Buying Groceries with a Credit Card

To better understand how credit card processing works for merchants, it helps to have a real-world example to sink your teeth into. So we’re going to take a common situation—a simple trip to the supermarket—and explain what actually happens in the background when you buy your groceries with a credit card.

Throughout the scenario described below, we’ll assume that you’re doing in-store shopping at a fairly large U.S. supermarket chain qualifying for Visa’s “CPS Supermarket Threshold 1” interchange rate (more on that later), that you’re paying with a basic Visa consumer credit card, and that your charge comes to $80.00 even after tax.

Some of these “facts” might seem a little weird at first (what the heck does “CPS Supermarket” mean anyway?), but we promise it will all make good sense in the end.

The thing to keep in mind, at this point, is that a seemingly simple act like buying groceries with a credit card actually masks a complicated process. The card brand and type, business type, and transaction type all influence the credit card processing fees the business pays for any given credit card transaction. And any significant change to the scenario described above—such as paying with a rewards credit card instead—will alter those rates and fees.

Let’s take a closer look.

The Credit Card Payment Process

So you’ve wandered the aisles, loaded up your cart, prepared for that Saturday family dinner, and found that artisan bread that defines you as a person. You even brought along your cloth grocery bags (nice work!). It’s time to head to the checkout line.

You know the routine. You find out your total, swipe your card at the payment terminal, and follow the prompts on the screen. A few seconds pass in which the cashier bags your groceries and maybe awkwardly asks you what you’re doing today (painting a self-portrait, obviously). Then the card goes through, you get your receipt, and you’re out the door.

That’s all most of us ever see. But if you’re a merchant accepting credit card payments, it’s important to understand what happens in those few awkward seconds, and it’s just as important to understand what happens afterward between the point when the sale takes place and the point where the money from the credit card transaction hits your account.

Note: If you’d prefer a more abstract account not focused on supermarkets and buying groceries, check out our general guide on The Credit Card Payment Process.

Authentication and Authorization

The first stage in the credit card payment process is typically called “authentication and authorization.” It’s what happens in the store, and it basically involves asking your issuing bank—the bank that issued your card—to verify your card details (“authentication”), confirm that you have the credit available to make the purchase, and approve or decline the transaction (“authorization”). In the scenario we’re describing, you’re the buyer and you got your credit card from Wells Fargo, so that makes Wells Fargo your issuing bank.

With the details of our hypothetical supermarket transaction in mind, here’s how the authentication and authorization stage works:

• After you swipe your card, the supermarket’s payment terminal needs to send a request for Wells Fargo to verify your card details and approve the transaction.
• But the payment portal can’t communicate directly with Wells Fargo. Instead, it has to send the request through the payment processor the supermarket hired to handle the technical side of its credit card transactions.
• The payment processor then relays the transaction information to the appropriate card network for the brand of card you’re using—in this case, Visa.
• Visa then sends the authorization request to Wells Fargo, which examines the card and transaction data, checks for signs of fraud, checks your available credit, and then issues its response (approved or declined). If approved, Wells Fargo would also place a temporary hold on your account for the amount of the purchase.
• Finally, Wells Fargo’s response travels back through the same chain of intermediaries—the card network (Visa) and the supermarket’s payment processor—until it “lands,” so to speak, in the supermarket’s payment portal and the cashier issues your receipt to complete the transaction.

From a consumer’s perspective, this is pretty much the end of the credit card payment process. From here, you’ll simply have to deal with your credit card bill—paying it in full at the end of the month if you can (and if you’re wise), or paying out this and other charges over time with interest.

But nothing fishy, beyond possibly confusing monthly fees and interest rates, happens to the total you charged here. If you charged, say, $80.00 for your groceries in this situation, an $80.00 charge is what will appear on your bank statement once the next stage—called “clearing and settlement”—comes to an end.

Clearing and Settlement

The clearing and settlement stage of the credit card payment process involves assigning the appropriate fees to the various players involved in the process and transferring the appropriate funds from bank to bank. Ultimately, the clearing and settlement stage ends when the money from your charge (less fees) finds its way to the supermarket’s bank account.

Clearing and settlement involves these essential steps:

• The supermarket sends a “batch” of authorized transactions to its payment processor (usually at the end of the business day).
• The supermarket’s payment processor then sorts the transactions and forwards the data to the appropriate credit card networks. So your charge of $80.00 would get sent to Visa.
• Visa would then relay the authorization to the buyer’s card issuing bank (in your case, Wells Fargo), and the issuing bank would transfer the appropriate funds, less fees, to the supermarket’s payment processor, which would ultimately deposit the money in the supermarket’s bank account.

Would the supermarket receive the full $80.00 from your hypothetical charge? No. It’s only going to receive what’s left over after Wells Fargo, Visa, and the supermarket’s payment processor take their cut.

Credit Card Processing Fees

Every credit card transaction generates three types of fees: interchange fees, assessment fees, and markups added on by the payment processor. Here’s where the fees come from and where the money goes:

• Interchange fees are set by the various credit card networks (in our case, Visa), but they’re actually paid to the cardholder’s issuing bank.
• Assessment fees are also set and collected by the card networks to cover their costs.
• Markups are fees added on by the payment processor that manages the merchant’s side of the credit card payment process, and they serve to cover the processor’s costs and generate profit.

In the section that follows, we’re going to concentrate mainly on the interchange rate and fee for your $80.00 charge at the supermarket, but we’ll have a few things to say about assessments and markups in the end.

Interchange Fees and Rates

Interchange fees are basically an incentive the card networks use to encourage banks to issue their branded credit cards and debit cards, which is one reason why banks like for you to use their cards to make purchases. They get a tiny slice of every sale.

Interchange rates are typically a combination of a percentage of the sale plus a fixed per-transaction fee (for example, 1.19% + $0.10), but the percentages and per-transaction fees vary widely depending on the card brand, card type, transaction type, and type of business.

Below, we’ll explore how various factors work together to produce the specific interchange rate for your $80.00 supermarket transaction.

Card Brand
This is a big one. Each credit card network sets its own interchange rates or “swipe fees,” and in fact every other influence we’ll consider—specific card type, transaction type, and business type—receives its categorization and the resulting interchange fee from the credit card network. In the transaction we’re analyzing, in other words, it’s Visa that determines the basic transaction rates the supermarket pays when you buy your groceries with a credit card.

Card Type
But the specific type of card you use also matters. Within Visa’s ecosystem of payment cards, there are debit cards, basic consumer credit cards, rewards cards, corporate cards, and so on—and each card type influences the interchange fees a business pays for accepting that type of card.

If you recall, we decided that you made your $80.00 purchase at the supermarket with a basic Visa consumer credit card issued by Wells Fargo, your issuing bank.

Transaction Type
But the card type isn’t enough on its own to determine a transaction’s interchange fees. The type of transaction also matters. Credit card payments made online, for instance, tend to bring higher interchange fees than in-store credit card payments, and the same thing can be said for manually keyed-in transactions that happen when a terminal can’t read a customer’s card.

What about your $80.00 purchase? We’re imagining that purchase was made in the store by swiping your card at the supermarket’s payment terminal, so your purchase qualifies as a “card-present” transaction.

Business Type or Merchant Category
Finally, there’s the type of business to consider. Visa and the other credit card networks assign merchant category codes (MCCs) to different types of business, and they assign different interchange rates based on those categories. (The details are messy, but the categories are based essentially on the level of risk different types of businesses pose to the card payment industry.)

We’ve already mentioned that the supermarket in our scenario is eligible for Visa’s “CPS Supermarket” category, and further that it qualifies for something called “threshold 1.” What does this mean? It means that the supermarket chain has the annual transaction and sales volume necessary to be eligible for the “threshold 1” interchange rate based on the following criteria:

• Threshold 1
  CPS Supermarkets with at least 95.5 million in annual transaction totals and $5.82 billion in sales volume qualify for “threshold 1.” For a basic Visa consumer credit card used in a card-present transaction like the one we’ve been describing, the interchange rate for this threshold is 1.15% + $0.05.
• Threshold 2
  CPS Supermarkets with at least 58.2 million annual Visa transactions and $3.31 billion in sales volume qualify for “threshold 2.” For a transaction like the one we’ve been describing, the interchange rate for this threshold is 1.20% + $0.05.
• Threshold 3
  CPS Supermarkets with at least 15.2 million annual Visa transactions and $840 million in sales volume qualify for “threshold 3.” For our hypothetical transaction, the interchange rate at this threshold is 1.22% + $0.05.
• “All Other”
  CPS Supermarkets without the transactions and sales volume necessary to cross one of the three thresholds listed above are categorized as “All Other” by Visa. With regard to the type of transaction we’ve been describing, this category as the same interchange rate as “threshold 3”: 1.22% + $0.05.

The “threshold 1” interchange rate applies to our $80.00 transaction, which generates the following interchange fee in the end:

1.15%($80.00) + $0.05 = $0.97

So $0.97 automatically goes to Wells Fargo, your issuing bank, representing about 1.21% of the $80.00 sale.

The Key Takeaway

Ultimately, though, this “buying groceries with a credit card” exercise hasn’t been about discovering the interchange rate for a transaction that takes place in a supermarket. It’s been about clearly seeing how the details of each transaction influence the interchange fees a business pays.

Change one factor, in other words, and the interchange rate changes as well.

For instance, if you had paid with a Visa debit card instead, the interchange rate would have been 0.05%($80.00) + $0.21 = $0.25 if your card was issued by a so-called “regulated bank” with over $10 billion in assets (such as Wells Fargo). A transaction using a Visa debit card issued by an “exempt” or unregulated bank, however, would have a flat fee of $0.30 for a transaction fitting the rest of our criteria (card-present and CPS Supermarket Threhold 1).

And the possibilities go on and on.

• If you had paid with a Visa “signature preferred” rewards credit card instead of a basic Visa consumer credit card, the interchange rate would have been 2.10%($80.00) + $0.10 or $1.78.
• If you had instead spent $80.00 at a business eligible for Visa’s “CPS/e-Commerce Basic” category, your basic Visa consumer credit card would have generated a 1.80% + $0.10 interchange rate for that transaction—or $1.54.

So any merchant that wants to understand their overall credit card processing costs—or even accurately read their monthly processing statements—needs to understand how and why interchange fees change from transaction to transaction. And they need to understand how the different credit card networks (Visa, Mastercard, etc.) categorize their business in the first place.

UP NEXT:     1.3 Credit Card Processing Fees