Interchange Fees: What Small Businesses Need to Know

Interchange fees are a major expense when you accept credit and debit cards, but there are ways to minimize them.
Jan 27, 2022

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Every card swipe, dip and tap come at a cost to your business — and interchange fees are the largest expense.

An interchange fee is a transaction fee a business must pay when a customer uses a card to purchase a product or service. There are other fees associated with card transactions, such as assessment fees, but they are much smaller in comparison with interchange fees.

Interchange fees ultimately go to the bank that issued the card to the cardholder. They’re used to compensate the card issuer for the costs associated with handling the transaction, including potential fraud and bad debt expenses. Your merchant account provider or payment processor deducts the interchange fee from the sales amount before the funds are deposited into your account.

How are interchange fees calculated?

Mastercard, Visa, Discover, American Express and other card networks set their own interchange rates for purchases using their card. They provide rate tables that list individual rates based on variables such as product type, merchant type, card type and transaction type (card present, online and keyed). The card networks update their tables periodically. For example, Mastercard typically updates its rates twice a year.

The interchange fee for each transaction is typically calculated based on a percentage of the sale amount and a set transaction fee. The exact rate that applies to each card transaction can be different. It varies based on the card network, card type and transaction type. For example:

  • The rate for a retail merchant is generally around 1.5% plus 10 cents per card-present transaction.

  • If the same transaction was manually entered or keyed, a higher rate of around 1.9% would be likely.

  • If the customer used a debit card instead of a credit card for the purchase, the rate would be lower at about 1% with a higher transaction fee of 15 cents.

Rates are generally lower for card-present transactions than online or keyed transactions.

Interchange fees reduce the revenue from every sale where the customer uses a card to pay. For example, a $200 credit card sale with an interchange rate of 1.8% of the sales amount plus 10 cents per transaction, would result in an interchange fee of $3.70. This amount, along with other processing fees, is deducted from the sales amount before funds are deposited into your account.

There are two common pricing models used by many payment processors to determine the amount your small business will be charged for a card transaction:

  • Interchange-plus pricing is where you pay the associated interchange rate plus a markup to cover other fees and the processor’s services.

  • Flat-rate pricing offers a set rate, based on the transaction type (card-present, online or keyed), to cover interchange fees, assessment fees and the processor’s services.

How can businesses save on fees?

To pay less in interchange fees, you could accept cash when possible and encourage card-present transactions and debit card use. But that could limit payment options for your customers. To lower your processing fees without limiting options, take these steps.

Compare pricing models

You can reduce the fees you pay for card processing by comparing pricing models based on the most common card types used at your business. For example, interchange-plus fees can often be more affordable than flat-rate fees if most of your transactions are from debit cards. In contrast, flat-rate fees can be lower than interchange-plus fees if most of your payments come from corporate credit cards and rewards credit cards.

When you’re comparing pricing models, remember to factor in additional costs, such as monthly fees, that can add to transaction costs. It’s important to get quotes from two to three companies before making a decision. You may be able to negotiate the fees you pay based on industry. For example, some processors have lower rates for a restaurant than for an e-commerce business.

Look for volume discounts

Some payment processors offer volume discounts that reduce the fee charged per transaction. These discounts are often based on monthly credit card dollar volume, but other discounts may be available based on the number of transactions or average transaction amount.

Consider adding a surcharge for credit card use

A surcharge is an extra fee charged by the business to customers who use a credit card. It can be used to recover the costs of interchange fees and other credit card processing expenses. The fee can be applied to credit card transactions only — not to debit or prepaid card transactions. Certain states prohibit or limit surcharging. This option should be researched thoroughly before implementation.