November 14, 2019

What Are Interchange Fees

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Between interchange and credit card processor markup fees, everyone seems to get a cut of your business' profits. What can you expect to pay for interchange fees? Read on to find out.

How Do Interchange Fees Work?

Credit card networks, like Visa, Mastercard, Discover, and American Express, charge an interchange fee for every swipe, tap, or manually entered payment.

You'll see the interchange fees as a percentage plus a fixed dollar amount, like 1.65% plus $0.10. On a $50 transaction, the interchange fees would cost $0.93.

The issuing bank collects the interchange fee. Once that bank approves the transaction and forwards the funds to the merchant bank, the fee amount is deducted from the total.

Keep reading to learn how interchange fees work and how to keep other fees to a minimum.

What is the average interchange fee?
On average, expect to pay between 1.8% and 2.2% in interchange fees in addition to the processor's markup. Each network charges its own fees based on the type of card you process.

What Factors Affect Interchange Fees?

Card networks charge various interchange fees based on the complexity and risk of the transactions. While there are hundreds of factors that may affect interchange fees, here are some of the most common:

  • Type of Card
    Networks charge less for debit card and PIN-based transactions because there is a lower risk of fraud. Reward credit cards, on the other hand, have some of the highest interchange fees because the credit card company must cover the cost of the rewards.

  • Type of Business
    Some businesses and industries are riskier than others. High-risk businesses pay the highest interchange fees and may even have a hard time finding a payment processor to accept them.

  • Size of Business
    Larger businesses with more or higher transaction amounts may pay lower interchange fees than smaller ones.

  • Type of Transaction
    Swiped and chip transactions have the lowest interchange fees. Keyed-in or card-not-present transactions have the highest interchange fees because they pose a higher risk of fraud or theft.

Credit Card Pricing Models

Interchange fees are expressed as a percentage of the transaction, plus a fixed dollar amount. Keep in mind that this is just the fee for the card network—you may still owe fees to the merchant bank, payment processor, and payment gateway.

The exact amount you pay depends on your credit card processor's agreement. Below are a few examples of different credit card pricing models:

  • Interchange Plus Pricing
    This model adds a markup to the interchange fee. The markup goes to the payment processor. For example, you may be charged interchange + 0.2% plus $0.10 per transaction. A $50 transaction would cost $0.20 in addition to the interchange fees.

  • Flat-rate Pricing
    You'll pay one flat rate for credit card processing, which the credit card processor divides up among each entity. In this case, you can't differentiate between the interchange fee and the markup. Right now, Square's pricing is 2.75% per transaction, making the fee on a $50 transaction $1.38.

  • Subscription Pricing
    Merchants pay a monthly fee for the ability to accept credit cards. Most providers also charge a fixed markup for each transaction. In order to figure out the per-transaction fee, you'd divide $49 by the number of monthly transactions plus $0.25.

  • Tiered Pricing
    Payment processors charge a flat percentage for transactions, but they have different price tiers (qualified, mid-qualified, and non-qualified). Within that pricing, there are variations according to type of card, its popularity, and what it costs the network. For example, rewards cards are typically the most expensive because the network needs to cover the cost of the redeemed rewards.

Processors may define each tier differently, making it complicated to determine which tier your credit card transactions fall under.

How to Determine Interchange Fees

If you opt for any pricing model outside of interchange-plus pricing, you should know what interchange fees you may pay. All credit card networks publish their interchange fees, though they will vary based on the type of card and the type of transaction.

A swiped transaction, for example, costs less to process than a keyed-in transaction or a debit card transaction.

Without a breakdown from the processor, it can be difficult to differentiate between the interchange fee and processor's fee. Before you sign a contract, ask about the interchange fees to make an informed decision.

Who sets the interchange fees?
Visa, Mastercard, Discover, and American Express each set their own interchange fees, which can change at any time. On average, you can expect changes in April and October, but it's always worth double-checking the fees to determine which pricing model is best for your business.

Are Interchange Fees Negotiable?

You can haggle with a card processor to get some fees lowered, but you won't be able to touch the interchange fees. The card networks set the fees for the type of business, size of the business, type of card, and type of transaction. These fees remain the same for every business in each category.

What you can negotiate are the markup fees charged by the processor. Fees such as the markup percentage, flat-rate markup, add-on fees (PCI compliance, chargebacks, etc.), as well as the price of card processing equipment are all fair game.

Is it legal to pass credit card fees on to customers?
It is legal for merchants to charge customers for using a credit card with the exception of a few states. You may see the fee called a surcharge or convenience fee. Merchants may also set minimum purchase amounts before allowing the use of a credit card.

Bottom Line

Interchange fees are unavoidable when processing credit cards. While you can't shop around for better interchange rates, you can negotiate by looking elsewhere. Shop around for the lowest markup or for processors that offer the best value to help minimize your business' costs.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

More from CreditDonkey:

How to Accept Credit Card Payments

Online Credit Card Processing

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Accepting credit cards involves a lot more than swiping a card and receiving payment. What goes on behind the scenes is called payment processing. Learn how it works and how to choose the right vendor in our guide.

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