Card payment networks such as Visa and MasterCard charge merchants a fee after every transaction. These fees, also known as interchange rates or swipe fees, can be complex to understand.
These fees can make or break the profit margins for small business owners. To avoid paying unnecessary interchange fees, consider the following tips:
What is an Interchange Fee?
A credit card transaction fee is a type of add-on charge that can be added to the purchase total by your payment processor after each swipe. This interchange fee definition, often called swipe or interchange rates, is charged by your merchant service provider to pay for maintaining payment processing networks like Visa and MasterCard.
Many variables impact these fees, and it can take time to determine precisely what you will be paying. For example, the type of card your customer uses can influence which rate they will be charged (a debit card typically comes with a lower interchange cost than a credit card). The transaction amount can also change the fees you’ll be charged, as higher-volume transactions tend to have lower rates than smaller transactions. Additionally, the specific industry your business is in can impact your interchange fees (e.g., charities typically have lower rates than airlines).
How your payment processor charges these fees can also affect the overall cost. Some processors offer an interchange-plus pricing model, including the card network’s standard fees and a markup that can be fixed or percentage-based. This method gives merchants greater transparency into their fees and can be a more budget-friendly option.
How do Interchange Fees Work?
Credit card payments require many moving parts from the customer to the merchant through the financial system. Interchange fees are one of the ways that credit card companies make money on these transactions and support the ongoing costs associated with fraud prevention systems, the system’s maintenance, and even call center support.
Interchange rates are set and managed by credit card payment networks (like Visa and Mastercard) and vary based on transaction type, card network, and even your business’s MCC code. For example, debit cards with PINs typically have lower interchange rates than credit cards. Rewards cards will have higher rates than non-rewards cards.
Almost every merchant that accepts debit and credit cards will have to pay these fees. They are a fact of life for small businesses, as the public expects they can use plastic to buy goods and services.
But some business owners complain that the cost of these fees is too high and would prefer to have them capped. Others point out that technology has made much credit card processing easier over the last decade and that these fees only take away a tiny percentage of a merchant’s profits. The card issuers and payment processors argue that these fees help to ensure that the industry can continue to invest in technology and reduce fraud and that everyone in the credit card payment ecosystem enjoys the benefits of these investments.
How Can I Lower My Interchange Fees?
While credit card fees are inevitable, there are many things you can do to minimize their impact on your business. Promoting debit card usage and optimizing your payment processing operations are critical. You can also lower your interchange rates by following payment network requirements, such as ensuring employees follow all prompts when manually keying in transactions. Additionally, implementing robust fraud prevention measures can help qualify your business for lower rates by reducing the risk of chargebacks.
Another way to lower your interchange fees is by implementing a surcharging program, where you pass the cost of accepting a credit card onto customers. This can be a great way to reduce costs and improve customer satisfaction, but it requires careful consideration and compliance with regulations.
Finally, you can lower your interchange fees by ensuring that you are submitting level two and level three data with every transaction. This can reduce your interchange fees by over 20%. Level three data includes the invoice number, tax ID, item commodity code, and more. This is especially important for e-commerce and phone-based transactions, where the information is often entered manually or inconsistently. Additionally, be sure that you are settling batches within 24 hours to obtain the lowest possible rates. Lastly, working with a partner that does not pad interchange is essential, as this can significantly increase your rates without you knowing it.
How Can I Avoid Interchange Fees?
While there’s no way to avoid interchange fees entirely, there are ways that businesses of all sizes can keep them low. First, ensure that your business meets the minimum requirements set by the payment card networks (the most prominent being Visa and MasterCard). Then, optimize how you accept cards to qualify for a lower interchange rate. This includes implementing address verification services (AVS) and settling transactions quickly.
Another option is to encourage customers to use debit cards, which tend to have low
er interchange rates than credit cards. Finally, be proactive about reducing chargebacks. Chargebacks can raise your interchange rates, so minimizing them is essential. This can be done by implementing robust transaction processing protocols, establishing clear fraud detection procedures, and training employees in proper customer service practices.
Of course, there’s also the possibility of negotiating with your processor to reduce interchange fees. But it’s crucial to understand what you’re paying for so that you can deal with it. This is why it’s critical to regularly review your fee structures and statements and consult with payment processors, financial advisors, or industry experts to ensure that you maximize the benefits of your payment processing services while keeping your costs low.
