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What Are Interchange Fees, And How Do They Affect My Business?

An interchange fee is a special type of charge that a merchant's bank pays to the card-issuing bank every time a customer purchases a good or service with a  credit card.

This special fee is essentially the price you pay for hanging a Visa or MasterCard logo in the window so that you can attract customers who enjoy the convenience of shopping with plastic. Other fees associated with accepting credit cards do exist, but these interchange fees represent the largest component of merchant account expenses.

Are All Interchange Fees the Same?

Usually set by the  card brands , these interchange fees vary depending on a host of factors, including:

  • The type of business
  • The card brand
  • The type of card
  • The size of the transaction
  • Whether the card is present or not

Moreover, most interchange fees are calculated using a percentage of the ticket price plus a flat fee — with the average amount ranging between 1 percent and 3 percent of the total transactional value.

Where you fall on this spectrum actually depends more on the types of cards your customers use. Premium reward credit cards typically carry the highest fees since issuing banks must charge more to provide their own customers with points and perks. Next come standard no-frill credit cards, then debit and signature — and finally, debit and PIN.

In addition, card-not-present transactions carry higher fees than if that same card is used at an in-store POS terminal. In other words, online shopping and phone orders cost merchants more than brick-and-mortar purchases.

Which Merchants Are Affected by Interchange Fees?

Every business that accepts credit cards is subject to interchange fees — even if those charges go by a different name. When they were first introduced, these charges made a lot of sense since processing credit cards required a great deal of human involvement. Today, however, these fees are mostly handled electronically, prompting many to question their value.

In the U.S. alone, interchange fees cost acquiring banks (and merchants) billions of dollars annually. Smaller merchants pay a disproportionate amount of these costs since they don't have the size or volume to negotiate lower rates.

In recent years, both businesses and regulators have begun closely examining interchange rate structures to look for instances of abuse. In 2005, several trade associations launched a class-action lawsuit against Visa and MasterCard accusing them of price fixing and antitrust manipulation. The suit was finally settled for $7.25 billion.

In the meantime, however, these charges are here to stay, and if your company regularly accepts credit cards, you should factor these fees into the cost of doing business.  

Although some merchants try to control these expenses by only accepting debit and PIN cards (or no plastic at all), there is a cost when you remove payment options. It becomes harder to attract and convert customers who prefer the convenience of shopping with traditional credit cards.  In addition, your customers may not spend as much if they don’t have the option to pay with plastic.  Merchants enjoy an increase in the number of transactions they process, a larger ticket amount on purchases, and the convenience of having their funds automatically deposited right into their business checking account.

To learn more about interchange fees and the costs of processing electronic payments for your business, contact our payment support team today.

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