Understanding Credit Card Interchange Fees – A Comprehensive Guide

Credit card companies charge a fee for the privilege of accepting their cards. This fee is called an interchange fee. Interchange fees are determined by the card network (Visa, Mastercard, etc.) and are non-negotiable. But there are ways to optimize the way you take and settle credit and debit payments that can help lower them.

What Are Interchange Fees?

Accepting credit or debit card payments at your business makes you understand and familiarize what are credit card interchange fees. These are the costs your company pays to verify that a customer’s funds are available, process the payment and protect against fraud. These fees make up the majority of your overall card processing charges. Every time a card-based transaction is processed, the acquirer (your merchant service provider) pays the bank that issues the card an interchange fee, which is then passed on to the merchant as part of their card processing fees. Interchange fees are set by the payment networks that run card-based transactions (Visa, Mastercard, and Discover) and are updated twice a year. Each card network has its complex fee schedule, with hundreds of possible rates. These can include everything from the card type (rewards cards usually come with higher fees than regular consumer ones) to the merchant category based on industry and region. Some small-business owners have taken matters into their own hands, limiting the types of cards they accept at their businesses to reduce the impact of interchange fees on their bottom line. But this is only sometimes a good idea. It can reduce the amount of sales you can do and limit your customers’ options – a move that could ultimately cost you more in the long run.

Interchange Rates

Credit card companies have extensive systems to collect money from consumers and send it back to merchants, all of which come with a price tag. These systems and services cost many fees that credit card networks (Visa, MasterCard, and American Express) charge merchants for processing transactions.

Interchange rates vary widely and are set by the card networks and revised periodically. Rates are based on factors such as card type (credit vs. debit), transaction type (card-present vs. card-not-present), the type of business, and whether data gathered during a transaction is suspicious or not, such as when address verification system (AVS) results or card security codes are used. The type of cardholder also impacts the fee structure, with cards for businesses, government agencies, and rewards credit cards typically carrying higher rates than traditional consumer cards.

While card issuers set interchange rates, acquirers and processors often add their markup to the fee schedule. Some offer tiered or flat-rate pricing plans that combine interchange and the processor’s markup into one rate, making it difficult for merchants to understand precisely how much they’re paying in fees.

While it may be tempting for merchants to pass the costs of interchange fees on to their customers by adding a surcharge to every transaction, this could hurt merchants in the long run by deterring consumers from using their credit cards at the business. In addition, any additional costs incurred by the merchant in the form of chargebacks can add up quickly and ultimately exceed the amount of the initial interchange fee paid.

Interchange Reimbursement Fees

Interchange reimbursement fees (also referred to as swipe fees) are costs that credit card companies like Visa and Mastercard charge their network users to maintain their payment transaction system. These fees provide a financial benefit to different entities in the design, including credit card issuing banks and payment processors. Small business sellers often find these fees high and unrelated to a specific service the card brands provide.

The bulk of credit card processing fees comprises interchange rates, so small businesses must understand these fees. The good news is that there are ways to lower the cost of credit card processing fees by leveraging a merchant account provider that offers transparent pricing models.

These models separate interchange rates from processor markup fees, making it easier for small-business owners to find ways to lower their costs. In addition, the rate that a merchant pays for a particular type of card may vary depending on the card brand, card category (rewards, travel, etc.), and whether it is a business, consumer, or government credit card.

There are also hundreds of interchange rates within each card network, each with unique rules that can affect what a merchant will pay. For example, the rates for a business reward credit card are much higher than those of a consumer rewards credit card. Additionally, merchants who process large volumes of transactions can qualify for processing tiers that offer lower rates.

Interchange Optimization

Many business owners believe they need more control over how much their credit card transactions cost. While it is true that credit card processing fees can be high, there are strategies to help lower the costs and reduce your overall payment process expenses. One of the most effective of these is called interchange optimization.

Interchange optimization ensures that your transactions qualify for the lowest rate possible for each swipe. It’s a complex and complicated process that involves multiple factors, but it can save you money on every transaction. To qualify for the best interchange rates, merchants must pass all the necessary information to the card issuer. This includes the transaction type (Visa versus MasterCard, for example) and the business industry. For instance, fueling stations tend to pay less than supermarkets.

In addition to capturing Level I data (basic transaction details), businesses should collect and send out Level II and III data whenever possible. This information helps the card issuer assess risk and can include things like customer codes, PO numbers, and tax IDs. This allows the card issuer to verify a legitimate transaction, which helps minimize fraud. Unfortunately, many merchants don’t realize they can exploit this opportunity. This is because a business will usually be set up with a processor that offers a blended pricing model, where the card-processing costs are hidden from the merchant.


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