Navigating the Basics of Interchange Fees

Your business pays interchange fees when accepting customer credit and debit card payments. These fees include verifying the funds, assessing fraud and protecting against bad debt.

These fees are bundled into a single percentage-based amount charged by your merchant services provider and card payment networks. However, there are ways to reduce these rates.

What are Interchange Fees?

Interchange fee definition is percentage-based fees that merchants pay whenever they accept a card payment. These fees are charged by the credit card payment networks like Visa and Mastercard, credit card-issuing banks, and payment processors (which may or may not be the issuing bank). In many cases, these fees will appear as a single, bundled amount on the statement that your processor hands you each month.

These rates are based on the cost of moving money and the risk and costs associated with a transaction. The credit card associations (like Visa and MasterCard) set these rates and adjust them twice a year.

Card payment network and transaction type: Interchange fees vary widely based on the card type, network and transaction type. For example, swiped transactions typically have lower interchange fees than keyed ones. Additionally, consumer cards generally have lower prices than business cards.

Merchant type: Interchange rates also vary by merchant type. Larger merchants typically have more power to negotiate rates with card networks and banks. As a result, they often pay lower rates than smaller merchants who need to be more savvy about the process. Additionally, some credit card processors “pad” interchange – adding onto Visa and Mastercard’s published rates without telling their customers. This big problem can be difficult to spot without familiarity with the process.

How Are Interchange Fees Determined?

Whenever you accept credit or debit card payments, your business will be charged a percentage-based fee known as an interchange fee. Banks and credit card networks charge these fees to cover the costs of verifying funds, processing the transaction and protecting the bank against fraud. They appear as a single, bundled amount on the bills you receive from your merchant services provider (a payment processor).

The exact rates charged vary by the type of card used and the type of business, which is determined by your four-digit Merchant Category Code (MCC). Card networks consider some industries higher risk than others, resulting in higher interchange fees. In addition, the payment method can impact the cost: in-person, swiped purchases typically have lower interchange fees than e-commerce or mobile payments.

While these fees may seem opaque and non-negotiable, small business owners can reduce the costs in some ways. For example, if you use an address verification service to reduce the risk of fraudulent transactions, your processor can often negotiate a lower interchange rate. You can also opt for a processor that uses tiered pricing, which groups hundreds of interchange rates into a few tiers based on transaction type and sales category. This can save you money over time.

Why Are Interchange Fees Charged?

Credit card and debit card processing costs can be a big hit to your bottom line. However, offering a variety of payment methods creates a smoother buying experience for customers, helps protect your business from fraud, and can boost profits.

To complete a credit or debit card transaction, several things have to happen in a short period. This includes requesting and receiving authorization, checking for fraud and other costs, and processing the payment. These processing costs are covered by the interchange fees charged to merchants.

Interchange rates are based on many complex variables and can vary based on what is being purchased, by whom, when and where. The fees are also based on the merchant’s four-digit Merchant Category Code (MCC), which is assigned to them by the card network. This determines whether or not a merchant is a small business, retail, restaurant, etc. Merchants in different MCC categories will be charged additional interchange fees.

For example, the rate for a purchase made by an American Express cardholder will differ from that of a Visa or Mastercard cardholder. That’s why it’s important to choose a merchant services provider that is a true partner, keeps up with the volatility in interchange rates, and passes savings on to clients when possible. Using this method, you can significantly reduce your interchange costs and help improve your business’s profit margins.

How Can I Avoid Interchange Fees?

As a merchant, there are a few ways to limit the interchange fees you pay. First, consider a flat-rate pricing model. This pricing model includes all costs in the transaction price, so there are no hidden fees that could surprise you down the line. Second, optimize security. Merchants can help reduce interchange fees by implementing best practices, such as requiring a PIN for debit card transactions and capturing additional authentication information on key or card-not-present transactions.

Finally, be sure to monitor your credit card processing rates regularly. Fees can fluctuate, and your processor may adjust them periodically based on market conditions, the size of your business, and other factors. By understanding your credit card processing rates, you can avoid unnecessary fees and ensure you receive a fair price for your payment services.

Interchange fees are the largest portion of the total fee charged to a merchant when they accept card payments. They are also non-negotiable and set by the card networks, including Visa and Mastercard. Despite being non-negotiable, there are a few things you can do to manage your interchange costs and lower your overall fee rate. Ultimately, the goal is to save as much money on your payment processing fees as possible so you can focus on running and growing your business.


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