How to Reduce Interchange Fees for Your Business

Businesses accepting credit card payments often encounter various fees that can reduce their profit margins. Among these, interchange fees represent a significant portion of the costs associated with processing card transactions. Understanding these fees is important for managing expenses. This article provides insights into how businesses can reduce their interchange fee burden, improving financial health.

Understanding Interchange Fees

Interchange fees are transaction costs paid by a merchant’s acquiring bank to the cardholder’s issuing bank for each credit or debit card purchase. These fees compensate the issuing bank for services like maintaining accounts, managing fraud risks, and funding rewards programs. Payment card networks, including Visa, Mastercard, Discover, and American Express, establish these rates.

The rates are not static; they are determined by multiple factors and vary significantly. For example, card type plays a role, with premium rewards credit cards typically incurring higher fees than standard debit cards. Transaction method also influences the rate; card-present transactions generally have lower fees than card-not-present transactions like online or phone orders. Additionally, the merchant’s industry category, identified by a Merchant Category Code (MCC), can affect the fee.

Interchange fees account for the largest share, often 70% to 90%, of a merchant’s total card processing fees. In the U.S., the average credit card interchange fee is approximately 2% of the transaction value. Debit card interchange fees in the U.S. are capped at $0.21 plus 0.05% of the transaction value due to the Durbin Amendment. Card networks update these fees twice a year, typically in April and October.

Optimizing Transaction Data for Lower Fees

Providing comprehensive transaction data can lead to lower interchange rates, particularly for business-to-business (B2B) and business-to-government (B2G) transactions. This is achieved through Level 2 and Level 3 processing, which involve transmitting more detailed information. Credit card companies offer discounted rates for these enhanced data levels because the additional information helps them assess risk more accurately.

Level 2 processing requires basic transaction details along with additional fields like sales tax amount, customer code, and the merchant’s postal code. An invoice number is another important data point for Level 2 processing. Ensuring these fields are consistently captured and transmitted helps qualify transactions for lower rates.

Level 3 processing demands even more detailed information, encompassing all Level 1 and Level 2 data, plus line-item details. This includes specific information such as ship-from and ship-to ZIP codes, invoice number, order number, item codes, descriptions, quantities, and unit prices. Businesses need payment systems that can capture and transmit this extensive data. Consistently providing this granular information for commercial card transactions can reduce processing costs.

Strategic Payment Acceptance Methods

Businesses can encourage the use of payment methods that incur lower processing costs. Promoting debit card usage over credit cards is one approach, as debit transactions have lower interchange fees. Educating customers about the cost differences can influence their payment choice. While businesses accept various payment types for customer convenience, understanding each method’s cost implications is beneficial.

Automated Clearing House (ACH) payments represent another cost-effective alternative, especially for recurring or high-value transactions. ACH fees are lower than credit card processing fees, often ranging from $0.26 to $0.50 per transaction, compared to credit card fees of 1.5% to 3.5% of the transaction value. Although ACH payments may have slower processing times, they offer savings for businesses with large volumes of recurring payments.

Some jurisdictions allow businesses to implement cash discount programs or surcharging. A cash discount program offers customers a reduced price if they pay with cash, effectively passing card acceptance costs to card users. This strategy can help businesses offset up to 100% of their processing fees. Surcharging, when permissible, involves adding a small fee directly to credit card transactions to cover processing costs, requiring clear disclosure to customers.

Reviewing Processor Agreements and Technology

The terms of a payment processor agreement and the technology used directly impact a business’s interchange fees. Understanding different pricing models is key, especially the distinction between “interchange-plus” and “tiered” pricing. Interchange-plus pricing, also known as “cost-plus” or “pass-through,” is more transparent; it separates the actual interchange fee from the processor’s markup. This transparency allows businesses to see the true cost of each transaction and negotiate the processor’s markup.

In contrast, tiered pricing groups transactions into categories like “qualified,” “mid-qualified,” and “non-qualified,” each with different rates. This model can be less transparent because processors determine how transactions are classified, leading to higher costs if many transactions fall into less favorable tiers. For most businesses, interchange-plus pricing offers better clarity and leads to lower overall costs.

Regularly reviewing processing statements helps identify discrepancies or opportunities for savings. These statements detail transaction activity, sales volume, and all associated fees. Businesses should calculate their effective rate, the total fees paid divided by the total processing volume. Comparing statements month-to-month helps identify unusual charges or rate increases. Proactive negotiation with payment processors can yield better terms, as processor markups are negotiable.