How Much Is The Interchange Fee
Though the interchange fee is paid to the issuing bank, the rate is set by the card networks. The interchange fee is made up of a percentage of the transaction value plus a fixed fee. There is no standard rate.;
Instead, individual card networks take into account a range of criteria to determine the interchange fee, including:
- The type of card;
- How the payment was made
- The security protocols used ;
- What sector the merchant is operating in
- The country where the transaction has taken place;
- Where the card was issued. For example, if the acquiring bank and the issuing bank are in different countries or jurisdictions, a higher interchange fee will reflect the additional complexity of the payment process.
The volume of transactions is also considered, with big merchants expecting to negotiate lower interchange fees. In other words, there are different interchange fees depending on what is being sold, where, how, by who, and to whom. There are actually hundreds of mini fees that make up the overall interchange fee for each transaction. So transparency is an issue.;
Whats more, interchange fees change. Visa and Mastercard update their interchange fees twice a year in April and October.
Interchange Optimization Can Lower Cross Border Fees
It is possible to reduce or eliminate your cross border fees by optimizing your payments infrastructure to utilize local processing in each region in which you have a significant amount of customers.
Cross border eCommerce is a specialized area of the;payments industry, which focuses on interchange optimization for global businesses.
Its something that many businesses dont consider but can save a lot of money. Some credit card networks provide interchange optimization, which is the process of helping your business to eliminate cross border fees and qualify for the lowest interchange rates in countries where you attract a lot of customers.
This requires establishing local merchant accounts in each region, which will require you to maintain a business presence in each of those regions.
Doing so will provide your business with the lowest possible interchange rate for each transaction that your business processes. However, because it can only be done if your business has, or is willing to maintain a business presence in different countries, it would usually only make sense to do this where you have;at least $100,000 per month in sales. .
For example, if your business had a lot of sales in the UK, but you operated a US-based business, it might make sense to set up a local company and to work towards making sure your sales in the UK qualify for domestic UK interchange.
What Is An Interchange Rate
An interchange rate is a fee that a merchant is required to pay with every credit card and debit card transaction. Also known as “swipe fees,” financial companies charge this fee in return for accepting the credit risk and handling charges inherent in credit card transactions.
Interchange rates are set by the credit card companies and revised periodically. These rates vary, not only by network , but also the type of transaction, such as supermarket, airline, etc. Of note, debit card transactions had an average rate of 0.78% in 2019.
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What Parties Are Involved In Credit Card Processing
When your customers swipe their credit card or insert it into the chip reader, a lot goes on behind the scenes. It’s not just a transaction between your store and the credit card company. There are many parties at work, including:
- Card issuer: This is the credit card company – the one that provides the credit card to consumers, such as Chase or Bank of America .
The banks work with Visa and Mastercard to process the transactions. The interchange fee goes to these banks and credit card companies to cover their operations and risk.
A few common examples are Square, Stripe, and Payline Data.
The issuer’s bank approves or denies the request and the result is sent back to the merchant. This all happens in the matter of a few seconds .
Are Flat Rate Or Interchange
These are the two most popular pricing models. Wondering whether you should choose a flat rate or interchange plus provider?
Unfortunately, the answer is different for each business. It depends on your total monthly transactions as well as the individual transaction amount. That’s not all, though. You also have to figure in any monthly merchant service fee or other add-on fees merchant services provider charge.
In general, interchange plus works for most businesses. Flat fee pricing is usually better for low-volume businesses or those with smaller average ticket size.
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How The Payment Processor Determines Credit Card Processing Fees
Each credit card processor assesses accounts differently based on the type of business and processing history. The average credit card processing fees a merchant pays will actually vary. There are many factors that go into determining the credit card processing fees for a merchant.
More more goes into deciding merchants transaction feesthan you may think. Three different parties participate in the process. They are:
- : Often called the issuer because its the entity that issues the credit card. Examples include Citibank, Chase, Capital One, Wells Fargo, and Bank of America.
- These companies are partners of the credit card companies. The most widely known are Visa and Mastercard.
- Payment Processor The company that securely carries out a merchants credit card transactions.
Each of these parties determines the transaction fees that they will charge for their involvement in a credit card transaction.
The 3 Types Of Credit Card Fees
Your processor is responsible for collecting all the various fees your business is charged for taking credit cards, but only a small portion of those fees actually go to your processor.;
There are three types of credit card fees:
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How Are Interchange Fees Calculated
Since interest rates and market conditions change often, interchange fees are adjusted on a regular basis. For instance, card issuers like Visa and Mastercard change their rates in April and October every year. Other credit card companies may set their fees annually. So the interchange fee you may pay this month may be different than the fee youre responsible for next year.;
It Pays To Learn How To Reduce Payment Card Interchange Fees
Weve probably all done business with merchants most likely small, local ones that add 2 or 3 percent to their payment card transactions to cover some of the cost of credit and debit card processing. They often tack on that charge visibly as a separate line item, rather than wrapping it into their overall pricing.
Those fees, while necessary to the operations and financial health of banks, payment processors, and card networks, can cut into the thin profit margins typical to many small businesses. To offer the convenience of card payments, they choose to charge a little bit more. Some refuse certain cards altogether based on their fees.
However, most businesses recognize the importance of offering their customers the option to pay with a card, and depending on the structure of payment processing fees, businesses of all sizes may be able to manage those costs by optimizing their payment card interchange fees. Below we discuss some of the specific measures that all businesses can take to save on fees, but lets start with a strategy for businesses that conduct considerable B2B and B2G transactions.
Thats why it literally pays to learn about and apply interchange optimization to your card transactions.
Interchange Fees Explained
First, lets review the main parties to credit and debit card transactions, how they interact, and where the interchange fee fits in.
The key players in card transactions include:
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How Is The Interchange Fee Calculated
Each card network maintains its own interchange rates, traditionally updated twice a year . Detailed information regarding the current interchange rates and fees for Visa and Mastercard are available online; here is more information about the Visa and Mastercard interchange fees.
Interchange fees are usually calculated as a percentage of the sale plus a fixed fee . This ensures the issuer receives the optimal payment, even if the original transaction was for a high or low dollar amount.
The exact percentage and formula will vary. The process of categorizing a transaction to determine the applicable rate is called interchange qualification. Qualification calculations happen on a per-transaction basis, and the applicable interchange rate will depend on a range of factors, such as:
Cards issued by banks offering rewards have higher interchange rates.
The interchange rate is influenced by the card owner, whether that is an individual, business, corporation, or municipal agency.
Visa announced it will offer lower rates to merchants who opt to tokenize transactions using a Visa smart-payment token, starting in October 2021.
Cross Border Fees Are An Additional Cost To Be Aware Of
Its beyond the intended scope of this article to speak too much about cross border fees.
You can find more information in;this blog post;or at a YouTube video about cross border fees.
What you need to know, at a high level, is that there are significant processing costs that are incurred when a transaction crosses a border.
For example, if a Canadian based merchant sells to a UK based cardholder, a cross border fee will be applied to that transaction. For a quick point of reference, the cross border fee for that a Visa transaction would be 0.80%, or 0.40%, depending on the transaction currency. Mastercard has recently increased the cross border fee to 1% in November of 2018. The takeaway point from this is that cross border fees can be a significant cost to your business.
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How Important Is Simplicity
Credit card processing fees are confusing, so its not surprising that some providers such as Stripe or Square promote themselves as a simpler solution, charging a monthly flat fee for credit card processing services.
Cunningham said its usually just small businesses with transactions that average $10 or less, such as coffee shops, that benefit from working with providers such as Square or Stripe.
Businesses with larger transactions will generally pay more each month.
In some cases, merchants dont mind that. They are OK with paying more for simplicity, Cunningham said. That is fine, but you need to understand this. Dont confuse simplicity with competitiveness.
What Is An Interchange Fee
Whenever a credit card or debit card transaction is processed, funds are transferred from the issuing bank to the acquiring bank, sometimes called the merchant bank. Card associations, like Visa and Mastercard, facilitate the process. For the service they provide, associations collect a fee from the acquiring bank this is what’s known as the interchange fees. Typically, the interchange fee is comprised of a percentage of the total transaction plus some fixed amount . While the card associations assess and determine the fees, they are paid to the issuing bank. The card associations instead collect a separate fee called the network fee, though this is not considered to be a part of the interchange. The network fee is usually far smaller, averaging somewhere around 0.05%.
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The Cost Of Accepting Credit Card Payments
When your business processes credit card payments, there will be multiple fees taken out of the total transaction amount. The non-negotiable credit card network fees can vary:
- From 1.15% + $0.05 to 2.50% + $0.10 in interchange fees, although this could be as high as 3.30% + $0.10 if the client uses an American Express card.
- From 0.13% to 0.15% in assessment fees.
The most important factors in what your business pays will be its MCC and the type of credit card the customer uses.
Next, your payment processor will take its cut, unless you’ve chosen a processor that charges one flat rate to cover all the fees in the transaction.
With credit cards growing more and more popular, the typical merchant doesn’t have much of a choice but to pay these fees to the card issuer and payment processor. By knowing how much you’ll pay on each transaction, you can price your products appropriately and ensure you’re making enough money on each sale.
Some businesses also charge a credit card convenience fee to cover the cost of the processing fees above.
Ways To Reduce Credit Card Processing Fees
Processing fees can really eat into your bottom line. While you can’t avoid them altogether, there are some ways to reduce processing fees so you keep more profits.
- Encourage debit card paymentsDebit cards have much lower interchange rates. For example, a standard Visa rewards credit card has an interchange fee of 1.65% + 10¢, while a Visa debit card is 0.05% + 22¢. On a $25 purchase, a debit card will cost you $0.23, compared to $0.51 for credit cards.
Read more in our guide on how to lower credit card processing fees.
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Mastercard And Visa Announce Changes To:
10 MAY 2021
2 min read
As of January 2021, the United Kingdom is no longer part of the EEA. As a result, Mastercard and Visa have announced revisions to interchange rates applicable between the UK and the EEA. These changes will come into effect by October 2021.
Mastercard revises interchange fees
As a result of Brexit, Mastercard is revising the interchange fees for transactions between the UK and EEA. The revised interchange fees will be effective as of October 15th 2021.
The revised interchange fees will especially have a significant impact on consumer card-not-present transactions from UK-issued cards at EEA merchants. Consumer card-not-present transactions between the UK and EEA countries are currently charged 0.20% for debit cards and 0.30% for credit cards. Due to the revised interchange, these transactions will be charged in line with the interregional capped consumer rates of 1.15% for debit cards and 1.50% for credit cards. Note that for Mastercard, the new rates will apply unilaterallyfor consumer card-not-present transactions from UK-issued cards at EEA-merchant locations. The consumer card-not-present interchange rates for EEA-issued cards at UK-merchant locations will remain unchanged.
Visa announce interchange fees updates
As for Bamboras customers, IC++ merchants will see the update as part of their reported scheme fees automatically. Merchants on a Blended price model will be informed in case impacts require adjusted pricing.
Can You Avoid Paying Interchange Fees
If you are accepting credit card payments, then you must pay interchange fees.
But there is one way to offset your processing fees. That is to pass them onto your customers by adding a . This is an additional fee added to the customer’s purchase for using a credit card instead of cash or debit.
There are some strict rules for surcharging. The surcharge cannot exceed the cost of the processing fee or 4% of the transaction, whichever is lower. It also must be clearly communicated to the customer . Read more for further details here.
With interchange fees taking so much of your profits, it’s understandable to want to avoid it. But really think about whether surcharging will be good for your business. It could turn off customers and drive them to competitors instead.
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