Credit Card Interchange Fees and Rates Explained

Credit card processing allows businesses to expand their portfolio of payment channels, but that does not come without a cost. Essentially, to accept credit card payments, payment processors, issuers, acquirers, and credit card companies require merchants to pay specified rates and fees. Without proper knowledge of these costs, merchants can incur very hefty prices to offset interchange fees.

Here is a quick guide to credit card interchange fees and rates.

What is an Interchange Fee?

An interchange fee, also known as an interchange rate, is a credit card processing fee charged by merchant service providers like Paymentcloud and banks for every card payment completed. Generally, interchange fees account for the largest segment of all online payment processing fees.

Typically, credit card companies attach a price to every card transaction, with the rates updated annually or semi-annually. This means that interchange fees are the same across all payment processors. The predetermined interchange fee is paid to the issuing bank, and the rate is generally not negotiable.

What are the Average Interchange Rates?

Since the rate is paid per transaction, the calculation of interchange fees is often accumulated against the merchant’s trading volume. However, the interchange rate per transaction varies with different card networks.

In a nutshell, the average interchange rates for the 4 major card networks are broken down as follows.

Card Network Average Interchange rate

• Discover 1.56% to 2.3% + $0.10
• Mastercard 1.65% to 2.7% + $0.10
• American Express 1.80% to 3.25% +$0.10
• Visa 1.29% to 2.5% + $0.10

Note that interchange rates are updated periodically and may vary from time to time. Additionally, interchange fees charged for debit card payments are lower than credit card transactions, offering a less costly option for merchants.

What Factors Influence the Interchange Rates?

Generally, the interchange rate is calculated as a sum of a specified transaction fee and a percentage of the sale amount. This applied percentage is determined by the card network. However, interchange rates tend to vary with a range of other factors, such as transaction type, card type, and merchant type.

Consumer/Commercial Card

Cards linked to corporates and commercial entities typically bear higher interchange fees than cards associated with individual consumers. For instance, a service procured by an individual using a Visa card would cost the user about 1.75% + $0.10. The same service purchased using a corporate Visa card would cost the merchant about 2.65% + $0.10.

Region Classification

Transactions initiated domestically carry lower interchange rates than cross-border purchases. In this case, the regionality of transactions weighs down on the issuing bank. Where the issuer is located outside the borders of the country in which the business operates, the interchange rates are relatively higher.

Business Classification (MCC)

In credit card processing, every business is classified into categories using a Merchant Category Code. As a result, the interchange fees charged against your business depend on the category under which your brand falls. For instance, large retailers may pay lower fees than micro supermarkets.

Card-Present/Card-Not-Present Transactions

Face-to-face transactions, popularly known as card-present transactions, attract lower interchange rates than card-not-present purchases. The assumption is that card-related risks are slightly lower when the cardholder is making a purchase physically. As a result, the cardholder’s absence is treated a high-potential exposure to fraud, attracting higher interchange fees.

Card Type

Typically, credit card processing comes with higher interchange fees than debit card purchases. This is because credit card purchases expose a higher risk of credit defaulting, an undertaking most issuers pursue to mitigate. In most cases, high interchange rates are adopted as the primary way of limiting this risk.

Should You Avoid Card Payments?

While businesses can operate without card payments, the overall impact that comes with accepting payments through rigid channels can be quite expensive. Today, an increasing number of consumers prefer credit card payments over cash, and credit card processing is the means to fulfilling this preference.

Here are more reasons why you should not avoid card payments.

Increased Cashflow

Credit card payments are a great way to improve your cash flow experiences. Interestingly, receiving your funds from credit card processing systems takes less time than methods like checks and Automated Clearing Houses (ACHs).

Sufficient Records

Payment disputes are common in business, and online payment processing makes it easy to keep a seamless digital record of all your transactions.

How to Reduce Interchange Fees

Undoubtedly, interchange rates are non-negotiable. However, there are measures that you can deploy to minimize associated charges and earn a better interchange rate category. These include:

Interchange Optimization

This is the use of best market practices to adjust transaction conditions that trigger high interchange rates. Such practices include daily settlement of card transactions, limiting manual keyed-in transactions, and PCI compliance.

Beware of Interchange Padding

Some payment processors are notorious for secretly adding costs to your interchange fees. Scanning and highlighting ‘padded’ fees significantly lower your overall credit card processing fees.

Verify Your Merchant Code

Merchant Category Codes are key determiners of the amount you will pay in interchange fees. Ensure you are categorized with the right code to minimize unnecessary interchange costs.

Conclusion

Interchange fees are part of the credit card processing system, and every merchant has to pay their dues. Generally, interchange fees are calculated per transaction, a value often influenced by variables such as card type, merchant type, category codes, and regionality. It is advisable to exercise due diligence to keep interchange fees under reasonable levels.