Interchange Fees Explained – All You Need to Know About This Fee

November 8, 2021/ Posted in Credit Card Processing

Accepting plastic is an almost obligatory practice for every merchant. However, it is not free. Commissions charged by banks and card companies can significantly burden your revenue. But, more importantly, do you know what you are actually paying for? Let’s take a look at interchange fees and see how they affect your costs and if there is a chance to lower them.

What Are Interchange Fees and How Do They Affect Your Business?

Every time cashless transactions take place at your POS, you’ll be charged credit card processing costs (along with POS fees). These costs include three different elements:

  • Acquirer processor fee – charged by the acquiring bank for collecting the funds from the customer,
  • Scheme rate – charged by card companies for using their network,
  • Interchange fee – charged by the customer’s bank.

The last item is also called a “swipe fee,” and it implies the commission the issuing bank (the customer’s bank) requires in return for accepting the risk and handling charges inherent to cashless transactions.

How Do Interchange Fees Actually Function and What Is the Connection Between Issuing and Acquiring Banks?

Once the merchant accepts plastic as a form of payment, the transaction process starts. This means that the money is not deposited into the merchant’s account immediately. On the contrary, some time will have to pass, usually up to five days. Here is what the whole procedure looks like in short:

  • The acquiring bank sets a deposit fund in the merchant account within two days,
  • Meanwhile, the issuing bank removes money from the customer’s account and takes the interchange fee,
  • After the interchange fee is charged, the issuing bank sends the rest of the money to the acquiring bank.

This is the first part of the process. Keep in mind that, at this point, the acquiring bank has received the amount of money lowered by the value of the fee. This means that the acquiring bank is in the red, and someone has to make up for it. Here comes the second part of the process:

  • As you may have concluded, the acquiring bank will take the difference from the merchant, plus a markup.
  • Now that the acquiring bank has all the necessary funds, the merchant will get their money deposited into their account.

In other words, credit card processing companies don’t only charge merchants for processing the transaction, but in the name of issuing and acquiring banks, too. And this is usually the highest expense when it comes to the merchant service rates a merchant can find on their merchant statements.

What Are Interchange and Scheme Fees?

Both interchange and scheme fees are paid at the moment when the payment takes place. However, they’re not the same. The scheme fee is paid to the issuing company, like Visa, MasterCard, or American Express. The interchange is paid to the customer’s bank since they are covering the risk of the transaction.

There are several parties interacting in the whole process of transferring money

How Are These Rates Determined?

Although banks take care of those rates, they are determined and revised by and depend exclusively on the network (MasterCard, Visa, American Express). Here are the main factors that determine how much a certain merchant pays.

The Card Type the Customer Uses Will Affect the Amount to Be Paid

Debit cards with PINs will always be charged less, since the risk of misuse is lower, and the payment is not postponed. On the other hand, accepting credit cards, especially those with reward programs, will be charged more.

The Size of the Business and the Industry Will Also Have an Impact

Different types of businesses are charged differently. This means that a supermarket and airline company won’t be charged the same, and the rate usually depends on the sale volume. The higher the sales volume, the lower the percentage to be paid.

Transaction Types – Card Present or Not-Present Payments

Another factor that can impact the amount is the way the transaction is done – is it a card-not-present transaction or not. The higher the safety issues are, especially when it comes to not-present transactions, the higher the fee.

There are many factors that influence the expenses a specific business pays

How Are Interchange Fees Calculated?

There are many complex variables that determine the total cost. Usually, a flat rate is used as a base, and then a percentage of total sales with taxes is added. In the US alone, billions of dollars are spent by merchants only to cover these expenses, so this is definitely not something to neglect when calculating the price of a product or service you offer, especially when you know that the average percentage equals around 2% of the purchase amount.

That’s why you should check in detail the deal credit card processing companies offer you and calculate it in the selling price. Although 2% doesn’t seem that much at first glance, when you calculate it on a yearly basis, it will become clear that it is not a neglectable sum. Especially when this is only one of few other expenses to cover related to cashless payment processing.

Keep in Mind That IFs Change as Often as Twice a Year!

The important thing to be aware of is that the interchange fee is not static. So always keep an eye on it and track how it affects selling prices and revenue. Visa and MasterCard, for example, make adjustments twice a year, usually in April and October. Since IFs represent 70-90% of all expenses paid by merchants, having a clear picture of how much they will cost you at any moment is definitely a good idea.

Always count all expenses into the selling price

Are Interchange Fees Negotiable?

Unfortunately, negotiations regarding this expense are not possible, since the processor you choose does not have any impact on the decision of the network. Simply put, if you want to accept plastic as a form of payment, you’ll have to agree to the terms and conditions of all relevant networks. Still, remember that for 67% of Americans, plastic is the preferred form of payment, so those expenses will definitely pay off in the long run.

What Are Credit Card Rates on Average Across the US?

As the latest data reveals, the average credit card processing fee across the US and all networks is 1.8%, while the same charge for debit cards equals around 0.3% per transaction. However, it is highly advised to take these numbers with a grain of salt, since every network has different rates. Also, the exact number depends on your line of work, region, and the type of card the customer used. So don’t expect the same rate for each transaction and provider.

What Is the Interchange Rate for Visa?

With more than 335 million cardholders in the USA, this card network is the most widely used one. The second is MasterCard with 200 million users, the third most commonly used is Discover that counts 51.4 million users. Last but not least is American Express with 47.5 million users. Here is how much they charge.

Visa Debit MasterCard Debit 
Debit (DR) Retail SwipeInterchange RateDebit (DR) Retail SwipeInterchange Rate
Visa DR CPS0.800% + 15¢MC DR 1.050% + 15¢
Visa DR CPS Regulated0.050% + 22¢MC DR Regulated0.050% + 22¢
Visa DR Prepaid1.510% + 15¢MC DR Prepaid1.050% + 15
Visa DR Business1.650% + 15¢
Visa DR Business Regulated0.050% + 22¢
Debit Retail KeyedInterchange RateDebit Retail KeyedInterchange Rate
Visa DR CPS1.650% + 15¢MC DR 1.600% + 15¢
Visa DR CPS Regulated0.050% + 22¢MC DR Regulated0.050% + 22¢
Visa DR Prepaid1.750% + 20¢MC DR Prepaid1.760% + 20¢
Visa DR Business2.450% + 10¢
Visa DR Business Regulated0.050% + 22¢
Visa Credit CardMaster Credit Card
Retail SwipeInterchange RateCredit SwipeInterchange Rate
Visa CPS Retail1.510% + 10¢MC Consumer1.580% + 10¢
Visa Rewards Traditional1.650% + 10¢MC Enhanced1.730% + 10¢
Visa Rewards Signature2.300% + 10¢MC World1.770% + 10¢
Visa Rewards Signature Preferred2.100% + 10¢MC World Elite2.300% + 10¢
Credit KeyedInterchange RateCredit KeyedInterchange Rate
Visa CPS Retail1.800% + 10¢MC Consumer1.890% + 10¢
Visa Rewards Traditional1.950% + 10¢MC Enhanced2.040% + 10¢
Visa Rewards Signature2.700% + 10¢MC World2.050% + 10¢
Visa Rewards Signature Preferred2.300% + 10¢MC World Elite2.950% + 10¢

Find a Reliable Credit Card Processing Service Provider to Get a Transparent Cost Scheme

Finding a reliable credit card processing company that will provide you with a transparent cost plan is of tremendous importance when growing a business. Paying for expenses you don’t understand will not only take a bunch of money from your pocket but could also prevent you from accurately calculating prices for your products and services. And these are the greatest mistakes business owners make.

For that reason, finding a merchant services provider ready to help you grow your business and provide you with the best credit card processing for small businesses should definitely be high on your to-do list.