November 14, 2019

What Are Interchange Fees

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Between interchange and processor markup fees, everyone seems to get a cut of your business' profits. What exactly are interchange fees? Find out below.

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It costs money to accept card payments. When a customer pays with a credit or debit card, you'll be charged a transaction fee.

The majority of this cost is something called interchange fees. Unfortunately, they are mandatory and you have no control over the rates. The fees vary depending on different factors.

Learn how interchange fees work and how they're charged.

How Do Interchange Fees Work?

Interchange fees are charged by the credit card networks (Visa, Mastercard, Discover, and American Express) whenever a customer uses one of their cards. These fees are set by the card networks and cannot be negotiated.

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

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, the interchange fees for credit cards is 1.8% - 2.2%. The average interchange fee for debit cards is 0.3%. Each network charges its own fees based on the type of card you process.

How Are Interchange Fees Charged?

To accept credit card payments, you need to sign up for a card processing service. All the fees will be charged through the processor, including the interchange fee.

To put it simply, the processor pays the interchange fees to the issuing bank. You pay the processor for the service, including transaction fees, admin fees, equipment fees, and other costs.

The interchange fees are directly taken out before funds from your sales reach your bank account. You don't really have to worry about them, since you have no control over it.

What Factors Affect Interchange Fees?

Card networks charge various interchange fees based on the risk of the transactions. Some factors that determine the interchange fees are:

  • Debit vs Credit Card
    Debit cards have much lower interchange fees 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.

  • In-Person vs Online Transactions
    In-person swipe and chip transactions have the lowest interchange fees. Keyed-in and card-not-present transactions have the highest interchange fees because they pose a higher risk of fraud or theft.

  • AMEX Cards
    American Express has an entirely different fee schedule. Typically AMEX charges higher interchange fees than Visa and Mastercard.

Interchange vs. Processor Fees

When you take a credit card payment, your total transaction fee will consist of the interchange fee and the processor markup. These are two separate fees.

  • The interchange fee is determined by the card networks. They are non-negotiable.

  • The processor markup is the commission that your card processing provider makes for each transaction.

    This fee can be negotiated (especially if your business has heavy volume). When looking for a processor provider, this is the fee you should be comparing.

But sometimes, these fees are not so transparent. Some companies blend them into each other.

Next, let's go over some pricing structures you'll likely encounter.

Credit Card Processing Pricing Models

Below are a few examples of different credit card pricing models. Remember that interchange fees always stay the same, so it comes down to how the processor charges their markup.

Interchange Plus Pricing
This model adds the processor markup to the interchange fee. This is the most transparent model to compare the provider markup fees. It works for most types of businesses.

You'll see the pricing displayed as Interchange + 0.2% + $0.10 per transaction. The 0.2% + $0.10 is the processor markup for each transaction.

For example, let's say the interchange fee for an online transaction with a Visa Rewards credit card is 1.95% + $0.10, and the merchant provider markup is 0.2% + $0.10 on each transaction. On a $100 sale, it would cost you $2.05 + $0.30 for a total of $2.35.

Flat-rate Pricing
You'll pay one flat rate for credit card processing, no matter which type of card. In this case, you can't differentiate between the interchange fee and the markup.

This pricing model works best for new and low-volume businesses.

For example, Square's pricing is 2.60% + $0.10 per swiped transaction. On a $100 transaction, the total processing cost will be $2.70.

Subscription Pricing
You pay a flat monthly membership fee for the card processing service. Most providers also charge a small fixed markup for each transaction.

For example, the cost could be displayed as Interchange + $0.25 per transaction, plus a $30 monthly subscription fee.

This pricing model works well for large-volume businesses who have enough in sales to justify the monthly fee.

Tiered Pricing
This is the least transparent pricing model. It categories similar transactions into tiers and charges a flat rate for each. For example, rewards cards are charged at a higher tier.

This structure often has hidden fees that merchants don't recognize, making it an expensive method to process credit cards, and thus not recommended.

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.

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 interchange fees. No one else gets a say.

What you can negotiate are the fees charged by the processor. Fees such as the processor 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 compare the processor fees and choose the pricing model best for your business.

Shop around for the lowest markup or for providers 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.

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