Pass-Through Pricing for California Merchants: The Honest Version

The pass-through pricing California merchants get pitched is often described as the fair option, and it usually is, but it is not automatically cheap and it is not immune to padding. This is the honest version: what the model is, how to read a statement, where processors still make margin, and when a simpler model is a reasonable choice.

What pass-through pricing actually is

Every card transaction has a cost set by parties other than your processor. Interchange goes to the bank that issued the card. Assessments and network fees go to Visa, Mastercard, Discover, or American Express. Those amounts are published, non-negotiable for a merchant, and identical no matter who processes for you. A pass-through (interchange-plus) account bills you those exact costs, then adds a disclosed markup: some number of basis points plus some cents per transaction. The markup is the processor's revenue. Everything else is passed through at cost.

Compare that to tiered pricing, where the processor sorts transactions into qualified, mid-qualified and non-qualified buckets by its own rules, or flat-rate pricing, where a single percentage covers everything and the processor pockets the difference on cheap debit transactions.

How to read a pass-through statement

• Interchange section: dozens of lines like "Visa CPS Retail Debit" or "MC World Elite" with counts, volume, and the rate. This is where your customers' card types show up.
• Assessments and network fees: small percentages and per-item fees, plus things like cross-border, FANF, and acquirer processing fees.
• Processor fees: your markup, monthly service fee, gateway fee, PCI fee, statement fee, batch fees, and per-item authorization fees.

Add the third section and divide by volume. That is what the processor earns. If it is materially higher than the markup you were quoted, the extra is coming from the add-ons.

Where the margin hides even on pass-through

1. Padded assessments: a few processors add a hair to network fees and label them as pass-through. Compare the line to the published rate.
2. Per-item fees stacked: 10 cents markup, plus 5 cents authorization, plus 5 cents gateway, plus a batch fee. Each is small; together they matter for low-ticket merchants.
3. PCI non-compliance fees: charged monthly if you never complete the self-assessment. Doing the questionnaire removes it; see PCI compliance.
4. Downgrades: transactions that miss the best interchange category because of missing data, late batches, or keyed entry. This is real cost, not padding, but a good processor helps you avoid it.
5. Monthly minimums and annual fees that never appear in the quote.

Why California merchants should care more than most

California has high card usage, a large share of rewards and premium cards among affluent customers in the Bay Area, Orange County and the Westside, and a lot of card-not-present commerce. Premium cards carry higher interchange, and card-not-present carries higher interchange. On tiered pricing those transactions get dumped into the non-qualified bucket at the worst rate. On pass-through you pay the actual, still higher, cost, and you can see it.

California's SB 478 also matters if you were planning to recover costs with a card surcharge or service fee. Advertised prices must include mandatory fees, and network surcharge rules have their own disclosure and cap requirements. Pass-through pricing lets you know your exact cost, which is the starting point for any compliant cost-recovery approach. Confirm the current rule with counsel before implementing one.

When flat-rate is a fine choice

If you process a few hundred dollars a month at a farmers market, or you are a brand-new seller with no history, or you simply cannot get pass-through without a monthly minimum you would never reach, a flat rate is reasonable. Predictability has value. The break-even is usually somewhere in the low thousands of monthly volume, with the exact figure depending on your card mix and ticket size. Beyond that, pass-through almost always costs less.

Questions to ask before you sign

• What is the markup in basis points and cents, and is it the same for card-present and card-not-present?
• List every monthly and annual fee. Are there minimums?
• Are assessments passed at published rates? Can I see a sample statement?
• How fast do funds settle? Cards should be 1-2 business days; ACH 1-3 business days.
• Is the contract month-to-month, and what does termination cost?
• Do you support Level 2 and Level 3 data for commercial cards so B2B transactions qualify for lower interchange?

Pass-through pricing is not a trick, but it is not a magic word either. The model gives you visibility; you still have to read the statement. Merchants who do usually find their effective rate drops, and more importantly they stop being surprised. If you want the mechanics laid out further, the pass-through pricing overview covers the structure in more detail.