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 you’re faced with niche financial terminology that few people understand and even fewer have the capacity to explain.
However, understanding the benefits and expenses of credit card interchange rates can help you understand your business’s financial statements, so you can make better decisions based on them (such as which credit cards to accept and decline at your cash wrap).
Fortunately, credit card interchange rates are a lot less complicated than they sound. So, let’s break down the basics of credit card 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 card purchase, your bank (the merchant bank) is paid instantly by the card association of your customer’s bank (the issuing bank) before your customer’s 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 card interchange fees are actually how banks make the majority of their revenue and they usually represent the largest payment processing expense for merchants.
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 credit card issuer’s interchange rate is determined by how expensive each card is to process. Generally, cards with a lot of extras – like free airline miles or cash back – have higher interchange rates than those that stick to the bare bones basics – like debit cards – since they are more difficult to process.
Credit card associations need to charge enough for interchange so that it’s worth it for banks to issue credit cards. However, they need to charge little enough that merchants like you will actually use them. Credit card 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 credit 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 go into 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 your credit card has a rewards program
- whether the card is swiped or manually entered.
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.
Swiped transactions: 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)
Swiped transactions: 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)
Swiped transactions: 1.6 percent + $.10 to 2.3 percent + $.10
Keyed transactions: 1.9 percent + $.10 to 2.4 percent + $.10
Transaction charges range between 2.5 to 3.5 percent
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 card interchange rates, you have very little say over how much you pay per transaction–– consumers decide which credit card networks they use, and the credit card networks determine their rates.
However, there are few things you can do to lower your credit card interchange rates, 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/
Interchange rates are assigned by the credit card networks, so you DON’T have control over them. However, you can lower your overall credit card processing fees by choosing a payment processor that doesn’t charge unnecessarily high markups + extra fees on top of the interchange.
One way to cut payment processing costs is to use a membership-based pricing model that enables you to pay a set fee every month for payment processing, instead of paying another percent of your profits on top of the interchange fee to your payment processing company. Payment Depot is often referred to as “the Costco of payment processing” because they use a membership-based pricing model that doesn’t charge an additional percentage of your profits from each transaction.
Payment Depot’s wholesale pricing model charges you monthly instead of taking a cut of each sale you make. Payment Depot saves merchants like you an average of $400 a month through switching to a transparent, membership-based pricing system–– where you also won’t find any surprises on your monthly bill.
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 service provider such as Payment Depot that offers merchants membership-based pricing. So that you can pass those savings along to your customers and ultimately run a more successful and in-demand retail business.