Card Payments and Processing Fees: A Complete Guide

A practical explainer for finance leaders, founders, and operations teams

For many UK businesses, card payments have become the default. But as margins shrink and operational costs rise, the true cost of getting paid is no longer just a back-office detail—it’s a strategic concern.

Between rising card fees, hardware costs, delayed settlements, and chargebacks, the traditional card payment infrastructure can quietly chip away at profitability. This guide breaks down how card payments actually work, what you’re really paying for, and what to watch out for.

How card payments actually work

A card payment might feel instant to the customer, but it moves through a complex chain:

• Customer pays using their debit or credit card
  
• Merchant initiates the payment
  
• Acquirer (your payment processor) routes the transaction
  
• Card Network (e.g. Visa, Mastercard) facilitates the request
  
• Issuer (customer’s bank) approves or declines the transaction

Step-by-step:

1. Customer taps/inserts card (or enters details online)
   
2. Acquirer sends the request to the card network
   
3. Card network routes it to the issuer
   
4. Issuer verifies funds and authorises the payment
   
5. Merchant receives authorisation and completes the sale
   
6. Settlement occurs 1–3 days later (minus fees)

Note: Some card providers batch settlements at the end of the day. Others do it per transaction. This affects how quickly you see funds in your account.

Who gets paid: The breakdown of card fees

Card payments involve multiple fees, often bundled together in a “blended rate.”

Common components:

• Interchange Fee: Paid to the customer’s bank (0.2–0.3% debit, up to 2% credit)
  
• Scheme Fee: Paid to Visa or Mastercard (typically 0.1–0.3%)
  
• Acquirer Markup: Paid to your processor (often 0.2–1%)
  
• Additional charges: PCI compliance, terminal rental, chargebacks, refunds

Many UK businesses pay 1.5% to 3.4% per card transaction when all fees are considered.

Scheme and processing fees from Visa and Mastercard have risen by over 30% in real terms over the past five years, leading to over £250 million per year in additional costs for UK businesses—a significant burden despite no corresponding improvement in service levels.

Some providers advertise low rates but charge higher fees for premium cards (e.g. Amex, commercial cards) or non-UK transactions. Always read the small print.

Understanding your merchant statement

Your monthly statement holds the keys to spotting overspending—if you know what to look for.

Key things to check:

• Gross sales vs net settlement
  
• Effective blended rate (total fees / total sales)
  
• Breakdown by card type: debit, credit, commercial, Amex
  
• PCI or scheme fees
  
• Any minimum monthly charges or unexpected add-ons

Tip: Ask for Interchange++ pricing instead of blended rates for greater visibility.

Some statements also include terminal performance data. For retail businesses with multiple tills, this can help optimise operations.

Chargebacks: What they are & why they matter

A chargeback occurs when a customer disputes a card transaction. The bank reverses the payment and deducts the funds from your account.

Common reasons:

• Fraud or unauthorised use
• Goods/services not received
• Transaction error

Cost of a chargeback:

• Lost revenue
• £15–£30 per dispute (admin fee)
• Higher chargeback ratios can result in higher fees or even termination of your merchant account

Industries like automotive, travel, and online services are particularly vulnerable to chargebacks due to large deposits or complex fulfillment.

Unlike open banking or bank transfer payments, card payments leave you vulnerable to chargebacks — even if you fulfilled the order.

Card machines & hidden costs

Card machines seem straightforward, but fees can add up. Here’s a look at some popular card providers in the UK and the fees associated:

Provider	Machine cost	Fee per transaction	Payout time
SumUp	£29 + VAT	1.69%	1–3 days
Zettle	£29 + VAT	1.75% (2.5% for links)	1–2 days
Dojo	£15–£20/month rental	1.4% + 5p	1 day

Other costs to consider:

• PCI compliance
• Refund and dispute fees
• Early termination charges
• Settlement delays on weekends or holidays

For newer businesses, many card machine providers also require merchant account underwriting, which can delay setup or restrict volume in early months.

Why card fees vary (and how to reduce them)

Factors that influence your total cost:

Factor	Impact on Fees
Credit vs debit cards	Credit is more expensive
Card-present vs online	In-person = lower risk, lower cost
Commercial vs consumer cards	Commercial cards cost more
UK vs international cards	Cross-border fees apply
Volume	Larger volume can unlock better rates

Ways to reduce card fees:

• Negotiate with your provider
• Encourage debit and in-person payments
• Monitor monthly statements for hidden fees
• Consider flat-rate providers for predictability
• Explore non-card alternatives (see below)

Some businesses save thousands annually by routing high-value or recurring payments through lower-cost methods, such as Pay by Bank.

Tax considerations for card fees

Card processing fees are tax-deductible business expenses.

Also:

• VAT may apply to certain card fees (check your processor’s documentation)
• Use accounting software (e.g. Xero, QuickBooks) to reconcile payment fees and income
• Maintain accurate records of fees and reconciliations to prepare for inspections or audits

If you’re using Atoa or other open banking providers, you may find reconciliation easier due to instant payment confirmations and simplified reporting.

Comparing cards to other payment methods

Feature	Card payments	Pay by Bank	Bank transfer
Avg fees	1.5% – 3.4%	0.3% – 0.7%	Usually flat fee or free
Settlement	1–3 business days	Instant or next-day	Same day
Chargebacks	High risk	No chargebacks	No chargebacks
Hardware	Required	None	None
Admin effort	Medium to high	Low	Medium

The shift to cardless payments doesn’t mean removing cards entirely, but rather offering a hybrid mix of methods that match customer preferences and optimise cost.

That being said, businesses like Ponko, a leading UK car dealership, reduced card usage by 96% and saved over £6,000/month by switching to Pay by Bank. 

[insert Ponko video]

What about digital wallets and mobile payments?

Digital wallets like Apple Pay and Google Pay still operate through card networks. Even though they offer added convenience and security for customers, they do not reduce card processing costs for merchants.

Pros:

• Fast and convenient checkout
• Built-in biometric security
• Popular with younger, tech-savvy customers

Cons:

• Still incur standard card fees
• Require NFC hardware for in-person payments
• Not accepted by all POS systems

While wallets improve user experience, they don’t solve the margin problem for merchants.

The case for re-evaluating your payment stack

If you’re still relying solely on card payments, now may be the time to reassess. With rising card costs and emerging alternatives like Pay by Bank gaining traction, businesses are increasingly adopting hybrid models to:

• Lower costs
• Improve cash flow
• Reduce chargeback risk
• Simplify reconciliation
• Better serve mobile-first customers

Some providers like Atoa also offer incentives for high-volume merchants and allow remote or in-person payments without the need for traditional hardware.

Final takeaway

Card payments have powered commerce for decades, but they come at a cost that’s no longer easy to ignore. From layered fees to settlement delays and chargebacks, it’s worth understanding your total cost of acceptance.

Whether you stick with cards, explore Pay by Bank, or combine multiple methods, the key is to choose what best supports your cash flow, customer experience, and long-term margins.

Curious to see what your payment cost savings could look like with Pay by Bank? [Book a short call with Atoa] to explore your options.