Infrastructure cost per transaction: €0.02-0.05

Real-time settlement between banks
Cryptographic security
Confirmation and reconciliation

What this means: The actual cost of moving €100 from one bank account to another in real-time is about €0.02-0.05 (0.02-0.05%).

Card networks charge: €0.80-2.50 (0.8-2.5%)

The multiplier: 16-125x more than actual money movement costs.

What Accounts for the Difference?

Intermediaries:
Card payments have 4-6 parties taking cuts. Bank-to-bank has 0-1 intermediaries.

Network effects and market power:
Once merchants accept cards and consumers carry cards, switching costs are high. Card networks can price above cost because alternatives haven’t existed.

Legacy infrastructure:
Card systems were built in 1970s-1980s. The costs embedded in that infrastructure (physical networks, geographic expansion, fraud losses during learning) got baked into pricing. Even though modern infrastructure is far cheaper, pricing didn’t drop.

Regulatory capture:
Card networks grew powerful before regulation caught up. European regulation capped interchange in 2015. US still largely unregulated. Market concentration limits competition.

The core insight: Card processing doesn’t cost 2%. It costs 2% because the market structure allows it.

A2A Payment Economics: Complete Breakdown

Let’s compare with direct account-to-account payment infrastructure:

€100 A2A Transaction Through payware (Europe)

Payment network fee (payware): €0.50

Initiation infrastructure (QR, NFC, links, BLE, etc)
Real-time authorization coordination
Settlement confirmation
Platform maintenance and security

Bank-to-bank transfer cost: €0.00-0.02

SEPA Instant infrastructure (already built, cost absorbed by banks)
Near-zero marginal cost per transaction

Total merchant cost: €0.50 (0.5% flat)

Settlement timing: 10 seconds (actual settlement, not authorization)

No other fees: No gateway fees (authentication happens in banking app), no processor markup (direct bank connection), no acquirer margin (no credit risk with instant settlement)

Why A2A Can Cost 60-80% Less

Fewer intermediaries:

A2A: Customer bank → Payment network → Merchant bank (1 intermediary)
Cards: Customer bank → Card network → Acquirer → Processor → Gateway → Merchant (4-5 intermediaries)

No legacy cost structure:

Built on modern infrastructure (instant payment rails deployed 2017-2023)
Cloud-native architecture (no physical network buildout costs to recover)
Automated from inception (no legacy manual processes to maintain)

Different security model:

No PCI compliance needed (no card data)
Authentication at bank layer (no merchant fraud infrastructure)
Cryptographic authorization (minimal chargeback dispute costs)

Instant settlement:

No credit risk (money moves immediately)
No acquirer risk premium needed
No 2-3 day working capital cost

Competitive market structure:

New market without entrenched monopolies
Multiple providers competing on price and service
Regulatory support (instant payment infrastructure, SCA standards)

The cost difference isn’t marginal. It’s structural.

Real-World Economics: Merchant Scenarios

Let’s look at concrete examples across different merchant sizes:

Scenario 1: Independent Coffee Shop

Annual card volume: €180,000
Current payment processing:

Average card fee: 2.2% (SMB standard rates)
Annual processing cost: €3,960
Settlement: T+3 (3-day delay)

With A2A at 30% adoption:

A2A volume: €54,000 at 0.5% = €270
Card volume: €126,000 at 2.2% = €2,772
Total annual cost: €3,042
Annual savings: €918 (23% reduction)

Plus operational benefits:

Instant settlement improves cash flow (€1,500/month velocity)
Reduced chargeback disputes (saves 4 hours/month staff time)
No PCI compliance for A2A transactions

Impact: €918 saved annually may not sound transformative, but for an independent business with 8-12% margins, that’s meaningful profit improvement for minimal implementation effort.

Scenario 2: Mid-Size E-commerce Retailer

Annual card volume: €8,000,000
Current payment processing:

Average card fee: 1.3% (negotiated rates)
Annual processing cost: €104,000
Fraud losses: €28,000 (0.35%)
Chargeback fees: €12,000
False declines: €15,000 (lost sales)
Total payment-related cost: €159,000

With A2A at 25% adoption:

A2A volume: €2,000,000 at 0.5% = €10,000
Card volume: €6,000,000 at 1.3% = €78,000
A2A fraud losses: €200 (0.01%)
Card fraud losses: €21,000
Chargeback fees: €7,500
False declines: €9,000
Total payment-related cost: €125,700

Annual savings: €33,300 (21% reduction)

ROI: Implementation cost €6,000 (integration + staff time). Break-even in 66 days.

Scenario 3: Large Subscription SaaS Company

Annual card volume: €45,000,000
Current payment processing:

Average card fee: 1.1% (high-volume negotiated)
Annual processing cost: €495,000
Involuntary churn: €675,000 (1.5% of ARR from expired cards, failed renewals)
Chargeback fees: €45,000
Payment operations: €120,000 (staff managing failed payments, updates)
Total payment-related cost: €1,335,000

With A2A at 40% adoption:

A2A volume: €18,000,000 at 0.5% = €90,000
Card volume: €27,000,000 at 1.1% = €297,000
Involuntary churn: €270,000 (bank accounts don’t expire)
Chargeback fees: €20,000 (reduced disputes)
Payment operations: €60,000 (automated A2A renewals)
Total payment-related cost: €737,000

Annual savings: €598,000 (45% reduction)

Key insight: For subscription businesses, payment stability (avoiding involuntary churn) is worth more than fee savings alone.

Scenario 4: Restaurant Chain (12 Locations)

Annual card volume: €6,500,000
Current payment processing:

Average card fee: 1.8% (mid-market rates)
Annual processing cost: €117,000
Settlement delay: T+2
Working capital cost: €3,500 (opportunity cost of delayed funds)
POS terminal fees: €2,400/year
Total payment-related cost: €122,900

With A2A at 20% adoption:

A2A volume: €1,300,000 at 0.5% = €6,500
Card volume: €5,200,000 at 1.8% = €93,600
Settlement: Instant for A2A
Working capital benefit: €2,100 (improved cash velocity)
POS integration: €0 additional (uses existing QR/NFC)
Total payment-related cost: €100,100

Annual savings: €22,800 (19% reduction)

Plus: Instant settlement means daily revenue available immediately for operations (inventory, payroll) instead of waiting 2-3 days.

Economics for Payment Institutions

Banks and payment institutions face a different calculation: Should they enable A2A payments for their merchant customers?

The Merchant Retention Value

Scenario: Regional bank with 800 SMB merchants processing €500M annually

Current card processing revenue:

Average merchant fee: 1.6%
Annual processing revenue: €8,000,000
Plus: interchange income on consumer cards issued
Plus: business banking relationship value

Merchant churn risk:
If 10% of merchants leave for competitors offering A2A:

Lost processing revenue: €800,000/year
Lost relationship revenue: €240,000/year (banking services)
Replacement cost: €400,000 (acquiring 80 new merchants)
Total annual impact: €1,440,000

Defensive A2A offering:
Enable A2A for merchants at 0.6% (bank keeps 0.1% margin):

25% merchant adoption of A2A
25% of transactions shift to A2A (€125M volume)
A2A revenue: €750,000
Card revenue: €6,000,000 (€375M remaining card volume)
Total revenue: €6,750,000 (16% reduction from baseline)

But: Retained merchants, deepened relationships, competitive differentiation.

The math: Losing 10% of merchants costs more than enabling A2A for all merchants.

The Growth Opportunity

Alternative scenario: Bank positions A2A as merchant acquisition tool

Merchant value proposition:

“Accept A2A payments at 0.6%, save 50-70% on payment costs”
“Instant settlement, improved cash flow”
“Reduce fraud and chargebacks”

Market response:

150 new merchants acquired (attracted by A2A offering)
€80M in processing volume (new business)
30% A2A adoption among new merchants
A2A revenue: €144,000 (€24M A2A volume at 0.6%)
Card revenue: €896,000 (€56M card volume at 1.6%)
Total new revenue: €1,040,000
Plus: Business banking relationships, lending opportunities

ROI: Implementation cost €200,000 (6-month project). Break-even in 6-7 months. Ongoing revenue growth.

Competitive Dynamics

Early mover advantages:

Capture merchant relationships before competitors
Build A2A transaction volume (network effects)
Establish technical integrations and partnerships
Develop institutional knowledge

Late mover penalties:

Merchant churn to early movers
Weaker bargaining position with A2A infrastructure providers
Playing catch-up while competitors optimize

Strategic question: Is A2A a threat or an opportunity? The answer depends on timing. Early = opportunity. Late = threat.

Why Fee Compression Is Inevitable

Payment processing fees have been declining for decades, but slowly:

1980s: Card fees averaged 3-5%
2000s: Card fees averaged 2.5-3.5%
2020s: Card fees average 1.5-2.5% (Europe), 2-3% (US)

The pattern: Fees decline when competition or regulation forces it, but incumbents resist.

What changes the dynamic:

1. Instant Payment Infrastructure Is Live

SEPA Instant (Europe): €50B monthly volume, 36 countries
FedNow + RTP (US): Growing rapidly since 2023
Faster Payments (UK): 95% of transaction volume
PIX (Brazil): 60% of all transactions in 3 years

The infrastructure exists. Costs are 95% lower than cards. Only adoption is missing.

2. Regulatory Support

European regulators explicitly support instant payments and competition:

PSD2 mandated open banking infrastructure
Interchange caps limited card network pricing power
PSD3 (proposed) will further support alternatives
Instant payment infrastructure investment by central banks

This isn’t free-market evolution. It’s policy-driven structural change.

3. Merchant Economic Pressure

Margin compression across industries makes 2% payment fees harder to absorb:

E-commerce margins: 5-15% (payment costs are 15-40% of margin)
Restaurants: 8-12% margins (payment costs are 15-25% of margin)
Retail: 5-8% margins (payment costs are 25-40% of margin)

When payment fees consume this much margin, merchants seek alternatives.

4. Consumer Acceptance

Mobile banking adoption is 70%+ across Europe. Consumers already trust banking apps for transfers, bill payments, and account management. The authentication infrastructure they use for A2A payments is familiar, not foreign.

The convergence: Infrastructure exists, regulation supports it, merchants need it, consumers accept it.

Fee compression isn’t speculative. It’s structural.

Common Economic Questions

”Won’t card networks just lower prices to compete?”

They could, but:

Structural cost disadvantage:
Cards have 4-5 intermediaries. Each needs margin. Even with compression, card payments can’t reach A2A cost levels without fundamentally restructuring (which means disrupting their own revenue).

Network effects work both ways:
Card networks’ power comes from universal acceptance. But if 30-40% of transactions shift to A2A, the “must accept cards” pressure weakens. Merchants gain negotiating leverage.

Historical pattern:
Card networks compress fees when forced by regulation or competitive threat, not proactively. European interchange caps prove this (they fought caps, then adapted).

Likely outcome:
Card fees will decline 20-40% over next decade as A2A grows. But cards will stabilize at 1-1.5% while A2A remains at 0.3-0.7%. The cost gap persists.

”What if banks charge merchants for A2A acceptance?”

Some might, but:

Merchant leverage:
If banks charge 1.5% for A2A, merchants will ask “why not just use cards?” Banks need to offer meaningful savings for merchant adoption.

Competitive pressure:
If Bank A charges 1.5% for A2A and Bank B charges 0.6%, merchants choose Bank B.

Strategic positioning:
Early mover banks are positioning A2A as merchant retention/acquisition tool. Aggressive pricing on A2A (even if less profitable than cards) is investment in relationships.

Historical precedent:
When new payment infrastructure emerges (contactless, mobile wallets), banks compete on adoption, not immediate profitability. Pricing rationalizes later.

Likely outcome:
A2A fees will range 0.5-1.0% in near term, settling around 0.5-0.7% as volume scales and competition stabilizes.

”Can merchants negotiate better card rates instead?”

To some extent:

Large merchants (€50M+ volume): Already have negotiated rates (0.8-1.2%). Further compression difficult without A2A as competitive threat.

Mid-size merchants (€5-50M): Can negotiate 10-25% reduction with leverage (competitive bids, volume growth). Still 2-3x more than A2A.

Small merchants (€0.5-5M): Limited negotiating power. Marginal improvements possible, but structural disadvantage remains.

The limit:
Card processing has minimum viable margins for intermediaries. Below certain threshold, processors/acquirers won’t serve merchant. That floor is higher than A2A’s cost structure.

Outcome: Negotiation can improve card rates, but not to A2A levels. Both strategies together (optimized card rates + A2A adoption) yield best results.

”What about the cost of customer education?”

Fair question:

Initial education cost:

Customer confusion: “What’s this QR code payment?”
First-use friction: Learning new flow
Trust building: “Is this secure?”

Education depreciation:

First customer: High effort, explains entire flow
Tenth customer: Moderate effort, some familiarity
Hundredth customer: Low effort, social proof exists
Thousandth customer: Minimal effort, it’s normal

Comparison to card adoption:
Cards required decades of consumer education. A2A leverages existing behaviors (mobile banking) rather than creating entirely new ones.

ROI timeline:
Month 1-3: High education effort, low adoption
Month 6-12: Moderate effort, growing adoption
Year 2+: Minimal effort, normalized behavior

Education cost is real but temporary. Economic benefit is permanent.

The 10-Year Economic Outlook

Payment economics are shifting. Here’s the likely trajectory:

2025-2027: Early Adoption Phase

A2A adoption: 5-15% in progressive European markets
Card fees: Stable at 1.5-2.5% (merchants lack leverage)
Merchant savings: Early adopters save 15-30%
Bank positioning: Defensive (retain merchants)

2027-2030: Mainstream Shift

A2A adoption: 20-40% in mature markets
Card fees: Declining 20-30% (competitive pressure)
Merchant savings: Mainstream adopters save 30-50%
Bank positioning: Offensive (acquire with A2A)

2030-2035: New Equilibrium

A2A adoption: 40-60% of domestic transactions
Card fees: Stabilized at 1.0-1.5% (international, credit niche)
Merchant savings: 40-60% lower total payment costs
Market structure: Multiple payment methods, use-case-specific

The pattern: Not replacement, but rebalancing. Cards don’t disappear. They price more competitively and focus on contexts where they have advantages (international, credit, specific use cases).

Why payware Prices at 0.5%

Our pricing philosophy:

Cost structure:

Infrastructure costs: €0.10-0.15 per transaction (cloud hosting, APIs, support, security)
Payment rail costs: €0.02-0.05 per transaction (SEPA Instant)
Margin: €0.30-0.33 per transaction

Why not higher?
We could charge 1.0% and still be half of card costs. But:

Network effects favor low pricing:
More merchants adopt → more customer familiarity → more merchant adoption
Growth in early years is more valuable than margin optimization

Merchant retention:
Merchants who see 60-80% savings become enthusiastic advocates. Word-of-mouth drives growth.

Bank partnerships:
Payment institutions integrate more quickly when they can offer merchants dramatic savings. Our 0.5% enables them to charge 0.6-0.8% and still be highly competitive.

Market positioning:
We want to be known as the infrastructure provider that made A2A payments economically viable, not the one that replicated card network pricing models.

Long-term thinking: Build the largest network, optimize pricing later.

Next Steps

For merchants:
Calculate current payment costs (processing + fraud + failed payments + working capital). Compare to A2A economics. Model 20-30% adoption scenarios.

For payment institutions:
Assess merchant churn risk and acquisition opportunity. Model defensive vs offensive A2A strategies. Calculate implementation ROI.

For both:
Payment economics are shifting whether any individual business participates or not. The question is positioning: early or late, proactive or reactive, with optimized economics or paying the incumbency premium.

Want to explore A2A payment economics for your business?

payware provides universal A2A payment infrastructure at 0.5% flat fees with instant settlement. We work with payment institutions to enable A2A for merchant portfolios and directly with large merchants for custom integrations.

Learn more: payware.eu
Contact: Get in touch

About payware

payware is the neutral universal interoperability standard for instant account-to-account (A2A) payments worldwide. The platform enables payment institutions, merchants, ISVs, and developers to join a network where every connection multiplies value for all participants. With 7 innovative payment initiation methods - QR code, NFC, BLE, soundbite, text, link, and barcode - payware delivers exceptional end-user experiences while offering fees as low as 0.5% and instant settlement. Founded in 2019, payware creates unprecedented value through universal domestic interoperability.