Payments Academy
Acquiring economics PAYMENT OPERATIONS STARTED LIVE 01 Acquiring economics - business of making money from processing ACTIVE 02 Single chargeback impact - If that merchant has a single chargeback QUEUED 03 Interchange cost - rate for the card types the merchant takes QUEUED 04 Chargeback rate - 0.5 percent, so 10 chargebacks a month, QUEUED 05 Operational and accounting implications - finance team must build a profit QUEUED 06 Merchant profitability - common gap is failing to specify QUEUED Acquiring economics is the business of making money from processing card payments for merchants Step 1 of 6 Acquiring economics STARTED Acquiring economics business of making money from processing ACTIVE Single chargeback impact If that merchant has a single chargeback QUEUED Interchange cost rate for the card types the merchant takes QUEUED Chargeback rate 0.5 percent, so 10 chargebacks a month, QUEUED Operational and accounting implications finance team must build a profit and loss QUEUED Merchant profitability common gap is failing to specify QUEUED Acquiring economics is the business of making money from processing card payments for merchants
Single chargeback impact PAYMENT OPERATIONS IN PROGRESS LIVE 01 Acquiring economics - business of making money from processing DONE 02 Single chargeback impact - If that merchant has a single chargeback ACTIVE 03 Interchange cost - rate for the card types the merchant takes QUEUED 04 Chargeback rate - 0.5 percent, so 10 chargebacks a month, QUEUED 05 Operational and accounting implications - finance team must build a profit QUEUED 06 Merchant profitability - common gap is failing to specify QUEUED If that merchant has a single chargeback of GBP 500 that the acquirer must cover, the margin for five months is wiped out. Step 2 of 6 Single chargeback impact IN PROGRESS Acquiring economics business of making money from processing DONE Single chargeback impact If that merchant has a single chargeback ACTIVE Interchange cost rate for the card types the merchant takes QUEUED Chargeback rate 0.5 percent, so 10 chargebacks a month, QUEUED Operational and accounting implications finance team must build a profit and loss QUEUED Merchant profitability common gap is failing to specify QUEUED If that merchant has a single chargeback of GBP 500 that the acquirer must cover, the margin for five months is wiped out.
Interchange cost PAYMENT OPERATIONS IN PROGRESS LIVE 01 Acquiring economics - business of making money from processing DONE 02 Single chargeback impact - If that merchant has a single chargeback DONE 03 Interchange cost - rate for the card types the merchant takes ACTIVE 04 Chargeback rate - 0.5 percent, so 10 chargebacks a month, QUEUED 05 Operational and accounting implications - finance team must build a profit QUEUED 06 Merchant profitability - common gap is failing to specify QUEUED Interchange cost is the interchange rate for the card types the merchant takes, multiplied by the volume. Step 3 of 6 Interchange cost IN PROGRESS Acquiring economics business of making money from processing DONE Single chargeback impact If that merchant has a single chargeback DONE Interchange cost rate for the card types the merchant takes ACTIVE Chargeback rate 0.5 percent, so 10 chargebacks a month, QUEUED Operational and accounting implications finance team must build a profit and loss QUEUED Merchant profitability common gap is failing to specify QUEUED Interchange cost is the interchange rate for the card types the merchant takes, multiplied by the volume.
Chargeback rate PAYMENT OPERATIONS IN PROGRESS LIVE 01 Acquiring economics - business of making money from processing DONE 02 Single chargeback impact - If that merchant has a single chargeback DONE 03 Interchange cost - rate for the card types the merchant takes DONE 04 Chargeback rate - 0.5 percent, so 10 chargebacks a month, ACTIVE 05 Operational and accounting implications - finance team must build a profit QUEUED 06 Merchant profitability - common gap is failing to specify QUEUED The chargeback rate is 0.5 percent, so 10 chargebacks a month, Step 4 of 6 Chargeback rate IN PROGRESS Acquiring economics business of making money from processing DONE Single chargeback impact If that merchant has a single chargeback DONE Interchange cost rate for the card types the merchant takes DONE Chargeback rate 0.5 percent, so 10 chargebacks a month, ACTIVE Operational and accounting implications finance team must build a profit and loss QUEUED Merchant profitability common gap is failing to specify QUEUED The chargeback rate is 0.5 percent, so 10 chargebacks a month,
Operational and accounting implications PAYMENT OPERATIONS IN PROGRESS LIVE 01 Acquiring economics - business of making money from processing DONE 02 Single chargeback impact - If that merchant has a single chargeback DONE 03 Interchange cost - rate for the card types the merchant takes DONE 04 Chargeback rate - 0.5 percent, so 10 chargebacks a month, DONE 05 Operational and accounting implications - finance team must build a profit ACTIVE 06 Merchant profitability - common gap is failing to specify QUEUED The operational and accounting implications are that the finance team must build a profit and loss for each merchant Step 5 of 6 Operational and accounting implications IN PROGRESS Acquiring economics business of making money from processing DONE Single chargeback impact If that merchant has a single chargeback DONE Interchange cost rate for the card types the merchant takes DONE Chargeback rate 0.5 percent, so 10 chargebacks a month, DONE Operational and accounting implications finance team must build a profit and loss ACTIVE Merchant profitability common gap is failing to specify QUEUED The operational and accounting implications are that the finance team must build a profit and loss for each merchant
Merchant profitability report gap PAYMENT OPERATIONS COMPLETE LIVE 01 Acquiring economics - business of making money from processing DONE 02 Single chargeback impact - If that merchant has a single chargeback DONE 03 Interchange cost - rate for the card types the merchant takes DONE 04 Chargeback rate - 0.5 percent, so 10 chargebacks a month, DONE 05 Operational and accounting implications - finance team must build a profit DONE 06 Merchant profitability - common gap is failing to specify ACTIVE A common gap is failing to specify the merchant profitability report, which is the report the finance team needs to decide whether to keep, reprice or exit a merchant. Step 6 of 6 Merchant profitability report gap COMPLETE Acquiring economics business of making money from processing DONE Single chargeback impact If that merchant has a single chargeback DONE Interchange cost rate for the card types the merchant takes DONE Chargeback rate 0.5 percent, so 10 chargebacks a month, DONE Operational and accounting implications finance team must build a profit and loss DONE Merchant profitability common gap is failing to specify ACTIVE A common gap is failing to specify the merchant profitability report, which is the report the finance team needs to decide whether to keep, reprice or exit a merchant.

Key points of this lesson, in order.

0:00 / 6:33 Step 1 of 6

Acquiring economics: pricing a merchant, MDR and the acquirer P and L

Cards compliance and acquiring, Lesson 6 of 8, Narration 6:33, D08 Cards and alternative payments

InterchangeScheme feeChargeback

What you will learn

Your objective. By the end of this lesson, you will be able to explain acquiring economics: pricing a merchant, mdr and the acquirer p and l and apply it to a real banking scenario.

Why it matters. For a business analyst, acquiring economics is a modelling and reporting subject.

Chapter objective: EMV, PCI DSS, merchant underwriting, interchange modelling and the chargeback chain

Key learning points

  • Acquiring economics
  • Single chargeback impact
  • Interchange cost
  • Chargeback rate
  • Operational and accounting implications
  • Merchant profitability report gap

Key terms

Interchange: A fee paid by the acquirer to the issuer for each card transaction, set by the card scheme. It compensates the issuer for handling the transaction, funding the interest free period and managing fraud...

Scheme fee: A fee charged by a card scheme to issuers and acquirers for using its network, rules and brand. Scheme fees cover processing, clearing, compliance and fraud services.

Chargeback: A dispute raised by a cardholder through the issuer to reverse a card payment, for example for fraud, non delivery or a duplicate charge.

Payment flow diagram showing Acquiring economics: pricing a merchant, MDR and the acquirer P and L.

Practise this lesson

Exercise

Work out what the beneficiary receives for a GBP 10,000 payment under OUR, SHA and BEN.

Use the charge arrangement rules in this lesson and the correspondent and beneficiary bank fees named in the lesson.

  1. What to do. Calculate the amount credited under each of the three arrangements and state who pays each fee.

Correct result. Under OUR the sender pays all charges and the beneficiary receives the full amount. Under SHA the sender pays the sending charges and the beneficiary pays the receiving charges. Under BEN the beneficiary pays all charges and receives the amount less all fees.

Why. The charge arrangement decides who pays and how much arrives. A customer who was promised the full amount and receives less will complain, and the complaint lands on the analyst.

Check your understanding

Practice question

Which of the following best describes acquiring economics: pricing a merchant, mdr and the acquirer p and l?

Takeaway and next step

What to remember

For a business analyst, acquiring economics is a modelling and reporting subject.

Follow GBP 10,000 through every stage, from instruction to beneficiary credit, and note where it can stop.

Open the Payment Lifecycle Simulator →

Builds on "The chargeback chain: representment, pre-arbitration and arbitration".

Transcript and full text

Show transcript

Acquiring economics is the business of making money from processing card payments for merchants, and it is a thin-margin business where a small pricing error can turn a profitable merchant into a loss. The acquirer earns the merchant discount rate, known as the MDR, and pays out interchange to the issuer, the scheme fee to the scheme, and the processing cost to its own operations. What is left is the acquirer margin, and that margin must cover the sales cost, the risk cost, the support cost, and the profit. A business analyst who works in acquiring must be able to build the profit and loss for a merchant, because that is how pricing decisions are made. Why acquiring economics matters is that the margin is small and the risks are large. A typical MDR for a small merchant in the United Kingdom is around 1.5 percent, of which interchange might be 0.3 percent, the scheme fee 0.1 percent, and the processing cost 0.2 percent, leaving a margin of 0.9 percent. On a merchant processing GBP 10,000 a month, that margin is GBP 90, which must cover the sales cost, the risk, and the support. If that merchant has a single chargeback of GBP 500 that the acquirer must cover, the margin for five months is wiped out. This is why acquirers price by risk, why they hold reserves, and why they monitor the chargeback ratio so closely. The parties are the merchant, the acquirer, the issuer, the scheme, and the payment service provider if one is involved. The merchant pays the MDR. The acquirer collects it, pays interchange to the issuer, pays the scheme fee to the scheme, and keeps the remainder. The payment service provider, if it sits between the merchant and the acquirer, takes a share of the margin for providing the gateway or the terminal. The scheme sets the interchange and the scheme fee. The issuer receives the interchange. Each party in the chain must earn enough to cover its costs, and the MDR is the total that the merchant pays for the whole chain. In practice the acquirer profit and loss for a merchant is built from six lines. Revenue is the MDR multiplied by the merchant volume. Interchange cost is the interchange rate for the card types the merchant takes, multiplied by the volume. Scheme fees are the scheme fee per transaction multiplied by the number of transactions. Processing cost is the cost of the gateway, the terminal, and the settlement. Risk cost is the expected chargeback loss, which is the chargeback rate multiplied by the volume and the average transaction value, plus the cost of the reserve. Operating cost is the sales, support and compliance cost allocated to the merchant. Profit is revenue minus all five costs, and the acquirer will only board a merchant if the expected profit is positive after allowing for the risk. A worked example shows the numbers. A merchant processes GBP 100,000 a month, 2,000 transactions at an average of GBP 50. The MDR is 1.5 percent, so revenue is GBP 1,500. Interchange averages 0.3 percent, so the cost is GBP 300. Scheme fees are GBP 0.05 per transaction, so the cost is GBP 100. Processing costs GBP 0.10 per transaction, so the cost is GBP 200. The chargeback rate is 0.5 percent, so 10 chargebacks a month, and the average chargeback value is GBP 50, so the expected loss is GBP 500, plus GBP 15 per chargeback in fees, which is GBP 150, a total risk cost of GBP 650. Operating cost allocated is GBP 100. Total costs are GBP 1,350, leaving a profit of GBP 150, which is a margin of 0.15 percent. If the chargeback rate rises to 1 percent, the risk cost doubles to GBP 1,300, and the merchant becomes loss-making. What happens when the economics are wrong is a loss that is often discovered too late. If the acquirer underprices a merchant, it loses money every month until the pricing is corrected, and correcting the price may lose the merchant. If the acquirer overprices, the merchant leaves for a competitor, and the acquirer loses the volume. If the acquirer does not monitor the chargeback rate, a merchant that was profitable can become loss-making without anyone noticing until the quarterly review. The finance team must review the profit and loss for every merchant at least quarterly, and the risk team must review any merchant whose chargeback rate is rising, because a rising rate is the earliest warning. The operational and accounting implications are that the finance team must build a profit and loss for each merchant, the pricing team must set the MDR based on that profit and loss, and the operations team must monitor the actual costs against the forecast. On the ledger, the MDR is revenue, interchange and scheme fees are costs, chargebacks are a cost, and the reserve is a liability. The accounting team must also track the payment service provider share, if any, because that is a cost that is often overlooked in the pricing model. The most common accounting error is to book the MDR as revenue without deducting the interchange, which overstates the acquirer profit. For a business analyst, acquiring economics is a modelling and reporting subject. You must specify the pricing model, the cost components, the profit and loss report, the review frequency, and the triggers for a pricing review. You must also specify how the system handles a scheme fee change, an interchange change, and a chargeback rate change, because each one affects the profit and loss. A common gap is failing to specify the merchant profitability report, which is the report the finance team needs to decide whether to keep, reprice or exit a merchant. Takeaway: acquiring is a thin-margin business, and the profit is made or lost on the chargeback rate and the card mix, not on the headline rate. Further reading: the Visa Core Rules for the merchant discount rate; the Mastercard rules; the Financial Conduct Authority guidance on acquiring. Last reviewed 7 November 2026. A pricing model that ignores the chargeback rate will look profitable until the first bad month, and then it will not.

Acquiring economics is the business of making money from processing card payments for merchants, and it is a thin-margin business where a small pricing error can turn a profitable merchant into a loss. The acquirer earns the merchant discount rate, known as the MDR, and pays out interchange to the issuer, the scheme fee to the scheme, and the processing cost to its own operations. What is left is the acquirer margin, and that margin must cover the sales cost, the risk cost, the support cost, and the profit. A business analyst who works in acquiring must be able to build the profit and loss for a merchant, because that is how pricing decisions are made.

Why acquiring economics matters is that the margin is small and the risks are large. A typical MDR for a small merchant in the United Kingdom is around 1.5 percent, of which interchange might be 0.3 percent, the scheme fee 0.1 percent, and the processing cost 0.2 percent, leaving a margin of 0.9 percent. On a merchant processing GBP 10,000 a month, that margin is GBP 90, which must cover the sales cost, the risk, and the support. If that merchant has a single chargeback of GBP 500 that the acquirer must cover, the margin for five months is wiped out. This is why acquirers price by risk, why they hold reserves, and why they monitor the chargeback ratio so closely.

The parties are the merchant, the acquirer, the issuer, the scheme, and the payment service provider if one is involved. The merchant pays the MDR. The acquirer collects it, pays interchange to the issuer, pays the scheme fee to the scheme, and keeps the remainder. The payment service provider, if it sits between the merchant and the acquirer, takes a share of the margin for providing the gateway or the terminal. The scheme sets the interchange and the scheme fee. The issuer receives the interchange. Each party in the chain must earn enough to cover its costs, and the MDR is the total that the merchant pays for the whole chain.

In practice the acquirer profit and loss for a merchant is built from six lines. Revenue is the MDR multiplied by the merchant volume. Interchange cost is the interchange rate for the card types the merchant takes, multiplied by the volume. Scheme fees are the scheme fee per transaction multiplied by the number of transactions. Processing cost is the cost of the gateway, the terminal, and the settlement.

Risk cost is the expected chargeback loss, which is the chargeback rate multiplied by the volume and the average transaction value, plus the cost of the reserve. Operating cost is the sales, support and compliance cost allocated to the merchant. Profit is revenue minus all five costs, and the acquirer will only board a merchant if the expected profit is positive after allowing for the risk. A worked example shows the numbers. A merchant processes GBP 100,000 a month, 2,000 transactions at an average of GBP 50. The MDR is 1.5 percent, so revenue is GBP 1,500. Interchange averages 0.3 percent, so the cost is GBP 300. Scheme fees are GBP 0.05 per transaction, so the cost is GBP 100. Processing costs GBP 0.10 per transaction, so the cost is GBP 200.

The chargeback rate is 0.5 percent, so 10 chargebacks a month, and the average chargeback value is GBP 50, so the expected loss is GBP 500, plus GBP 15 per chargeback in fees, which is GBP 150, a total risk cost of GBP 650. Operating cost allocated is GBP 100. Total costs are GBP 1,350, leaving a profit of GBP 150, which is a margin of 0.15 percent. If the chargeback rate rises to 1 percent, the risk cost doubles to GBP 1,300, and the merchant becomes loss-making.

What happens when the economics are wrong is a loss that is often discovered too late. If the acquirer underprices a merchant, it loses money every month until the pricing is corrected, and correcting the price may lose the merchant. If the acquirer overprices, the merchant leaves for a competitor, and the acquirer loses the volume. If the acquirer does not monitor the chargeback rate, a merchant that was profitable can become loss-making without anyone noticing until the quarterly review. The finance team must review the profit and loss for every merchant at least quarterly, and the risk team must review any merchant whose chargeback rate is rising, because a rising rate is the earliest warning.

The operational and accounting implications are that the finance team must build a profit and loss for each merchant, the pricing team must set the MDR based on that profit and loss, and the operations team must monitor the actual costs against the forecast. On the ledger, the MDR is revenue, interchange and scheme fees are costs, chargebacks are a cost, and the reserve is a liability. The accounting team must also track the payment service provider share, if any, because that is a cost that is often overlooked in the pricing model. The most common accounting error is to book the MDR as revenue without deducting the interchange, which overstates the acquirer profit.

For a business analyst, acquiring economics is a modelling and reporting subject. You must specify the pricing model, the cost components, the profit and loss report, the review frequency, and the triggers for a pricing review. You must also specify how the system handles a scheme fee change, an interchange change, and a chargeback rate change, because each one affects the profit and loss. A common gap is failing to specify the merchant profitability report, which is the report the finance team needs to decide whether to keep, reprice or exit a merchant.

Takeaway: acquiring is a thin-margin business, and the profit is made or lost on the chargeback rate and the card mix, not on the headline rate. Further reading: the Visa Core Rules for the merchant discount rate; the Mastercard rules; the Financial Conduct Authority guidance on acquiring. Last reviewed 7 November 2026. A pricing model that ignores the chargeback rate will look profitable until the first bad month, and then it will not.

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