Interchange fees

Interchange fees, also referred to as swipe fees, are the payments that a merchant's bank sends to the bank of a customer who uses a credit or debit card to purchase merchandise. These fees cover the cost of sending the payment to the merchant's bank account and the risk of fraud. 

What is the Rationale Behind Interchange Fees?

The acquirer or the merchant's bank pays the interchange fee to guarantee that card associations, like Visa and Mastercard, will facilitate the sending and processing of the transaction. Upon receiving the payment request, the issuer or the cardholder's bank first conducts checks to verify that the customer has enough funds and that the card is being used legally before depositing the money to the merchant's bank. 

What Are the Average Interchange Rates?

Credit card companies set their respective interchange fees, which range from 1% to 3% of a transaction's total value. They're a percentage of the sales price plus a flat fee. Visa and Mastercard set their rates semi-annually while others do so once a year. 

In practice, credit card associations pass the interchange fee to the issuing bank to promote their card over others. What happens is that the merchant's bank pays the interchange cost first, then collects a fee from the issuing bank that's higher than the interchange fee in order to make money. 

What Are the Factors Affecting Interchange Rates?

Interchange rates depend on the following:

  • Type of transaction 

Interchange fees tend to be higher for card-not-present (CNPs) transactions, as they are less secure than point-of-sale (POS), where customers can physically present their scannable cards or supply their signatures or PINs. 

  • Industry and business size

Card associations categorize businesses, with interchange fees varying depending on their merchant category. Traditional retailers usually pay lower than e-commerce merchants and direct marketers. But, a business with a higher volume of transactions per billing cycle has greater negotiating power to ask for lower card or bank fees compared to a small enterprise. 

  • Brand and type of card

As mentioned earlier every card brand has its own rate. Card associations consider the cost of moving money, current interest rates, and possible risks when deciding on the rate.

Meanwhile, interchange fees for credit cards are usually higher than those for debit cards, which are less risky, as they're PIN-activated and draw funds directly from a customer's bank account. Credit cards offer points, airline miles, and other rewards that need funding to enable issuing banks to offer and pay for these perks.

  • Card owner

The fee varies depending on whether you're an individual card owner, a business, or a government agency. Card companies will charge lower fees for card owners known to have a better ability to pay, such as a private business or government office, compared to an individual consumer.

  • Merchant location

The interchange fee will be higher if the cardholder is making the transaction in another country. The rate will account for the cross-border payment process.

How Can Interchange Fees Be Optimized?

Although business owners can't avoid interchange fees, they can optimize transactions to lower expenses from credit card related fees such as this. Some of the ways include: 

  • Observe proper processing habits.

To qualify for the lowest interchange rate possible, provide all the customer information as required by POS-terminal prompts, including zip code and card verification value number. Giving the issuing bank more data will lower suspicions of fraud.

  • Report credit card batches on a daily basis.

Your establishment has a better chance of qualifying for a lower interchange rate by settling transactions by the end of the business day or within 48 hours. 

  • Submit additional client details.

B2B companies who supply banks with level 2 or 3 data—such as invoice and purchase order numbers or tax ID—may qualify for lower interchange tiers. 

  • Use an address verification service (AVS).

An AVS verifies the card holder’s billing address with the issuer. The issuing bank sends the merchant an AVS code to authorize or reject the transaction after the former checks the address that the client gives the merchant. Visa and Mastercard encourage businesses to use this service.

  • Tap a credit card processing expert.

You may have to hire a payment processing service provider who can help examine your current software for handling credit card payments. The service may also customize a solution that can help you better manage the interchange rates and lower the expenses of your business. 

About the Author
Koba Molenaar brings nearly a decade of rich experience in content writing, specializing in digital marketing, branding, SaaS, and eCommerce. Her passion for helping brands, from solopreneurs to established companies, connect with their audiences shines through her work. As a member of the Golden Key International Honor Society, Koba’s commitment to excellence is evident in her work, showcasing her as a relatable and knowledgeable voice in the industry.