Unraveling the Mystery of Interchange Fees – What You Need to Know

In the world of payment processing, many variables impact interchange fees. Understanding how these fees work can help you reduce your overall processing costs.

While these rates are unavoidable, there are innovative strategies that can minimize their impact on your business. These strategies include negotiating competitive rates with your processor, optimizing card acceptance policies, and streamlining processing.

What Are Interchange Fees?

Interchange fees are what credit card networks charge banks for the risk and operations involved in processing credit and debit card payments. These fees are non-negotiable. The payment card network determines the fee structure, which can be a percentage of transaction value or a flat fee per transaction. They also vary by transaction type, with rates for debit cards lower than those for credit.

These fees are charged to the merchant bank that processes transactions and the card-issuing bank. They do not affect the cardholder directly but are passed through to the cardholder at some point during a transaction. The fees cover authorization costs, losses due to fraud and credit, and the average bank cost of funds.

The fees charged to a business can be affected by its merchant category code (MCC), a four-digit code defining the merchant’s industry, affecting its overall credit card processing rates. The fees can also be affected by the type of card used, with airlines, for example, generally paying higher interchange fees than grocery stores or restaurants.

Many third-party credit card processors have flat transaction rates, which simplify the pricing structure for small businesses by including the interchange fees in the total cost of a swipe or keyed-in transaction. It is known as interchange-plus pricing, an excellent way for small business owners to avoid surprises.

How Do Interchange Fees Work?

When a card is used to make a purchase, it goes through several stages before entering your business’s bank account. First, the card’s bank (the issuing bank) sends funds to the card network to facilitate the transaction. Then, the card network takes its share of the fees and passes the rest on to the merchant’s acquiring bank. The acquiring bank then deposits the money into the merchant’s account.

This process is a little complicated, but what matters for merchants is that they must be aware of the underlying costs of accepting card payments. These are called interchange fees and are set by card networks like Visa, MasterCard, American Express, and Discover. Generally, these fees comprise a small fixed fee and a percentage of the sale amount. The rates may differ based on the card type, merchant category code, and other variables.

Despite the complex nature of these rates, merchants often reduce the overall impact on their bottom line by lowering other payment processing charges. For example, encouraging customers to use debit cards instead of credit and conducting address verification services on these purchases can help you avoid higher interchange fees.

Similarly, you can lower your processing fees by making sure transactions settle as quickly as possible. It’s also important to note that while the fees charged by card networks are not negotiable, other fees charged by your processor are.

How Can I Negotiate Interchange Fees?

Avoiding interchange fees is impossible, as they are an intrinsic part of the payment ecosystem. However, intelligent strategies exist to minimize their impact and optimize processing costs.

The card-issuing banks, payment networks like Visa and MasterCard, and your payment processor all charge a fee on every transaction. These fees cover many costs, including maintaining infrastructure, managing fraud risk, and providing cardholder benefits.

In most cases, those hundreds of individual interchange fees are bundled together and appear as a single rate on the bills you get from your payment processor. But you can negotiate your rate if you know what to look for.

For example, in e-commerce and phone-based transactions, you can lower your rates by ensuring that you capture the full billing address of your customers. Doing this eliminates the more expensive “non-qualified” tier and reduces the total amount of your interchange fee.

Another way to reduce your rates is to switch to an “interchange-plus” or subscription pricing model. These models separate the processor markup from the interchange rate, making comparing and negotiating rates easier.

Lastly, be sure to keep up to date with the frequent changes in interchange fees. They can change as often as twice a year, so it’s important to regularly analyze your fees and determine how they can affect your business.

How Can I Avoid Interchange Fees?

Credit card companies charge merchants an interchange fee to accept their cards. This fee covers the risks of accepting credit cards and helps businesses access guaranteed payment when customers purchase. While the fee structure varies from card to card, it’s generally expressed as either a percentage of transaction value or a flat amount per transaction.

Although interchange fees are non-negotiable, merchants can minimize their impact by leveraging strategies such as interchange optimization, fraud prevention, and more.

Many factors influence the size and scope of an interchange fee, including card type, transaction value, and whether the payment is recurring or one-time. In addition, some industries face a heightened risk of fraud and other chargebacks, which may result in higher interchange fees. For these reasons, small business owners must understand their card processing rates and stay informed about frequent changes to the industry’s fees and rates.

While paying debit and credit card interchange fees does take a bite out of business profits, there’s no way to avoid these hidden costs altogether. However, merchants can manage their payment costs by embracing new technologies and ensuring they’re getting the best deal on their card processing rates. In this way, they can continue to offer the convenience their customers demand while keeping costs low.