How Do Interchange Fees Work?

interchange fees

Credit card processing fees can be a touchy subject to say the least, so this article is made in hopes of shedding a little light on a common problem: Explanations of those various fees on your merchant account statement.  While this will only tackle interchange fees, understanding fees is vitally important, and there are several more resources on this site that explain credit card processing fees.

For starters, you can brush up with:

If you’re already somewhat familiar with what’s going on, we can jump right to an explanation of those interchange fees, specifically.

Interchange fees are funny in that they can vary wildly depending on a few different situations, so a simple explanation of what the term interchange fee means doesn’t exactly suffice.

First off, what is an interchange fee?

Interchange is the term used in the payment industry to describe any base cost associated with accepting a credit card transaction.

To determine where the base cost even lies, it’s good to take a slight step back at the big picture of credit card processing.  In payment processing, there are three major players dividing up funds after you pay for a transaction.

There are:

  • The card issuer (like a bank), which takes an interchange fee, a set cost.
  • The card provider (like Visa or MasterCard), which takes an assessment fee, another set cost (but much smaller, comparatively).
  • The payment processor (which can be a bank or a processing-specific company), which takes a variable markup so it can stay in business.

That’s essentially it.

If we were to look at a graph of how the different credit card processing fees stack up, it might look like this:

interchange fees

Assessment fees always comprise around 0.11% of your credit card sales volume.  Markup can vary based on your processor’s discretion, and interchange can vary based on the kinds of credit cards you accept – but, the graph is meant to illustrate the fact that interchange fees usually comprise the majority of your monthly processing fees.

So, what makes an interchange fee vary so much?

If you’ve taken a look at a couple of your own credit card processing fees, you might have seen that some of your interchange fees are very small percentages (like 0.05%) and some are much larger, comparatively (like 3.50%).  This is because of the subcategories Visa, MasterCard, Discover, and American Express, there are hundreds of different types of credit cards available for use – not just a couple.

Writing an exhaustive list of card types isn’t practical, but, consider this small sample of credit cards available from Visa:

  1. A personal debit card (used by consumers)
  2. A consumer rewards card
  3. A business rewards card
  4. A purchasing card (used by businesses or the government)
  5. A business debit card

Even the costs of these five different credit cards within the Visa subcategory can change depending upon things like:

  • When the transaction settles. (Did it happen on time, or was it too late and did the cost go up as a result?)
  • How much information is provided along with the transaction. (Certain business cards and government cards are eligible for lower set costs if more information about the transaction is provided at the point of sale.)
  • How large the transaction is. (Certain credit cards have lower interchange costs for larger transactions.)

Again, this isn’t an exhaustive list.  But, the idea is clear that interchange fees, while set in stone, can still fluctuate wildly depending on certain business circumstances.

Is it possible to lower specific interchange fees?

As a means to lower your total processing fees, yes, it is.

Lowering interchange fees usually requires tweaking certain business procedures or addressing certain subjects with your credit card processor, such as providing extra information to lower your business credit card costs, making sure your batches settle at the right time, or ensuring you receive lower costs for your higher volume transactions.

It’s also possible to lower interchange fees by using credit card processing software, such as:

Once again, that isn’t an exhaustive list.  Confer with your own credit card processor if you have questions related to how you can lower your specific interchange costs.