As a business, it’s important to take every step you can to preserve your bottom line. While cutting costs at every corner isn’t always a smart way to succeed, there are changes you can implement that help to keep expenses at a minimum. Arguably one of the most effective ways of doing this is by reducing the amount you pay in interchange fees.
But what exactly are interchange fees? And how can a business take the right steps to make sure they’re paying a fair and reasonable rate? In this informative guide, we’ll assess everything you need to know about these unwanted additional charges as well as what you can do to reduce how much you might expect to have to pay.
Image Credit: Upgraded Points
Understanding Interchange Fees
First and foremost, it’s important to have a strong understanding of the wider impact of interchange fees as a whole. From comprehending exactly how they work to learning how they’re calculated, be sure to educate yourself as best as possible to really get on top of managing your fees.
What Is an Interchange Fee?
If you’re a business that takes payments via credit or debit cards, you’ll be subject to interchange fees. This is an amount you’ll pay as a merchant when someone makes a transaction with your business using a debit or credit card. Interchange fees are designed to cover the costs associated with accepting, processing, and authorizing any and all card transactions.
The fee itself will be a combination of a certain percentage of the transaction and a fixed amount (both of which will be determined by the network of the merchant service provider). For example, it could be that a provider sets a fee of 1.5% and a 15-cent charge for every transaction. This would mean your interchange fee is 1.5% (of the price of the transaction) + 15 cents (your fixed charge).
Image Credit: Upgraded Points
The fee itself will be a combination of a certain percentage of the transaction and a fixed amount.
How Do Interchange Fees Work?
Determining what kind of fee you’ll have to pay depends on 4 important factors. Together, these will be used to determine what percentage of a transaction will be taken as part of the fee, as well as how much the fixed amount will be.
The core 4 factors in question are:
Card Network
Each network operates according to their own rates. Just as with any multi-provider system, these rates will vary depending on what the network in question can offer or the risk they have to take into account.
Card Type
There can be a big difference between credit or debit card rates. Debit cards are generally considered a lower risk, which means the rates offered on payments using them are lower than on a credit card. Furthermore, a business credit card might also carry a higher interchange fee than a consumer rewards credit card, as there’s an expectation that higher transactions will be made with these kinds of cards.
Method of Payment
Consumers have a series of ways to purchase digitally. Whether someone taps, swipes, or pays online will affect how much you can expect to pay on your interchange fee. Generally speaking, when a card isn’t present, a fee will be slightly less than when a customer pays in person.
Merchant Category Code (MCC)
Every business will be assigned a 4-digit code that tells a provider what kind of business a merchant is operating – such as an e-commerce store, travel agency, insurance firm, etc. This code will determine the risk factor on the end of the card network, which will also change the rate you can expect to pay.
How Are Interchange Fees Calculated?
Each merchant service provider will have a range of fees, which will be changed and adjusted over time. These include a bottom and upper bracket – with a merchant being charged depending on all the factors we looked at in the previous section.
Remember, an interchange fee is a set percentage of a transaction added to a fixed amount for every purchase made. So X% + $Y = interchange fee.
Let’s look at some of the rates that the 4 biggest credit card networks currently charge their customers:
| Network | Percentage Fee Range | Fixed Fee Range |
|---|---|---|
| Mastercard | 1.35% to 3.25% | $0.00 to $0.10 |
| Visa | 1.15% to 2.7% | $0.10 to $0.25 |
| Discover | 1.56% to 2.4% | $0.10 |
| American Express | 1.43% to 3% | $0.10 |
Source: ValuePenguin
Image Credit: Upgraded Points
Remember, an interchange fee is a set percentage of a transaction added to a fixed amount for every purchase made.
How Are Interchange Fees Charged?
As they effectively serve as a payment on a payment, it might be confusing to work out where interchange fees factor into the wider transaction lifecycle. Here’s a step-by-step breakdown of how this occurs to make it simpler to understand when a card network takes an interchange fee:
The customer's bank receives a request to ensure funds are available for a transaction. The bank will then confirm this request (assuming they can foot the bill) and put a hold on the money needed.
At a set time of day, the merchant sends all of these transactions to their payment processor.
The payment processor receives all the accepted fees from each customer’s issuing bank.
At this stage, the payment processor takes the interchange fees and deposits them into the card network’s chosen bank.
After the fees have been deducted, the remaining amount is sent in 1 lump sum to the merchant’s bank.
The nature of when interchange fees are taken in the payment pipeline means that the money is never actually in the merchant's
Image Credit: Nathan Dumlao via Unsplash
The nature of when interchange fees are taken in the payment pipeline means that the money is never actually in the merchant's account.
Interchange Fee Rate Examples
As we've discussed, different merchant types will be offered different interchange fee rates depending on the type of business they operate. These will vary depending on the card network being used. Here is an example of some interchange fees that payment processors will use for different merchant accounts:
![visa logo]()
Visa
Visa| Debit | Supermarkets, Retails, Gas Stations | 0.05% + $0.21 |
| Credit | Supermarkets | 1.55% + $0.05 |
| Credit | Insurance | 1.43% + $0.05 |
| Signature/Infinite Cards | Fuel | 1.15% + $0.25 ($1.10 Cap) |
![mastercard logo]()
Mastercard
Mastercard| Debit | Charities | 1.45% + $0.15 |
| Debit | Utilities | 0.00% + $0.65 |
| Credit | Airlines | 2.30% + $0.10 |
| Credit | Restaurants | 1.73% + $0.10 |
![discover logo]()
Discover
Discover| Debit | 1.02% + $0.16 |
| Rewards | 1.71% + $0.10 |
| Commercial | 2.30 + $0.10 |
![amex logo]()
American Express
American Express| Travel and Entertainment | 2.4% |
| Healthcare | 1.6% |
| Restaurants | 1.6% |
Source: Investopedia
What Did the Average Interchange Fee Look Like in 2023?
While a host of factors change how much a merchant can expect to pay in their interchange fees, you might be wondering what the average interchange fee looks like for a singular transaction.
In 2023, that number sat at $0.23 across all eligible transactions made in the U.S. This represented an average of 0.47% of a total purchase’s value being taken by a network provider.
The numbers were similar amongst the leading networks, with the 3 most commonly used payment processors reporting the following for the year:
![discover logo]()
Discover
$0.24 per transaction
(0.47% of total transaction)
![visa logo]()
Visa
$0.24 per transaction
(0.48% of total transaction)
![mastercard logo]()
Mastercard
$0.22 per transaction
(0.45% of total transaction)
While these costs aren’t going to make or break your business, they can slowly add up over time. For example, if you made $1 million in a financial year and lose the average 0.47% per transaction, your business will be charged $4,700 for these fees.
What is your best option to counter these costs? Do what you can to reduce the amount you pay in interchange fees for every purchase made through your business. Read on to discover some of the best ways to lower this unavoidable cost.
14 Ways To Reduce Interchange Fees
Now that we’ve assessed the core aspects of interchange fees, it’s time to look at some of the most viable ways to reduce any that you might be facing. Be sure to keep these 14 practical steps in mind when thinking about bringing yours down.
Negotiate Your Fees Ahead of Time
Once your interchange fees are set, they can’t be negotiated – but that doesn’t mean you can’t sit down with your payment processor first to discuss your rates or ask for a more competitive pricing structure. This is particularly effective if you have clear evidence of a high transaction volume and accurate projections for future growth and sales.
By having this discussion, you’ll be able to leverage more competitive rates from your processor, which will reduce the amount you have to pay on every transaction. Even if it’s just a change of a few percentile points, this can make a big difference in the grand scheme.
Reduce the Risk of Card Fraud
Part of the payments given to your card network are to cover the risks associated with fraud and other nefarious activity. If you can show evidence that you have a strong anti-fraud policy in place, your processor might reduce the fees you’re expected to pay. Some of the best ways to do this would be to:
Have a clearly defined refund and return policy.
Use tap or swipe payments instead of keyed transactions.
Ask for a CVV for card-not-present transactions.
Request a signature for all orders delivered to premises.
Comply with all PCI standards and practices.
Save all receipts and keep a detailed transaction history.
Make sure you’re using the latest and most up-to-date card readers as your point-of-sale terminal.
Implementing this approach has the knock-on effect of also mitigating the risk of fraud on your business as whole. It’s a win-win from a financial perspective.
Provide Level 3 Data When Accepting and Processing Card Payments
The way that a merchant takes payment from credit and debit cards is categorized into 3 different levels of security. Level 3 transactions are optimum for lowering interchange fees, as they will give your bank and payment processor as much information as possible, lowering risk factors.
The 3 levels of enhanced data are as follows:
| Level 1 | Level 2 | Level 3 |
|---|---|---|
|
Card number |
Sales tax amount |
Quantity purchased |
Source: Payway
By providing Level 3 data, a merchant is likely to get a reduction in their rates.
Set a Minimum Spend on Credit Cards
By setting a minimum amount that needs to be paid via credit card, a merchant might encourage a customer to use a payment method with a lower interchange fee – such as a debit card or even cash (where no interchange fees apply at all). This method can’t be flippantly implemented. You’ll need to strike a balance between local and federal laws and card network regulations regarding credit card minimums while ensuring the minimum amount doesn’t inconvenience your customers and cost you a sale. Cost savings are nice, but not at the expense of customer satisfaction. Also, be sure to clearly display the credit card minimum to your customers in your store.
Check Your Merchant Category Code (MCC)
As we’ve discussed, the 4-digit MCC assigned to your business will determine what kind of interchange fees you might pay. If you think a payment processor has assigned your business the wrong code, challenge it.
Furthermore, if you’re a company that operates 2 unique services, be sure to have your secondary business assessed independently. If transactions to the second venture are different from your primary business, it could be that the code assigned to the second revenue stream is inaccurate. Optimize your interchange fees by making sure they’re correct.
Get Payment Processing From Your POS Provider
By doubling up your payment processor and the company through which you utilize your POS system, you’ll eliminate additional costs like integration and fraud prevention fees. This makes it much simpler for your processor to accurately charge you for interchange fees, ensuring you avoid any errors and heightening security – another factor that can see interchange fees lowered.
By marrying these 2 important payment factors together, you might also be eligible for discounts from your processor. This is not a guarantee, but it could be another bonus if payment processing and POS solutions are part of a package they offer.
Image Credit: dusanpetkovic1 via Adobe Stock
Use an Address Verification Service
An address verification service (AVS) allows you to verify the cardholder’s billing address every time a payment is made. This anti-fraud system reduces the chances of a chargeback (both in-store and online) and has proven particularly useful for e-commerce businesses. Mastercard and Visa both support this system and encourage users to implement it.
The process is quite simple:
The customer gives their address as they checkout.
An AVS system compares and matches it to the registered address at the customer’s bank.
The bank completes a check and sends the merchant a code. At this point, the merchant will either accept or decline the transaction based on this code.
As another form of fraud detection, an AVS helps to reduce the interchange fees you’re likely to face on every transaction.
Consider Discounts and Incentives for Cash Payments
One way to avoid interchange fees is to encourage the use of cash payments. While it may be an increasingly antiquated practice, there’s still a place for cash in the business world. Incentivizing customers to pay using this method will negate interchange fees on a transaction altogether.
Ensuring you stay within legal boundaries and regulations, consider introducing a system that sees customers get a certain percentage off their purchases when they pay with cash. This discount needs to be clear and transparent to all customers to be fair and capitalize as a business.
Make Sure Your Merchant Account Is Set Up Properly
Misinformation or incorrect data could see you paying more than you need to. When you’re setting up your account, make sure that everything is entered accurately. Some key factors to consider when doing this include things like:
Making sure you have the right business type, transaction type, and frequency
Having the correct MCC for your business
Setting a minimum credit card payment amount
Using the appropriate level of data enhancement during transactions
For this reason, it’s useful to have the bare bones of your account laid out before you begin setting it up. Understanding each of these factors will go a long way to preventing a mistake from being made during setup.
Consider Surcharging
This might not be the ideal solution if you’re looking to undercut the competition, but it does negate fees lost to payment processors. A surcharge will serve as an additional fee that your customers pay on every transaction. While it doesn’t reduce interchange fees, it lowers the lost amount.
Naturally, there are very important considerations when implementing this kind of system. Aside from potentially isolating customers with higher prices, strict regulatory measures need to be abided by. You’ll need to comply with local laws and the regulations put in place by your specific payment processor.
Image Credit: Upgraded Points
Find a Pricing Model That Makes Sense
While most interchange fees are calculated using singular payments, payment processors sometimes use pricing models that vary depending on your business type or projected growth. Generally speaking, there are 3 core models that are offered:
Flat or Blended Pricing: Best for smaller businesses, this model means you’ll pay a fixed fee no matter the customer card type or payment method. This allows you to more easily budget for interchange and other processing fees.
Interchange-Plus Pricing: This is a more traditional approach, where the interchange fee is decided by the factors we’ve already assessed. It works best for large businesses and those looking to scale.
Subscription or Membership Pricing: You can also pay a monthly membership fee, which combines assessment and interchange costs into 1 lump sum.
You’ll need to discuss pricing models with your payment processor to determine which is best for your needs.
Minimize Manually Keyed-In Transactions
Mail order or telephone transactions (those that have to be manually entered) are classified as high-risk by almost all payment processors. As such, businesses that take payments using this system will likely face much higher interchange fee rates.
Instead, use POS solutions that rely on card insertions or make it easy for customers to complete a transaction using mobile payments. Accuracy and processing times will improve, resulting in lower fees, heightened security, and better profitability over time.
Educate Yourself on “Interchange Padding”
Payment processors will sometimes add additional costs, known as “interchange padding,” to your interchange rates without letting you know. It can be hard to understand what is or isn’t a fair interchange fee if you’re not an expert, so think about reaching out to a payment advisor to discover how you’re being billed and if it’s accurate.
Settle Transactions Every Day
Perhaps one of the easiest – yet most effective – ways to reduce your interchange fees is to settle all of your daily transactions on the day they happen. For many payment processors, having the clearing call (sending off a list of all your received payments) should happen within a 24-hour period to qualify for the lowest interchange rates. Any longer than this and you can expect the fees to begin to rise.
Image Credit: Blake Wisz via Unsplash
9 Other Ways To Reduce Costs as a Business
Interchange fees aren’t the only costs you’ll face as a business owner. There are a number of other areas where fees, bills, and general expenses can soon stack up and start to make a real dent in your profitability. Here are 9 of the best ways for a company to negate and combat these potential costs.
Look at Your Energy Bills
It might not feel like a core aspect of your business, but saving on energy bills goes a long way to impacting your profitability (while also having a positive effect on the environment). Have an electricity audit carried out on your office, and educate staff on how they can do their bit to reduce this often-forgotten overhead cost.
Some easy steps to get started include:
Turn lights off when not in use.
Set the thermostat to a precise number.
Replace all light bulbs with energy-saving alternatives.
Keep the refrigerator set to 35 to 38 degrees.
Check for air leaks and replace the air filter regularly.
Also, consider applying for green initiatives or grants that might save you money, assuming your business will qualify for them.
Lower Your Production Costs
If you’re a business that actively produces a product or generates excess resources or materials as part of your operations, think about ways to cut costs or even see a return on investment on these items.
Steps a business could take:
Sell leftover materials rather than just recycling them.
Consider how leftover resources could be repurposed into a new product.
Optimize the space used for construction so that no area is going to waste.
Lease any unused space to another business or even an individual.
Track and measure the efficiency of your production costs and carry out an audit to determine if the process is optimized.
Set clear goals, metrics, and key performance indicators (KPIs) to work toward.
Furthermore, if you think production is hindered by having the wrong people in certain positions, consider shuffling around your staff.
Identify Where Overspending Is Happening
While it might sound like an oversimplification, working out where you’re spending too much money is guaranteed to help you cut back on unnecessary costs. Carrying out a financial audit is one of the most effective ways to take this step. Still, there are a handful of other tips you can implement:
Look at how much you’re paying in insurance and run your policy through a comparison website to see if you could get a better deal.
Forecast for the future, and work out what kind of budget is needed to scale at your desired rate.
Try paying off debt quicker to lower interest rate repayments.
Identify if your internet package is the most cost-effective for your business.
Make sure to optimize raw materials.
Work out a fair and even pay scale for all members of staff.
Practically any area where you’re spending money can be assessed, with a determination made on whether funds are being dedicated to the right avenue.
Utilize Virtual Technology
While the pandemic was far from ideal, one positive that sprung from it was the adaption of several remote-first technologies. These tend to minimize expenses, cutting costs across several areas. Most noticeably, companies were able to negate the need for a physical office space thanks to the use of virtual meeting platforms like Zoom and Google Meet.
Instant messaging was once the realm of social media alone, but Workplace and independent platforms like Slack also make it possible for people to communicate with each other from anywhere in the world. Introducing these tools can save thousands annually on an office, with factors like rent, equipment hire, and energy bills a thing of the past.
Furthermore, technologies like Google Drive and Microsoft SharePoint allow companies to house important documents completely digitally. This removes the need for paper, ink, cabinets, and even postal costs.
Use Modern Marketing Methods
Paid advertising campaigns have been at the forefront of many successful businesses for decades for a reason – they work. But that doesn’t mean that you can’t also balance this approach with more modern and often cheaper methods. Some of those that have been proven most effective are things like:
Consider email marketing, using a dedicated and built-out list of current and prospective customers or clients.
Try networking more if you want to bring clients into the fold.
Think about social media marketing. This increasingly popular option usually comes with minimal overhead costs but reaches a massive audience.
If you don’t feel comfortable introducing these methods, speak to someone who is.
Assess Vendors
If you work with one or a series of vendors for your supply of products or resources, consider whether there’s a better option available on the market. Look at what other vendor’s pricing levels are and consider making a switch if the dip in costs also doesn't impact the overall quality of your supplies.
First, it’s only fair to allow your vendor to negotiate fees. Approach them with evidence of cheaper rates elsewhere and see if they can bring their prices down at all. It might be the case that while they can’t exactly match their rivals, they can still give you a discount on your existing rate.
Image Credit: Luke Southern via Unsplash
Hire a Financial Expert (And Have Them Do an Audit)
While you’ll be able to work out where money can be saved to an extent on your own, having a thorough financial audit done on your business is always optimal. This is the only way you’ll know that every potential revenue stream has been heightened, with an expert narrowing in on every aspect of your company.
An accountant (who can even be brought on as a full-time staff member) is generally the best way to go here, as they’ll have forged a career in analyzing data by the numbers. Alternatively, a freelancer could run a full audit of your business for a one-time fee.
Optimize Time Management
As the old saying goes, time is money. And while that might sound a little cliché at this point, it’s definitely true that optimizing the time you spend working is the best way to ensure that you’re squeezing every penny possible. Some good plans to implement here include:
Use apps like Harvest to track how long you work on certain tasks.
Ensure meetings are capped at a specific time to avoid your team losing valuable working hours.
Make sure everyone has a clear and concise understanding of what they need to do on a given day.
Time management tools are hard to universally introduce across a company and are best for individuals to implement. As such, give your team the resources and tools necessary to optimize their time management skills.
Restructure Your Departments
While a more extreme step, restructuring departments allows you to combine and consolidate workflow channels to maximize efficiency and heighten profitability. This doesn’t mean letting anyone go, but rather moving your team around so that they’re working in the manner that best benefits the company.
Image Credit: Upgraded Points
Useful Links
If you’d like to learn more about what can be done to reduce interchange fees – or even just general expenses – in your business, browse this collection of useful secondary sources: