Last updated: August 2024

Card fees look simple until they aren't. This guide breaks down what's really happening every time a customer pays by card — and why growing UK merchants are increasingly switching to Pay by Bank.

Key Takeaways

• Card payments are

  pull-based

  : merchants request money from customers through a chain of intermediaries, and settlement takes days.

• UK card processing fees are layered — interchange, scheme fees, processor margins, and operational overhead all stack on top of each other.

• As transaction volume grows, so does exposure to fraud reviews, rolling reserves, and chargeback penalties.

• Pay by Bank is

  push-based

  : customers authorise payments directly from their bank, funds arrive immediately, and transactions are final.

• For scaling UK merchants, Pay by Bank reduces risk, improves cash flow, and removes structural friction that quietly limits growth.

How Card Payments Actually Work

Most people think of a card payment as a simple transfer. It isn't.

Every time a customer taps, inserts, or enters their card details, what's actually happening is a

credit-based pull request

routed through multiple intermediaries — each with their own role, fee, and exposure to risk.

Here's what happens behind the checkout button:

1. Customer enters card details

   at checkout

2. Your acquirer submits an authorisation request

   to the card network

3. The card network routes the request

   to the customer's issuing bank

4. The issuing bank approves or declines

   — and reserves the funds

5. Money is not transferred

   — it's held temporarily

6. Settlement happens days later

   , after the network clears the transaction

This is the part most merchants never fully internalise:

card payments are promises, not transfers

. The money isn't yours until settlement, and even then it remains reversible for weeks or months.

The Real Cost of Card Processing in the UK

Processors typically present card costs as a single blended percentage. That number is almost always misleading — not because it's wrong, but because it only shows one layer of a much deeper stack.

Interchange Fees

Set by the issuing bank. These vary based on:

• Card type

  — debit cards attract lower rates than credit cards

• Card origin

  — UK-issued, EEA, and non-EEA cards are priced differently

• Merchant risk category

  — some sectors pay more by default

Scheme Fees

Charged by Visa and Mastercard for routing transactions, compliance, and network assessment. These are rarely broken out clearly on invoices.

Acquirer or Processor Margin

On top of interchange and scheme fees, your payment processor adds their own markup covering:

• Fraud tooling and monitoring

• Risk underwriting and reserves

• Settlement handling

Operational Overhead

This is the category that never appears on a statement, but it's very real:

• Chargeback management

  — responding to disputes takes staff time and cost

• Fraud review

  — transactions flagged for manual review slow everything down

• Evidence preparation

  — disputing chargebacks requires documentation

• Cash flow drag

  — delayed settlement means delayed access to your own money

The practical result

: the effective cost of card processing in the UK is consistently higher than the advertised rate once you account for all of these layers.

Why Card Fees Get Worse as You Grow

This is the part that surprises most growing businesses.

Card payments don't scale neutrally. As your volume increases, card networks and processors apply tighter scrutiny — and the cost of that scrutiny lands on you.

At higher volumes, merchants typically encounter:

• Increased fraud monitoring

  — more transactions flagged for review, more false positives

• Rolling reserves

  — processors hold a percentage of funds as a risk buffer

• Chargeback threshold penalties

  — exceed a certain dispute rate and you face fines or programme termination

• Category restrictions

  — certain product types become harder to process as you grow

This isn't arbitrary. Card networks are structurally designed to externalise risk onto merchants as volume scales. High-growth businesses, high-ticket merchants, and those operating in regulated or digital-first categories tend to feel this pressure earliest.

Pull Payments vs Push Payments: The Fundamental Difference

Understanding why card payments and Pay by Bank behave so differently comes down to one thing:

who initiates the transaction

.

Who initiates the payment

• Card payments: The merchant requests funds from the customer via the card network

• Pay by Bank: The customer pushes the payment directly from their own bank

Authorisation

• Card payments: Card details are entered externally and verified through network intermediaries

• Pay by Bank: Authorisation happens inside the customer's banking app — authenticated by them directly

Settlement timing

• Card payments: Delayed — typically 2–3 business days after the transaction

• Pay by Bank: Immediate — funds arrive as soon as the payment is confirmed

Reversibility

• Card payments: Transactions can be disputed weeks or months after settlement

• Pay by Bank: Final once completed — no reversal mechanism exists

Chargeback risk

• Card payments: High — issuing banks can reverse funds at the customer's request

• Pay by Bank: None — there is no chargeback process

Dispute burden

• Card payments: Merchants must provide evidence and absorb losses if disputes are upheld

• Pay by Bank: No post-payment dispute process exists

Control over the transaction

• Card payments: Primarily held by card networks and issuing banks

• Pay by Bank: Shared between the customer and the merchant

This single structural distinction —

pull vs push

— explains why fees, fraud exposure, and operational complexity look so different between the two models.

With cards, the merchant is always downstream of the network. With Pay by Bank, the customer makes a deliberate, authenticated decision inside their own banking environment, and the payment flows directly.

Where Card Payments Hurt Merchants Most

Card networks were designed with consumer protection at the centre. That's a feature for cardholders — but it's a structural risk for merchants.

The key friction points:

• Friendly fraud

  — legitimate customers dispute valid purchases, often successfully

• Long reversal windows

  — chargebacks can arrive 30 to 120 days after the original transaction

• Network-defined evidence standards

  — the rules for winning disputes are set by networks, not merchants

• Automatic losses on missed deadlines

  — fail to respond within the dispute window and you lose by default

For many businesses, chargebacks aren't an edge case. They're a predictable, recurring cost of accepting cards — built into the model by design.

Pay by Bank: How the Cost Structure Actually Works

Pay by Bank operates over bank transfer infrastructure rather than card networks. The cost architecture is fundamentally different:

• No interchange fees

• No scheme fees

• No chargeback mechanism

Fees are typically flat or low-variable, and they remain predictable as volume grows. There's no scaling penalty, no hidden reserve, and no sudden exposure to new risk categories as your business expands.

Settlement is immediate — which matters more than most merchants initially realise. Immediate settlement means better cash flow, less working capital strain, and cleaner reconciliation.

At Fena, we built our Pay by Bank product on these principles. The goal was simple: payment costs that support growth rather than penalise it.

A Real-World Payment Scenario

Consider a £300 transaction.

With a card payment:

• The payment is authorised — but not final

• Fees are deducted from the settlement amount

• Funds arrive days later

• The transaction remains reversible for up to 120 days

If the customer raises a dispute — valid or not — the merchant faces:

• Loss of the goods or service already delivered

• Loss of the original processing fees

• Time spent preparing and submitting dispute evidence

• Risk of additional penalties if their chargeback rate crosses network thresholds

With Pay by Bank:

• The customer opens their banking app and authorises the payment

• Funds arrive immediately

• The transaction is final — there is no dispute or reversal process

• Reconciliation is clean from day one

The difference isn't just cost per transaction. It's

operational certainty

— knowing that a completed payment stays completed.

Is This Guide Right for Your Business?

Pay by Bank isn't the right fit for every merchant at every stage. Here's a clear-eyed view of who benefits most.

Most relevant for:

• UK merchants processing consistent or growing monthly volumes

• Businesses seeing margin compression from card fees

• Merchants experiencing rising chargeback rates or fraud review friction

• High-ticket, subscription, digital, or regulated-category businesses

Less critical for:

• Early-stage merchants with very low order volumes

• Businesses where cards are occasional and low-risk

• One-off sellers without repeat customers or scaling plans

If you're in the first group, the structural limitations of card payments will only become more apparent as you grow. Addressing the payment mix early tends to be easier than retrofitting after chargeback rates or reserve requirements have already become a problem.

Making the Decision

If card fees, reserves, or dispute overhead are already showing up as a cost or operational burden, that's usually the point where merchants start reassessing their payment stack.

The most common outcomes:

• Full transition

  to Pay by Bank for categories where cards create most of the risk

• Hybrid approach

  where Pay by Bank handles high-value or repeat transactions, and cards remain available for customer preference

Doing nothing is also a choice — one that typically means accepting compounding fees, tighter controls, and increasing operational drag as volume scales.

FAQ

Why are card payment fees higher than the advertised rate for UK merchants?

The rate you're quoted covers the processor margin, but not the full picture. Interchange fees, scheme fees, chargeback handling costs, and cash flow drag from delayed settlement all add to the true cost. As volume grows, these layers compound rather than decrease — meaning the effective cost per transaction often rises even if the quoted rate stays the same.

Why can card transactions be reversed after payment?

Cards are a pull-based, credit-driven system. When a customer pays by card, they're not directly transferring money — they're authorising a request. Issuing banks retain the right to reverse that authorisation through the chargeback process, often weeks or months after the original transaction. Merchants are required to dispute these reversals with evidence, and losing the dispute means absorbing the full loss.

How does Pay by Bank eliminate chargeback risk?

Pay by Bank uses a push-based model. The customer initiates the payment themselves from inside their banking app, using their own authentication. Once the payment is authorised and sent, it's final — there's no network mechanism to reverse it. This removes the entire chargeback exposure that exists with card payments.

Is Pay by Bank suitable for high-value or recurring transactions?

Yes — it's particularly well-suited to these use cases. High-value transactions attract more chargeback risk and fraud scrutiny under card rails. Recurring payments can be disrupted by card expiry, failed renewals, and dispute windows. Pay by Bank sidesteps all of these friction points, making it a strong fit for subscription, high-ticket, and repeat-purchase models.

Can Pay by Bank replace cards entirely?

For some merchants, yes. For others, a hybrid model works better — Pay by Bank for high-risk or high-value transactions, cards retained as an option for customers who prefer them. The right balance depends on your product, your customer base, and where card friction is currently showing up in your operations.

Does offering Pay by Bank affect checkout conversion?

When implemented well, Pay by Bank can improve conversion — particularly for high-intent customers. Authorising directly within a trusted banking app often feels more secure than entering card details on a checkout page. The key is clear presentation at checkout so customers understand what they're choosing and why.

Why don't payment processors explain these risks at sign-up?

Card pricing is typically presented as a simple percentage, which looks clean and comparable. The risk-related costs — reserves, chargebacks, scaling penalties — emerge later as volume grows. These dynamics are structural to how card networks operate, not exceptions to it. They're rarely surfaced at the point of onboarding.