As a merchant, you can expect to pay a range of processing fees every time customers use their credit or debit cards to buy whatever you’re selling.
The full list of these credit card processing fees is extensive. The most important are interchange fees, which represent up to 90 percent of all processing-related charges that appear on your monthly merchant statement.What is an interchange fee? How does it work?
Credit Card Interchange Rates Defined
Interchange fees are transaction charges that your acquiring bank pays to the customer’s card-issuing bank every time plastic is used within your store. These fees are designed to help the card issuer cover processing costs, fraud protection and risk management.
Your acquiring bank passes on these charges to you — the merchant. In effect, interchange fees represent the “cost of doing business” if you accept credit cards. These charges are also known as the wholesale rate, since they are usually non-negotiable and don’t factor in additional markups.
If interchange fees are mostly non-negotiable, how are they determined? And who actually sets them?
How Credit Card Interchange Rates Are Calculated?
Interchange fees are set by the credit card associations (i.e., Visa, Mastercard), and they usually have two components:
- A percentage fee based on the transaction amount (e.g., 2 percent)
- A fixed fee that remains unchanged (e.g., $0.10)
As a result, the average interchange fee can range anywhere from 1 percent to 3 percent per sale. Note that this is in addition to what credit card associations charge on top of the interchange fee. Visa and Mastercard usually work off a tiny percentage (e.g., 0.12%) plus an extra fixed amount (e.g., $0.02).
How and When Do Interchange Fees Change?
Although the credit card associations set the interchange fees, these rates are not set in stone.
- New regulations can help make credit card processing more secure, which reduces fraud prevention costs for everyone within the industry.
- The same is true with technological security improvements such as the EMV card standard or data tokenization.
However, the credit card associations don’t have a whole lot of leeway when setting their rates. They have to strike the perfect balance:
- If interchange fees are too high, card-acquiring banks (and their merchants) will explore other payment options.
- If the fees are too low, issuing banks aren’t incentivized to send their customers new cards in the mail.
Moreover, there’s a lot of controversy surrounding interchange fees, especially among merchants who spend billions every year to cover these costs. Reforms like the Durbin Amendment are designed to make these charges more transparent and manageable.
For the foreseeable future, interchange fees will likely stick around. Since they’re mostly nonnegotiable, you can’t really shop for better rates.
What you can do, however, is make certain that the value you receive matches the money you’re paying. If interchange fees are the same everywhere, then choose a PCI-compliant processor that can provide you with the fraud management protection and advanced payment options you need to grow your business.