Understanding Interchange Rates & Fees
Interchange fees can sometimes be the most confusing transaction fees you need to understand as a merchant, but they're also the most important. They make up the bulk of your overall card processing costs each month, and they vary according to your industry type and customer base.
Sadly, it's become far too common for shady merchant services providers to charge extra percentage rates or purposely confuse their clients on the terms of interchange in their desire to make more money.
We are tired of seeing this happen, so we wanted to write a blog to provide some clarity to interchange rates and fees.
The easiest way to understand interchange fees is by first understanding the basic reason of why they exist. With that in mind, let’s start from the top.
Definition of Interchange Fees
In short, interchange rates and fees are fees the issuing banks (a.k.a. the cardholder’s bank i.e. Chase, BOA, Barclay, etc.) charge merchants for the convenience of seemingly instant deposits. This "convenience fee" is designed to pay for the billing services, risk, and float costs the issuing banks incur while transferring money from the cardholders to the merchants.
In other words, it’s the underlying cost you as the merchant have to pay for the “convenience” of accepting credit cards.
When you run a credit card transaction, you typically pay a combination of three fees: transaction fees, flat fees, and interchange fees.
Each party involved in a credit card transaction charges one of those types of fees.
The parties involved are:
- The credit card associations: Companies like Visa, Mastercard, Discover. They ultimately control the credit card ecosystem.
- The credit card issuing banks: These are banks like Chase and Wells Fargo who issue credit cards. Keep in mind that sometimes the association and issuing bank are one and the same, like American Express.
- The credit card processor: A.k.a. Acquiring banks. These handle the communication between all relevant parties — ensuring safe and accurate transactions. These come in all shapes and sizes.
- Merchant account providers: These companies handle the service end, everything from sales to support to complementary software.
Why Interchange Fees Exist
Interchange is all about incentive balancing and growth. There are three entities that need to be satisfied during a credit card transaction process: the merchant, the issuing bank, and the credit card association (Visa, Mastercard, etc.).
The idea is to set a rate that pays the issuing bank enough to compensate for the risks it incurs during the direct transfer of funds while also giving enough incentive to the card associations to sign up more people for credit cards — all while providing that “convenience” at a rate that doesn’t make merchants decide it’s not worth it.
It may not sound too convenient for merchants, but customers love to pay with credit cards, and that convenience is the instant sales and flexibility you can offer your customers.
It’s not surprising that this balance is often precarious and has been the source of much contention over the years — e.g. merchants banding together to pass surcharge laws in their respective states.
The Varying Kinds of Interchange Rates
There are A LOT of interchange rates, and they are typically reviewed twice per year. Any changes to the rates will take effect in the months of April and October.
Interchange rates vary by industry, size of business, size of the transaction, type of transaction, along with some other variables. It all goes back to that aforementioned balance. These rates change to make sure growth is being incentivized across the board.
Here are a few more common examples:
- The bigger the transaction rate the more the interchange fees are to compensate for float & fraud risk.
- The more perks a credit card has, the higher the fees.
- The less secure a transaction is, the higher the fees. So if you manually key-enter or swipe instead of using EMV (chip) payments your fees will be higher.
Interchange rates are typically displayed in the following format: 1.6% + $0.10
Or something similar… so:
Percentage X + Transaction Fee X.
If you’re curious about the actual rates, you can view them for each of the major card associations HERE
You may be thinking, well if there are that many rates ,and it’s impossible to keep up with them as a business, then why try? Why shouldn’t I just pay a single flat rate from my merchant services provider?
Well, let’s take a look at that...
How Interchange Relates to Growth
We know that there are hundreds of interchange rates between Visa, MasterCard and Discover, and that’s why some merchant services providers charge a flat fee (e.g. 2.9% + $0.10) per transaction that covers ALL interchange fees.
The idea is that some will be higher than the flat rate, and some will be lower, so ultimately you pay for fewer headaches and know exactly what you’re paying per transaction every time.
At first glance the flat rate pricing model may seem like a no-brainer. But upon further review, you will find that it can become quite costly.
Most businesses who are receiving flat rate pricing never conduct a proper analysis of their interchange fees, and fail to recognize that on average 70-80% of their transactions are actually falling way under the flat rate they're paying?
Example:
Say you accepted one thousand $100 transactions a month ($100K), and roughly half of those came out to 2.4% interchange fees, and the other half hovered about 1.6%, but you were paying a 2.3% flat rate.
That means on that $100,000 in sales volume, with a flat rate of 2.3%, you would pay $2,300 in processing fees for the month.
Now in the SIMPLEST interchange rate example ever, let’s break down by your actual rate costs:
$50,000 at 2.4% = $1,200
$50,000 at 1.6% = $800
That equals $2,000 — a savings of $300 per month -- $3,600 annually!
Chances are your business would save even more money. Some merchants have saved up to 45% when they swtich to Cost-Plus Pricing.
Conclusion
Understanding interchange fees becomes increasingly more important as your business grows, but you don’t have to handle it yourself.
Tailored Transactions has a partnership mindset with all of our clients. We have the expertise and experience needed to set up your merchant account in the most cost-effective manner possible.
Follow the link below to contact us for a no-obligation Free Rate Quote!
Visit us online at www.TailoredTransactions.com or call us direct at (888) 669.1686