While interchange fees are often seen as unavoidable pass-through fees that cannot be negotiated or affected, there are many ways to reduce them.
Credit cards are the most used payment method in the United States.
And if your business takes credit cards, you’re well aware that doing so isn’t free.
Credit card transaction and processing fees consist of three different factors: interchange fees, processor markup fees, and assessment fees.
At roughly 80% of the fee total, interchange fees are the largest portion of the total credit card transaction fees. Reducing them can mean a substantial cost reduction.
The challenge: interchange fees are in constant flux, and they’re so complex and nuanced that often, even the credit card processor doesn’t know which adjustments to make to optimize them.
To do so requires knowing how interchange fees work, why they exist, what factors affect their calculation, and a number of industry benchmarks.
Interchange fees were first introduced nearly 50 years ago as a way to reimburse the banks for lost interest. Now, these fees go primarily to pay for fraud transaction risks and cardholder reward programs and perks.
Every time your customer swipes their credit or debit card, the card networks collect interchange reimbursement fees, which are ultimately paid to the bank that issued the card.
As Value Penguin explains, “Whenever a credit card or debit card transaction is processed, funds are transferred from the issuing bank to the acquiring bank, sometimes called the merchant bank. Card associations, like Visa and Mastercard, facilitate the process. For the service they provide, associations collect a fee from the acquiring bank (which is then passed on to the issuing bank)—this is what’s known as the interchange fees.”
In short: today’s interchange fees exist to fund card-holder reward programs … helping to drive a continued increase in credit card use.
Even though interchange fees are paid to the issuing bank, credit card brands such as Visa, MasterCard, Discover, and American Express set the rate requirements for accepting their cards.
Interchange fees vary by credit card network or association, averaging 1.5% to 3.3% for credit cards and 0.5% for debit cards.
Each credit card brand uses its own rate percentage calculations for types of cards and categories of transactions resulting in over 300 different interchange fee programs.
Visa alone has over 800 pages of rules governing how these programs work.
Here are just a few of the factors identified by Payment Depot that influence how interchange fees are calculated:
- Business category such as general merchandise, gas station or restaurant
- Debit card vs. credit card
- Private company or government agency vs. individual consumer
- Ecommerce, telephone and mail order sales where the card is not present vs. in-person transactions where the card is present
- Tokenized transactions that improve security
- Customers with rewards cards
Semiannually, in April and October, Visa and Mastercard update their rules governing interchange fees.
The nature of these updates can be unpredictable, as evidenced by a recent controversial fee increase by Visa. Visa had planned to introduce 20% rate increases in 2020. Due to the pandemic, they elected to delay their rate changes until April 2021. After further pressure from Congress, Visa once again announced a delay, pushing the increases into 2022. Then in April 2021, Visa unexpectedly moved forward with a portion of the contested fee increases anyway. The remaining increases are still slated for 2022.
Often interchange fee changes come as a result of market conditions. For example, in October of 2021, VISA updated its dispute rules in response to the pandemic-driven increase in disputed transactions. Noteworthy changes to new rules apply to travel-related disputes, wait time limits for canceled merchandise and services and the use of compelling evidence for dispute responses.
Another recent fee increase is related to EMV non-compliance. Some processors charge additional fees when EMV cards are swiped instead of processed through a chip reader.
Your business must be proactive and thoroughly understand the details and nature of these changes to avoid or offset fluctuating increases.
While interchange fees are unavoidable, it’s a common misconception that they can’t be reduced. This misconception stems primarily from the fact that processors are rarely able to negotiate lower interchange fees. As interchange is a pass-through fee for them, most processors won’t be able to offer a lower rate (unless the processor itself has a hidden markup applied).
To effectively reduce these fees, there are numerous tactics, which can be grouped into two categories: updating your payment technologies, or optimizing the back end of your merchant account.
Unfortunately, there is a big difference between the two, when it comes to effectiveness.
Updating Payment Technologies: Cost Reduction of 3-5%
Aliaswire has identified these as three of the most effective strategies when attempting to lower fees on your own. But, unfortunately, these methods typically only result in a 3-5% reduction.
- Increase security at the moment of payment capture
- Use an integrated payments solution to reduce the risk of data entry errors and fraud
- Use an incentive-based card steering solution
Credit Card Processing Optimization: Cost Reduction of 10-30%
A credit card processing optimization engagement is necessary for truly substantial savings.
The process is complicated but essentially entails:
- Obtaining a more detailed version of the merchant statement
- Disecting every fee on the statement
- Comparing each individual fee against industry benchmarks, and against the published rules from Visa, Mastercard, and American Express
- Directing the processor to adjust multiple individual account settings
- Ensuring adjustments are completed in the proper sequence to avoid putting optimization components at risk
Because implementing these optimizations requires numerous micro-adjustments to the back end of the merchant account, doing so requires extensive knowledge of the rules governing interchange fees, as well as access to various industry data.
Done properly, a substantial cost reduction of 10-30% can be achieved.
While this can be handled internally, most businesses will find it necessary to enlist merchant account experts to do so on their behalf under a gain-share model. This eliminates risk, and removes the need to devote internal staff to the project.
Verisave is a third-party cost-reduction firm specializing in merchant accounts and credit card processing fees.
Verisave is not a payment processor, and is not affiliated with any processors, card brands, or banks.
Verisave has more than 20 years of experience optimizing and monitoring the credit card processing industry.