Understanding Merchant Interchange Fees
Last Updated on May 27, 2021 by Corepay
If you’re a merchant that has just started accepting credit and debit cards, you’re probably still learning a lot of the terms, including interchange fees. You may even be wondering how they work, what they cover, and how much they cost.
Interchange fees, which are also known as interchange rates or interchange reimbursement fees, are the transfer of fees between acquiring banks (the bank that processes card payments for the merchants) and the issuing bank (the bank that issued the credit card to the customer).
The fees cover the cost of handling the transactions and sending payments to the acquiring bank and the merchant’s bank account, as well as covering the risk of fraud.
Whenever there’s a transaction, the acquiring bank charges a small percentage to the merchant. The fee is usually between 1 – 3% of the purchase price, plus a fixed cost per transaction, like $.10. So, you could see an interchange fee of 2% + $.10 for a single transaction. For a $100 purchase, the acquiring bank will take out $2.10 in interchange fees. (There are other fees, but we’re just talking about that one.)
That interchange fee is then split between the issuing bank (who can share part of it back to the cardholder in the form of cashback, rewards, or loyalty points) and the credit card network, like Visa or Mastercard.
Visa uses interchange reimbursement fees as transfer fees between acquiring banks and issuing banks for each Visa card transaction. Visa uses these fees to balance and grow the payment system for the benefit of all participants.
The average interchange rate is around 1.50% for credit card payments and 0.3% for debit cards, but it also varies between card present transactions, card not present transactions, high-risk merchants and low-risk merchants, plus a few other things.
What Determines My Interchange Fees?
Your interchange fees will vary widely based on a number of factors, including
- The processing method. Card not present (CNP) transactions, like ecommerce, tend to have a higher rate than card-present as there is more potential for fraud
- Your merchant category code. Your category code affects whether you’re a higher risk merchant, which affects your interchange rate.
- The type of card. Debit cards have lower interchange fees and premium/corporate credit cards have higher ones. All other types of cards fall within that range.
- The brand of card. American Express tends to have a higher interchange rate, but if an issuing bank has their own card, and/or it’s a reward card, the rates can be a bit higher as well.
- The owner of the card. Rates vary if the owner of the card is an individual, business, or corporation.
- The data submitted during the transaction. More data, and more security, means lower rates. So using the Address Verification Service/CVV to prevent fraud can lower your rate.
- Tokenization. Visa and Mastercard have begun using tokenization to encrypt and protect transactions. Visa is going to start giving discounts to merchants that use a Visa EMV Payment Token starting October 2021.
Which Credit Card Networks Charge Interchange Fees?
Visa and Mastercard are the only two major (U.S.) credit cards that charge their own interchange fees; Discover and American Express have interchange fees, but they function as both the credit card network and the issuing bank. Visa and Mastercard let other banks issue their cards for them. American Express also tends to charge higher interchange rates, which is why some merchants choose not to accept that card.
Visa and Mastercard also charge a separate network fee, which means that cost also gets added into each transaction. They’re usually fairly small, around 0.05% per transaction or $.05 out of every $100, but they’re not part of the interchange rate.
Finally, it’s possible for merchants to make up for their lost interchange fees through things like adding surcharges to your bill or getting other discounts from your payment services provider. If you’ve ever seen a gas station that offers a lower price for cash payments, or a utility that charges a “convenience fee,” that’s an example of a credit card surcharge.
Keep in mind that Visa is the only credit card that allows credit card surcharges for nearly all their merchants. Mastercard, American Express, and Discover all have heavy restrictions on whether a merchant can charge a “convenience fee.”
Photo credit: Republica (Pixabay, Creative Commons 0)
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