What are interchange fees?
When a debit or credit card payment is processed, the funds are usually transferred from the issuing bank to the acquiring (merchant) bank. The card associations, such as MasterCard and Visa, facilitate this process, and for this service, they collect a fee from the merchant’s bank. This is what we refer to as interchange fees.
In other words, interchange fees are the transactional fees paid by the merchant’s bank account whenever a customer uses a debit or credit card to purchase a product or service from their store. The fee is paid to the issuing bank for processing the payment, to cover the costs and risks of fraud, handling, and bad debt involved in payment processing.
Interchange fees make up a huge percentage of the total costs involved in accepting card payments. Although they are collected by the credit card networks, interchange fees are paid out to the bank that issued the card. The typical interchange rate for debit card payment is around 0.3%, while that of credit card payments is 1.81%.
The card associations typically evaluate and determine the fees; they usually go to the issuing bank. The card association will then collect a separate fee known as the network fee, which is not considered a part of the interchange fee.
Transactional factors affecting interchange program rates and fees
There are hundreds of interchange rates that could apply to any given transaction. As such, each transaction is categorized based on given criteria to determine the applicable rate in a process known as interchange qualification. This qualification is applied on a per-transaction basis.
- Type of card: debit cards that have PINs generally have lower rates compared to credit cards, due to their relatively lower risk. Each card company charges a different rate for their cards. Reward cards have to pay for the perks that the cardholders enjoy, which then comes over higher interchange rates to the business. However, these perks might induce the cardholder to purchase even more.
- Size of business and its industry: the rates will vary based on the type of business. For instance, supermarkets tend to pay more than gas stations do. Moreover, the larger merchants tend to get lower rates because they often have enough “clout” to negotiate for better rates with the credit card companies and banks.
- Type of transaction: card-not-present transactions are considered more risky than card-present (point-of-sale) transactions since the chip cannot be scanned physically, PIN entered, or signature taken. Online orders and mail order telephone order transactions are both classified as card-not-present, and they usually require a higher interchange rate.
- Method of processing: as already mentioned, card-present transactions require a lower rate than the card-not-present transactions.
- Merchant category code: certain merchant category codes have specific interchange rates
- Data submitted along with the transaction: overall, the more secure the transaction is, the lower the rate. As such, data with regards to the card security codes or AVS results will generally qualify the transaction for a lower rate.
- Card owner: the interchange rate will also be affected by the cardholder –whether it’s an individual, municipal agency, corporation, or a small business.
How interchange fees are calculated?
The card-issuing banks, the merchant’s bank, payment gateways, card networks, and payment processors will all charge a percentage-based fee on each transaction processed. These fees often comes as a single, bundled amount on the monthly bill that your payment processors gives you.
Interchange fees are determined by a range of different, complex variables. In order to simplify the cost for the merchants, the credit card companies usually compute the interchange into a flat rate along with a percentage of the total sales, which is inclusive of taxes.
For instance, you may be offered 1.8% + $0.12 per sale. This helps make sure that the issuer gets an optimal payment amount, regardless if the original transaction was for a low or high dollar amount.
In the United States alone, billions of dollars are paid out annually by merchants to cover these fees, with the average interchange rate amounting to about 2% of the purchase amount.
Interchange rates are not static
Due to the costs of moving money, the value of money in terms of the relative risks involved and the current interest rates, credit card companies regularly adjust their interchange rates accordingly. For example, MasterCard and Visa revise their rates twice a year, typically in April and October.
Although there are other fees that the merchants have to pay for the privilege of accepting debit and credit cards transactions, the interchange fees are usually the largest; accounting for 70% to 90% of the fees they pay to their banks.
Average interchange fees for card brands
Visa and MasterCard
The biggest card networks in the world, Visa and MasterCard, are companies whose interchange fees merchants will often face. In both companies, the interchange rate will largely depend on the kind of card used in the transaction.
As mentioned earlier, debit cards usually have a much lower interchange rate than credit cards, while the high-end reward cards attract higher interchange fees compared to their non-rewards counterparts. The interchange fees for both MasterCard and Visa will also vary based on the type of transaction.
- Debit Assessment: 0.13%
- Credit Assessment: 0.13%
- Acquirer Processing Fee (Credit): $0.0195
- Acquirer Processing Fee (Debit): $0.0155
- Credit Voucher Fee (Credit): $0.0195
- Credit Voucher Fee (Debit): $0.0155
- Credit Voucher Fee (Base II): Credit $0.0195, Debit $0.0155
- System File Transmission Fee: $0.0018
- Transaction Integrity Fee (TIF): $0.10
- Fixed Acquirer Network Fee (FANF): Varies
- Settlement Network Access Fee: $0.0025
- Kilobyte (KB) Access Fee: $0.0047
- Misuse of Authorization Fee: $0.09
- Zero Floor Limit Fee: $0.20
- Zero Dollar Verification Fee: $0.025
- International Service Assessment Fee (ISA): 0.80%
- International Acquirer Fee: 0.45%
- Acquirer Brand Volume: 0.13% to 0.14%
- Digital Enablement Fee: 0.01%
- Cross Border Fee: 0.60%
- Global Acquirer Program Support Fee: 0.85%
- Network Access and Brand Usage Fee: $0.0195
- Acquirer License Fee: Varies
- Processing Integrity Fee (Card-Not-Present, Card Present, No Reversal transactions): $0.055
- Processing Integrity Fee (Undefined Authorization and Pre-Authorization): $0.045.
- Processing Integrity Fee: Final Authorization: 0.25% (Minimum $0.04)
- Address Verification Fee – Card-Not-Present: $0.01
- Address Verification Fee – Card-Present: $0.005
- Account Status Inquiry Service Fee – Interregional: $0.03
- Account Status Inquiry Service Fee – Intraregional: $0.025
- Merchant Location Fee: $15 p.a (merchant) and $3 p.a (facilitators)
As of 2018, Visa is still the dominant market player with almost 53% of the market share, while MasterCard has about 22% of the market.
The interchange fees for Discover are similar to MasterCard and Visa. The major distinction between them is that they distinguish between their one-off payment and the recurring payments. If your business charges a recurrent monthly fee, you will pay a lower interchange fee overall than you would for a one-off equivalent.
- Debit: 1.02% + $0.16
- Debit Regulated: 0.05% + $0.22
- Debit Keyed: 1.62% + $0.16
- Rewards: 1.71% + $0.10
- Premium: 1.71% + $0.10
- Premium Plus: 2.1% + $0.10
- Commercial: 2.300% + $0.10
- Recurring Consumer: 1.200% + $0.05
- Debit Recurring: 1.2% + $0.05
- Debit Recurring Regulated: 0.050% + $0.22
- Recurring Rewards: 1.2% + $0.05
- Recurring Premium: 1.2% + $0.05
- Recurring Premium Plus: 1.8% + $0.05
- Recurring Commercial: 2.3% + $0.10
American Express doesn’t have interchange fees; instead, it imposes a discount rate. Although they sound different, they generally have the same functionality. The discount rate charged by Amex is comprised of a fixed transaction fee plus a percentage.
American Express charges fees based on the kind of business being serviced, which is unlike Visa, Discover, and MasterCard. They have some qualifying aspects that determine the interchange fees, such as whether or not the card is considered premium.
- Telecommunications, mail order & internet: 3.5%
- Retail: 2.89% + $0.1
- Supermarket: 2.3%
- Independent Gas Stations: 3.25%
- Tuition: 2.4%
- Office-based Doctor, Orthodontist, Dentist,: 2.55%
- Restaurant: 3.5% + $0.05
- Wholesale, Services & All Other: 2.89% + $0.15
- Healthcare (non-office-based): 2.89% + $0.15
Conventionally, American Express features more premium credit cards in its portfolio, which naturally leads to higher fees. While the fees are higher by themselves, the company has card members that spend more than the average MasterCard or Visa user. So, while the interchange fees always tend to be higher with Amex compared to its competitors, many merchants readily accept their cards because it enables them to do business with high-spender cardholders.
Pricing Models Explained
Interchange Plus Pricing
When a customer submits their payment information, a series of events occur (within seconds) to decide whether the payment is approved or declined. This process involves a complex network of systems, security measures, and people – enabling ecommerce to flow seamlessly.
- The customer purchases something from a store. To makes things easy, let’s assume the product costs $100. The transaction details are then submitted to the issuing bank for approval.
- The issuing bank then approves the purchase and authorizes the release of funds, less the interchange fee, which are sent to the payment processor.
- The payment processor then pays the merchant and deducts their processing fee in the process.
- The final amount that lands in your merchant account is the balance of your $100, minus the acquirer and interchange fee.
In this example, the amount that is charged to the customer in full is $100. Assuming an interchange rate of 1.5% + 0.5%, you will receive $98 in your merchant account, and the summary of the fees applied will be shown in your statement.
The negotiable component in this scenario is the “plus” element, which is the fee paid to the payment processor or acquirer. Depending on your processing volume, there might be some room for negotiation with your provider.
The key benefits of interchange plus pricing model is the amount of transparency it has. Every time you accept a card transaction, you will be fully aware of the fees and charges made, so it’s clear where your money is going between the card issuers and your provider.
To get interchange plus pricing, the merchant has to undergo underwriting for a proper merchant account. This will take time, and is the reason why new businesses tend to forego this and settle for a payment facilitator.
Nonetheless, with the interchange plus model, businesses can enjoy interchange refunds when a customer returns a product. This can really add up for the larger businesses, and is exclusive to this pricing model.
Tiered Pricing Model
In this model, the merchants get a preset charge, which ideally uncouples the fee from the payment processor and the issuing bank. Fixed price models allow the provider to group the processing volumes into different tiers, setting a rate against each of the tiers. Based on the average processing volume of your business per month, your account will fit into one of the tiered pricing groups.
In general, a payment processor might have anywhere between two to five levels or tiers for their pricing plans, which should accommodate all different kinds of merchants and their unique needs. In most cases, there are three basic tiers: non-qualified, mid-qualified, and qualified. The tier a transaction falls into is determined by a number of criteria set by the processor.
These criteria typically include things like card-present and card-not-present transactions, the category the items purchased fall into, and whether the transaction was processed the same day it occurred.
Tiered pricing might initially seem attractive, since it has simplified pricing, which makes the monthly statement easier to decipher. Although the numbers are much easier to understand, they are often much higher than you’d expect. Tiered pricing makes it impossible to determine how much of a processing fee goes to the credit card brands, the issuing bank, and how much goes to the merchant account provider. This model is also vulnerable to some deceptive marketing gimmicks, where the provider advertises the lowest possible rates, usually the qualified tier. However, most transactions aren’t qualified, resulting in much higher rates.
Flat Rate Pricing
Payment facilitators have a flat rate pricing model. If you’re with PayPal, Square, or Stripe, this is most likely your plan.
The pricing model is simple; each transaction gets the same processing cost. However, to make this work, the provider has to cover both the low-cost and high-cost scenarios, which means that they will ultimately charge more for the kind of transactions that would cost less on different plans.
Flat-rate pricing is comprised of the interchange along with a blend of fees to produce a consistent rate. Although it might seem simple, it’s impossible to determine the kind of cards you’ve taken with flat pricing. For business owners, getting good discounts for the low-cost cards is important. For example, despite debit cards having lower interchange fees, the flat rate pricing means that you’ll end up paying more for these kinds of transactions.
Newer businesses turn to payment facilitators primarily due to the ease of access, and might generally prefer the simplicity of flat rate pricing, especially if they have a low processing volume. As businesses grow and generate more credit card sales, the improved transparency and access to low-cost options start to make more financial sense.
How to get a good rate with credit card processing companies
Some of the factors that determine the interchange rates are usually beyond merchant’s control. However, others can be manipulated by the merchant to get better rates. In fact, it’s important to optimize these factors to ensure that you’re getting the best deal.
To optimize your interchange rate as a business owner, you need to:
- Settle the transaction of a completed sale within 3 days
- Use a reputable Address Verification Service
- Include the order number and the authorization ID in the settlement
- Ship the product within 7 days of authorization
Although it’s impossible to completely avoid interchange rates, optimizing the transaction whenever possible is a surefire way to reduce your expenses.