9.  The Virtues of the Pass-through Fee Arrangement

Another, less common form of payment processor billing is known as the “pass-through” or “cost plus” method.  Under the pass-through model, the processor reports on all of the constituent components, “I”, “A” and “P” as separate fee areas.  Generally speaking, there is no notion of a discount.  Interchange fees and Assessments are reported in the same format as the Associations’ published rates.  The Processor fees will be billed and reported to the merchant as agreed upon between the parties. 

From a reporting standpoint, it is always more desirable to be billed under the pass-through model.  In this way, it is perfectly clear what you are paying and to whom you are paying these fees.  What’s more, itemized Interchange reporting allows merchants to fine tune their Interchange qualification – usually the largest component of merchant fees.  The only drawback to pass-through billing is that merchants are subject to Interchange and Assessment fee increases.  As we have seen, however, it is not uncommon for Interchange rates to decrease.  The benefits of transparency in pass-through arrangements therefore usually outweigh the potential drawback of pass-through fee increases.

As stated, processor fees will appear independently as agreed to by the merchant.  Processor fees may be expressed in terms of a fixed per transaction fee, a percentage, or a combination of both.  The important thing is that the processor itemizes the payees, and hopefully provides good detail around Interchange reporting.


What you have undoubtedly learned in this document is that credit card processing is an inherently complex subject.  Many payment processors complicate matters more by favoring a bundled discount arrangement.  The larger the merchant, the more potentially costly this type of arrangement becomes.  Although not necessarily simple, a pass-through fee arrangement with good reporting offers merchants more accountability and a greater ability to optimize Interchange.  In any case, The Merchant’s Guide recommends that all merchants obtain an independent payment processing operations audit at least once a year.

A comprehensive discussion of these topics and other related subjects is covered in TMG’s 70-page publication, Understanding Merchant Account Fees.