Credit Card Interchange Rates: What You Need to Know About Payment Processing Fees
Researching credit card interchange rates isn’t the most exhilarating aspect of running a business, nor is it the easiest–– especially when you’re faced with niche financial terminology that few people understand and even fewer can explain.
However, understanding the benefits and expenses of interchange rates can help you understand your business’s financial statements and the reality of what merchants pay for card processing so that you can make better decisions and be knowledgeable about the payments industry.
Fortunately, interchange rates are a lot less complicated than they sound. So, let’s break down the basics of interchange pricing – starting with what it means – so that you can decode your company’s financial statements and make more informed business decisions.
Interchange Rates Explained
When your customers make a credit purchase, your bank (the merchant bank) is paid instantly by the card association of your customer’s credit card bank (the issuing bank) before the cardholder bank actually collects the payment from your customer. Interchange pricing has two major benefits for merchants:
1. Credit card interchange pricing prevents payment delays while you wait for your customer’s bank to collect the funds.
2. With interchange pricing, your customer’s bank has to deal with potential security issues that may arise, such as fraud and credit issues.
The “interchange” cost refers to the set fee your customer’s card association charges your bank for immediate payment processing, and for taking on any issues come up with the customer’s payment. Credit interchange fees are actually how banks make the majority of their revenue and they usually represent the largest payment processing expense for merchants, which can be significant, especially for small businesses.
However, few can agree on how much card companies should charge for interchange. PYMNTS reports, “Interchange fees are a longstanding point of contention between merchants, banks and the card networks – and it’s an issue that ended up in front of the Supreme Court, which ruled in favor of the card networks.”
How are interchange rates calculated?
The cost of each card issuer’s interchange rate is determined by how expensive each card type is to process. Generally, rewards cards with a lot of extras – like free airline miles or cash back – have higher interchange rates for merchants than those that stick to the bare bones basics – like debit cards – since they are more difficult to process.
Card associations need to charge enough for interchange so that it’s worth it for banks to issue the cards. However, they need to charge little enough that merchants like you will actually use them. Interchange rates are constantly evolving (and being debated) to make sure that they remain a valuable proposition for both banks and merchants.
Visa and Mastercard, which are two of the largest card issuers in the U.S., will raise their credit card interchange rates in April of 2019. TechCrunch reports, “While fees on each transaction are nearly unnoticeable, they add up quite rapidly. They generate a ton of revenue for Visa and Mastercard, and they represent significant costs for large merchants.”
Since this is a transitional time for most retailers, it’s obviously not a great time to be hit with added credit card processing fees. The reality is that when you’re paying higher interchange fees, it can be difficult to avoid passing that expense onto your customers–– which is why understanding what each company charges for interchange, and why they charge what they do, is so important.
What factors fo into credit card interchange fees?
Although there is an industry average for interchange rates, your credit card companies’ interchange rates can also fluctuate depending on factors such as:
- your customer’s average transaction size (whether or not you sell large ticket items)
- whether your customer’s card type has a rewards program
- whether the card is swiped or manually entered (card present vs card-not-present)
The National Retail Federation reports, “Swipe fees for credit card transactions vary by purchase amount, but they average 2 percent of the total. Federal law caps debit card swipe fees at 21 cents per transaction.”
Let’s compare the price range of some of the four top card providers’ interchange rates for merchant credit card processing. These rates are based on U.S. transactions, so if you have a lot of international customers you’ll want to do further research into what each card provider charges for international transactions/for swiping foreign cards.
Also, note that fees were rounded up when necessary.
Average Interchange Fee Costs
The average interchange fee costs vary by card brand, with Visa, Mastercard, and Discover each having their own fee structures. Generally, these fees are calculated as a percentage of the transaction value plus a flat fee. Visa and Mastercard, being the two largest card networks globally, tend to have similar interchange rates, although they may differ slightly based on factors such as card type and industry. Discover, while less ubiquitous, also sets its interchange rates, often competitive with Visa and Mastercard interchange rates. Understanding the interchange fee costs by card brand is crucial for businesses to accurately forecast their payment processing expenses and implement strategies to optimize costs.
Network Acquirer Processing Fee by Card Brand
The Network Acquirer Processing Fee, sometimes referred to as the Network Access and Brand Usage fee, covers the cost of utilizing the network’s infrastructure and brand recognition. While the specific amount of this fee can vary based on factors such as card brand, transaction volume, and merchant category, it generally represents a small percentage of the transaction value. Understanding and accounting for these Network Acquirer Processing Fees by card brand is essential for businesses to accurately assess their overall payment processing costs and make informed decisions to optimize their financial performance.
Visa Interchange Rates
Swiped transactions (Card Present): 1.65 percent + $.10 to 2.3 percent + $.10
Keyed transactions: 1.8 percent + $.10 to 3 percent + $.10
(Keep in mind that these fees are set to increase in the near future)
Mastercard Interchange Rates
Swiped transactions (Card Present): 1.6 percent + $.10 to 2.5 percent + $.10
Keyed transactions: 1.9 percent + $.10 to 3 percent + $.10
(Keep in mind that these fees are set to increase in the near future)
Discover Card Interchange Rates
Swiped transactions (Card Present): 1.6 percent + $.10 to 2.3 percent + $.10
Keyed transactions: 1.9 percent + $.10 to 2.4 percent + $.10
American Express
Transaction charges range between 2.5 to 3.5 percent
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As you can see in the above data, American Express rates are higher than the competition and less information about them is available online. The reason for this is that American Express operates more charge cards than credit cards, meaning card users pay off their full balance every month. Instead of getting paid by monthly interest, American Express makes money by charging customers a monthly fee and charging retailers like you more for each transaction. However, AMEX also caters to an affluent clientele. Nerd Wallet reports:
“Merchants have to do the math to decide whether appealing to higher-spending consumers is worth the higher fees they have to pay. Those that decide it is will pay the fees (and adjust their prices to absorb them). Those that don’t think so will decline to take AmEx.”
How can you lower your interchange fees?
When it comes to credit and debit card interchange rates, you have very little say over how much you pay per transaction–– consumers decide which card networks they use, and the card networks determine their rates.
However, there are few things you can do to lower your average card interchange rate, including:
1) keeping an up-to-date mobile POS system, so you rarely have to key in a customer’s transaction
2) staying informed about rate increases, such as Mastercard and Visa’s upcoming increases, to enact minimum transaction limits when necessary
3) encouraging customers to use debit cards when possible/
An interchange rate is assigned by the card networks, so you DON’T have control over them. However, you can lower your overall processing fees by choosing a payment processor that doesn’t charge unnecessarily high markups + extra fees on top of the interchange.
Debit Card Interchange Fees
Interchange rates for debit cards play a significant role in the world of payment processing. Unlike credit cards, which often carry rewards and incentives, debit cards are linked directly to a cardholder’s bank account, making them a preferred choice for many consumers seeking convenience and control over their spending. Interchange rates for debit cards typically vary based on factors such as the type of transaction (e.g., PIN-based or signature-based), the issuing bank, and the card network involved. While debit interchange costs tend to be lower than those for credit, they still constitute a significant expense for businesses, especially those with high volumes of debit card transactions. Understanding and managing debit card interchange rates is essential for merchants looking to optimize their payment processing costs and enhance their bottom line.
Bottom line
While there’s little you can do to lower the amount your business pays for interchange, you can take charge of your business’s payment processing costs to save money where you can by switching to a payment processor such as Payment Depot that offers transparent and competitive interchange plus pricing. So that you can pass those savings along to your customers and ultimately run a more successful and in-demand retail business.