If you’re looking to open a merchant account, then you probably want to get the best deal possible on your credit card processing. But wading through murky lists of fees and charges can be difficult, especially if you’re not familiar with what the terms mean.
Interchange fees are integral to credit card processing costs, and if you know how they work, then you can significantly reduce your processing costs each month.
What are interchange fees?
There are a number of fees that go into credit card processing. Networks, banks, processors, and card brands charge these fees—it’s one of the main ways that they make money from credit cards.
Interchange fees are one of several different fees that are paid each time a credit card transaction occurs:
- Assessment fees: Fixed percentage paid to card payment brands (Visa/MasterCard, etc.)
- Authorization costs: Cost per transaction to authorize/charge a card
- Fixed monthly network fees: Paid to the network each month
- Discount rates: The margin the processor charges above cost
- Interchange fees: The base cost for each type of card merchants accept
Interchange fees are set by payment card brands like Visa and MasterCard, and are typically adjusted at least once a year. Interchange fees are paid to card-issuing banks and are designed to cover any fraud, risk, or debt that the card brand may incur. As with most credit card processing fees, the buck is passed to the merchant, who’s responsible for paying interchange fees.
Why do interchange fees matter for merchants?
Out of the five different fees listed above, only discount rates and interchange fees are variable—the rest are essentially fixed costs. Interchange rates also make up the vast majority of credit card processing fees. So if you want to lower your credit card processing, you should hone in on the discount rate and interchange fees in order to get the best deal possible.
Interchange fees form, appropriately, the backbone of the interchange plus pricing model for credit card processing. Unlike a flat rate pricing model, with interchange plus, you pay a flexible percentage for your credit card processing. This variable percentage is determined based on the type of credit card processed and how it was processed (meaning that your percentage may be different for every transaction.)
Interchange plus is the cheapest pricing model for credit card processing because you’re sure to get the lowest price for every card processed. However, interchange plus is also the riskiest pricing model—for businesses that may prefer a more stable option, flat rate is appealing because they know in advance what their rate will be. Because interchange plus pricing is based on constantly changing interchange fees, merchants will not know their fees in advance.
If you choose an interchange plus pricing model, there are a number of factors outside your control—such as regularly rising interchange rates, new cards that cost more to process, or changes in the industry—that can affect your overall processing costs.
But don’t let that risk put you off—every business is different, and interchange plus pricing may be the best option for you (especially if you’re looking for the most cost-effective plan.)
How to get lower interchange fees
Interchange fees are determined by several different factors:
- The standards set by payment card brands like Visa and MasterCard
- The type of card processed
- How it was processed
Of course, merchants can’t control payment card standards, but they can control which cards they process and how they process them.
Some credit cards cost more to process than others. For example, corporate and government cards and certain rewards cards will cost more for merchants to process than a standard credit card. One way of controlling your interchange fees is to only accept standard credit cards. However, this approach is a bit narrow-minded; refusing to accept certain credit cards will only increase the likelihood that potential customers will take their business elsewhere. It’s usually in your best interest as a merchant to allow customers to pay with the method that’s most convenient for them.
A more effective method to lower your interchange rates is to follow best practices for credit card processing. That is, if you can decrease the perceived risk of each transaction, you can lower its cost.
Risk is one of the main reasons that interchange fees exist. Payment card brands like Visa and MasterCard have to deal with the repercussions of pervasive credit card fraud, so by charging interchange fees with every transaction, they have a built-in backup fund to pay for the losses caused by credit card fraud.
That means that the riskier a transaction seems, the higher its interchange fees will be. For example, card-not-present transactions (via phone or the internet) have higher interchange rates than in-person transactions because there’s a higher risk for fraud.
Here are a few ways you can make your transactions seem less risky and therefore qualify your cards at the lowest possible interchange fees:
- Always capture the cardholder’s address, ZIP code, and CVV (number on back of card)
- Include line-item details like invoice number, PO number, unit of measure, and more (some credit card integrations automatically do this)
- Preauthorize and capture in a timely manner
- Preauthorize and capture for the same dollar amount
If you don’t follow the above best practices, then your cards may be downgraded and you’ll pay much higher interchange fees.
Credit card processing rates are confusing, and processors often keep merchants in the dark, so it can be difficult to understand what goes into processing rates and what merchants can do to lower their costs. Interchange fees are one of the most important aspects of processing costs to understand—if merchants follow best practices for processing credit cards, then they can qualify their credit cards at lower interchange rates and save money on their processing costs each month.