Edited by: Nick Ellis
& Keri Stooksbury
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Behind the scenes of every credit card transaction are processes and payment infrastructures that come with costs — and credit card networks charge businesses interchange fees for these costs.
Credit card interchange rates affect every credit card payment you accept as a business, so it pays to know about these fees, how they affect credit card payments, and how your business can manage them effectively. Strategies for lowering your interchange fees can help your bottom line, too.
Learn what credit card interchange fees are, how they work, and why interchange rates matter to any business that accepts credit card payments.
Also known as interchange rates, swipe fees, or credit card interchange fees, interchange fees are part of the fees businesses pay to accept credit card payments. Any time a customer uses a credit or debit card to make a purchase, the business accepting the payment must pay an interchange fee to facilitate the transaction.
Card networks, such as Visa, Mastercard, American Express, and Discover, charge these fees to cover the cost of processing and managing payment infrastructure.
Acquiring banks calculate interchange rates and factor in these fees when charging their merchant clients for processing credit card payments.
The interchange fee is typically a small percentage of the transaction value, a flat fee, or a combination of a percentage and a flat fee. Credit card interchange rates often range from 1% to 3% of the transaction but depend on various factors.
For merchants relying heavily on credit card transactions, that 1% to 3% fee can add up and eat into operational costs. You should clearly understand interchange fees and devise a strategy to manage them so your business doesn’t pay more than necessary to accept credit card payments.
You may be able to optimize payment acceptance methods and implement fraud-prevention measures to reduce interchange rates. For example, your business might encourage customers to use debit cards instead of credit cards, as interchange fees are typically lower for transactions made with debit cards as opposed to credit cards.
When a customer makes a purchase using a credit or debit card, the transaction goes through a series of steps:
Performing all these steps comes with costs, which is where interchange fees come in. These fees cover the costs of processing transactions, mitigating fraud risks, maintaining the payment infrastructure, and providing customer rewards programs.
Interchange fees are affected by factors determining the overall cost of processing credit card transactions:
Each credit card network charges unique interchange rates. Here’s an overview of the typical credit card interchange rates for Mastercard, Visa, Discover, and American Express:
Credit cards typically have higher interchange fees than debit or prepaid cards because credit cards often come with additional benefits and rewards programs, partly funded by the interchange fees.
Payment processors, also known as merchant service providers, facilitate card payments between merchants, card networks, and issuing banks. Processors serve as intermediaries, managing the data associated with credit and debit card transactions.
Usually, a merchant’s payment processor collects the interchange, assessment, and processing fees associated with accepting card payments. The processor may deduct fees off the top before you receive payouts, or you may pay fees afterward in a lump sum.
When you choose a payment processor, consider the nature and size of your business, transaction volume, specific industry requirements, and the level of customer support needed. Additionally, analyze the interchange fee structures, pricing transparency, additional services, and integration capabilities to determine the best fit for your business.Hot Tip:
Some payment processors, such as Square and Stripe, combine point-of-sale systems, hardware, and payment processing.
Interchange fees and processing fees are 2 different components of credit card acceptance costs.
Interchange fees are non-negotiable, but processing fees are usually negotiable. Interchange fees are generally higher in value and are determined by varying factors, some of which merchants may not have much control over. In contrast, processing fees are typically a smaller percentage of the transaction value but can still add up over time.
While interchange fees are non-negotiable, merchants can explore options for obtaining the best possible processing rates by comparing offerings from different acquiring banks or payment processors. Negotiating competitive processing fees can help merchants optimize their cost structure and improve profitability.
Ultimately, consumers pay interchange fees, but merchants get the bill.
Interchange fees are paid by acquiring banks to issuing banks, but it doesn’t stop there. Acquiring banks and payment processors charge merchants for interchange fees — and then merchants charge consumers, either in the overall cost of products and services or as a credit card use fee.
The Federal Reserve regulates credit card interchange fees to ensure fairness and transparency in the payment card industry. It also has the authority to regulate and set standards for debit card interchange fees under the Durbin Amendment, which was introduced as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Signed into law in 2010, the Dodd-Frank Act introduced comprehensive financial regulatory reforms to enhance consumer protection, promote market stability, improve transparency in financial transactions, and increase accountability of financial institutions, promoting fair practices in the payment card industry. The Act established regulatory bodies such as the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC) to oversee and regulate various aspects of the financial industry, including interchange fees.
The Durbin Amendment of the Dodd-Frank Act put caps on debit card interchange fees for transactions issued by banks with more than $10 billion in assets and requires that debit card interchange fees be reasonable and proportional to the processing cost. And businesses may set a minimum credit card charge of up to $10.
It also promotes competition and transparency among card networks, mandating that merchants can choose between at least 2 unaffiliated payment card network options for transactions.
For businesses, these regulations mean cost savings in interchange fees and negotiation opportunities with the ability to choose preferred payment card networks. However, businesses must ensure compliance with the regulations imposed by the Dodd-Frank Act and other applicable legislation, which may involve adjusting payment processing systems and procedures.
In addition to the Federal Reserve, international organizations oversee interchange fees and related regulations. For example, the European Union has implemented regulations such as the Interchange Fee Regulation (IFR), which caps interchange fees for certain types of card transactions within the E.U.
Each country has its own credit card payment system and regulations, so interchange fees can vary for businesses operating internationally and making cross-border transactions.
A transaction involving cards issued in one country and used in another is considered a cross-border transaction. Cross-border transactions often have higher interchange fees due to increased risk, currency conversion, and the involvement of multiple payment networks and regulatory frameworks.
For example, suppose a U.S.-based merchant accepts a payment from a customer using a European credit card. In that case, the interchange fee may be higher than a domestic transaction due to the cross-border nature of the payment. The interchange fee will depend on the agreements between the card networks, acquiring banks, and issuing banks involved in the transaction.
If your business frequently accepts international payments, you might prefer to use international payment service providers. Or, you may want to consult with financial experts to optimize your cross-border payment processes to minimize interchange fees on international transactions.
Some countries have strict regulations that cap interchange fees, while others have more market-driven fee structures. For example, the European Union has implemented regulations to harmonize interchange fees within the member states. The Interchange Fee Regulation (IFR) caps interchange fees for card-based transactions within the European Economic Area.
While card networks set interchange fees and can’t be directly negotiated, there are strategies you can implement to optimize your payment processes and potentially reduce your overall interchange costs. Use these strategies to lower interchange fees with interchange optimization:
You can potentially reduce your interchange fees by implementing these strategies and staying proactive in managing your payment processes. Consult with payment processors, financial advisors, or industry experts to optimize your interchange costs while maintaining compliance with card network regulations.
Interchange fees play a crucial role in the credit card payment ecosystem and significantly impact both businesses and consumers.
Businesses should clearly understand interchange fees and develop effective strategies to manage and reduce them, particularly for businesses heavily reliant on credit card transactions.
You can potentially lower interchange fees and improve your bottom line by adopting strategies such as optimizing payment acceptance methods and implementing fraud prevention measures.
If your business accepts debit or credit cards, avoiding interchange fees is impossible. The only way to avoid interchange fees is to operate a cash-only business, accepting only cash or check and no card payments. You can reduce interchange fees by encouraging customers to use lower-cost payment methods such as debit cards or ACH transfers and optimizing your payment processing and card network compliance to reduce interchange fees.
Card networks such as Visa, Mastercard, Discover, and American Express control interchange fees each network charges. They establish the interchange rates merchants pay to accept credit cards in each network. Some interchange fees, such as debit card interchange fees, are subject to regulatory oversight by the federal government.
Credit card interchange fees vary based on factors including the card network, transaction type, card type, risk level, merchant industry, transaction amount, and acceptance method.
No, not all businesses pay the same credit card interchange rates. These rates are based on various factors that aren’t the same across all businesses, so what your business pays to process credit and debit cards isn’t necessarily the same as another business down the street.
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