Interchange is the fee collected by a customer’s credit card issuing bank on every transaction.
These rates are set by Visa and Mastercard and apply to ALL processors. In other words, this is the card brand cost that the processor must pay on every transaction.
Visa interchange rates
Mastercard interchange rates
Understanding interchange rates and what they mean for your business
As a business owner, navigating the complex world of credit card processing can be daunting. One term that often comes up is “interchange rates.” These rates are set by credit card companies and are essential for covering the costs of providing cards and processing transactions. These rates are a fundamental part of the fees merchants pay to accept credit and debit card payments. Understanding interchange rates can help you make informed decisions, negotiate better rates, and ultimately save money on processing costs.
What are interchange rates?
Credit card interchange rates are fees paid by a merchant’s bank (acquiring bank) to the cardholder’s bank (issuing bank) every time a credit or debit card transaction occurs. These fees compensate the issuing bank for the risks and costs associated with facilitating card payments. Interchange rates are a significant component of the overall merchant discount rate, which also includes other fees charged by payment processors and card networks such as Visa and Mastercard.
How do interchange rates work?
When a customer makes a purchase using a credit or debit card, the credit card transaction process involves several steps:
- 1 Authorization: The merchant’s point-of-sale (POS) system or online payment gateway sends the transaction details to the acquiring bank.
- 2 Routing: The acquiring bank forwards the transaction information to the card network (e.g., Visa, Mastercard), which routes it to the issuing bank.
- 3 Approval: The issuing bank checks the cardholder’s account for sufficient funds or credit and either approves or declines the transaction.
- 4 Settlement: If approved, the transaction is processed, and funds are transferred from the issuing bank to the acquiring bank, minus the interchange fee.
Factors influencing credit card interchange fees
Several factors determine the interchange rates for a given transaction
Card type
Different types of cards (e.g., debit, credit, rewards, corporate) have different interchange rates. Generally, credit cards have higher interchange rates than debit cards, and premium or rewards cards have higher rates than basic cards. The average interchange fee varies by card type and can range from 1% to 3% of the transaction amount.
Transaction method
Transaction processing impacts interchange rates. Card-present transactions (in-store purchases) usually have lower rates than card-not-present transactions (online or over-the-phone purchases) due to the higher risk of fraud associated with the latter. Certain industries or transaction types may incur higher interchange fees due to increased risk.
Merchant Category Code (MCC)
Each merchant is assigned a category code based on their business type. Some industries, such as grocery stores or gas stations, have lower interchange rates due to lower fraud risk and high transaction volume.
Transaction size
Interchange fees can be a flat fee, a percentage of the transaction amount, or a combination of both. Smaller transactions might incur a higher percentage rate compared to larger transactions.
Processing technology
Using secure payment technologies can lower interchange rates by reducing the risk of fraud.
Reducing interchange fees and costs
Although interchange rates are largely non-negotiable, there are strategies to minimize their impact on your business:
- Optimize transaction methods Encourage card-present transactions whenever possible. By adopting secure payment technologies, you can help your business qualify for lower interchange fees.
- Verify MCC Ensure your business is correctly classified with the appropriate MCC. Some processors might misclassify your business, leading to higher interchange rates. Verify and correct your MCC if necessary.
- Reduce risk of fraud Implement robust fraud prevention measures such as Address Verification Service (AVS) and Card Verification Value (CVV) checks for card-not-present transactions. Lowering your fraud risk can lead to lower interchange rates.
- Negotiate with processors While interchange rates are set by the card networks, you can negotiate other components of your merchant discount rate with your payment processor. Shop around for the best rates and consider processors that offer interchange-plus pricing, which provides more transparency.
- Consider flat-rate pricing For small businesses with low transaction volumes, flat-rate pricing models offered by some processors can be cost-effective. These models charge a single rate for all transactions, simplifying fee structures and potentially saving money on high-interchange transactions. Regularly reviewing processing statements and negotiating with payment processors are effective strategies for reducing interchange fees.
Interchange plus vs. flat rate pricing
When selecting a payment processor, you’ll encounter different pricing models for payment processing fees. The two most common are interchange-plus pricing and flat-rate pricing:
How interchange rates affect different businesses and credit card transactions
Interchange rates impact businesses differently based on their industry, transaction volume, and payment methods. Here are a few examples:
- Retail stores Retailers with a high volume of card-present credit card transactions benefit from lower interchange rates. Implementing secure payment technologies and encouraging debit card use can further reduce costs.
- E-commerce Online businesses face higher interchange rates due to card-not-present transactions. Implementing robust fraud prevention measures and optimizing checkout processes can help mitigate some of these costs.
- Restaurants Restaurants often deal with small to medium-sized transactions and tipping. Ensuring that your POS system properly handles pre-authorization and final settlement of tipped amounts can prevent unnecessary interchange fees.
- Negotiate with processors While interchange rates are set by the card networks, you can negotiate other components of your merchant discount rate with your payment processor. Shop around for the best rates and consider processors that offer interchange-plus pricing, which provides more transparency.
- Service providers Service-based businesses, such as consultants or freelancers, may have fewer but higher-value transactions. Interchange-plus pricing can be advantageous in these cases, providing transparency and potential savings on larger transactions.
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