If you’re in city or county finance, you’ve likely had questions about credit card fees come up more than once, and understandably so. Between acronyms, industry jargon, and conflicting advice from vendors, there can often be a steep learning curve to navigating service fee models.
That’s why local governments that accept credit card payments should be armed with some baseline knowledge about payment and fee structures. This is especially important before entering into negotiations with merchant services providers, the entity that provides the city with the infrastructure to accept credit card transactions. When you have a clear understanding of how these fee models work, you’ll be in a better position to ensure the best results for your agency.
In this guide, we’ll walk you through the key players in credit card processing, break down the most common government fee models (in plain language), and share the questions you should be asking potential vendors to protect both your agency and constituents.
Because when you’re equipped with the right knowledge, you can negotiate smarter, serve your residents better, and make sound financial decisions that support your community’s goals.
Payment processing: the key players
Before diving into billing models, it’s helpful to know the key players involved in the flow of funds and their roles in credit card transactions. With so many participants, it can be challenging to understand how everyone gets paid. A typical setup will involve a card issuer, acquirer, card brands, and the merchant (in this case, the city accepting payments). Their roles and respective fees are described below.
Merchant: A merchant is any business entity authorized to accept credit card payments—like a city, county, or state government. If your customers are paying your agency by credit card, you are the merchant in this relationship. As such, you’re responsible for paying all the fees below. As we’ll see, there are a few ways these are assessed and can be recouped.
Card Issuer: The card issuer is the financial institution (e.g., Capital One Bank) that issues credit to the cardholder, your customer. They are responsible for maintaining the cardholder relationship and extending the line of credit to the cardholder.
Card Brand: Card brands are organizations that provide the networks to support card payments. They support the card issuers. Card brands include Visa, Mastercard, Discover, and American Express.
Interchange fees: These are charged by the card issuer to compensate for the handling of funds and risk associated with processing credit cards. These make up the majority of fees charged on a card payment. Interchange fees are set by the card brands (Visa, Mastercard, Discover, and American Express) and paid by the merchant.
Acquirer: The acquirer is the financial institution that contracts with the merchant to process payments. They’re responsible for processing transactions and providing the technology layer to interface with the card brand networks and banks.
Acquirer fees: These are extra costs charged by the acquirer to the merchant for the services rendered. Typically a fixed amount per transaction, these are charged on top of interchange fees.
Card brand fees — Charged by card brands to merchants for supporting the card brand networks, these fees are also referred to as “dues and assessments”. There are generally two categories of card brand fees: per-transaction fees and fees that are assessed as your overall processing volume increases.
Credit card fee models
There are different types of fee structures a merchant services provider can offer to a local government. Understanding their nuances will help you be aware of the costs that you are agreeing to and who incurs them at each stage of processing. Below, let’s take a look at the two most common fee structures:
Absorbed fee model
In this model, your merchant services provider charges you for all card processing fees on the merchant statement (interchange fees, card brand fees, and acquirer fees). The merchant services provider then assesses their markup or transaction fee, which you can think of as their revenue earned. This markup is typically assessed per transaction, but it can be a fixed annual amount (similar to a subscription). The merchant services provider typically has a lot of flexibility in terms of setting these fees.
Convenience / service fee model
Using a convenience/service fee model, the cardholder is charged an additional fee at the time of payment to complete the transaction, which is then paid directly to the merchant services provider.
This fee covers all three fee types (interchange fees, acquirer fees, and card brand fees), with the remaining difference serving as the merchant services provider’s revenue.
This model has less transparency since the merchant doesn’t see any of the processing fees directly. You will therefore always want to request a merchant statement if you decide on this model. This will allow you as the merchant to understand how much revenue your merchant services provider is truly earning on your account.
Questions cities should ask a payments vendor
Even if you’re not an expert on the topic, there are still a few questions you should be asking merchant services providers to make sure they’re who you want to work with.
Will we have access to merchant statements throughout the process?
The merchant statement is a guide to the price breakdown, as well as who incurs fees. Having a merchant statement will ensure that you have full transparency for all the fees being assessed throughout the process.
Which billing models do you support?
Fee structure setup is not a “one size fits all” situation, so you should beware of merchant services providers that don’t offer flexibility. If they can’t offer options in terms of fixed fees, variable fees, and types of models, then it might be best to look elsewhere. You need to know that your chosen merchant services provider has the flexibility in their system to provide a billing structure that best meets the needs of your constituents.
Final Thoughts
Payment processing may not be the flashiest part of government operations, but it plays a critical role in how effectively and equitably you serve your community. By understanding the basics of service fee models and knowing what questions to ask, you’re better positioned to choose a setup that aligns with your agency’s goals, supports your staff, and makes life easier for your residents. The more informed you are going into these conversations, the more control you’ll have over outcomes that affect both your budget and your public’s trust.
Euna Solutions, a leader in government technology, designs, builds, delivers, and supports trusted procurement, payments, grants management, and budgeting software for the public sector.