Credit Card Fees (Interchange Explained)

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What is Interchange?

Interchange is the fixed cost for each card type issued by Visa, Mastercard, Discover, American Express and other credit cards for US merchants. It is regulated by the Federal Reserve, and changes every April and October. There are hundreds of different rates, based on the type of card and issuing banks. Visa, Mastercard and the other credit card companies publish these rates on their websites and every processor in the US has these exact same fixed costs.

What/who gets paid interchange?

Interchange is paid to the card-issuing banks, credit card companies and processing networks to cover the cost of each transaction. When a card is authorized, both the card issuing bank and the processing network are called upon to authorize and accept or reject the transaction based on available funds/credit. Visa, Mastercard and the other credit card companies make up the bulk of the fees for interchange to cover the cost of accepting these payments as well as the risk.

Why do interchange fees vary?

Interchange is based on risk and rewards. A debit card with no credit associated with it, used in-person would qualify for an interchange rate of only 0.05% + $0.22, whereas an AMEX corporate rewards card taken over the phone could cost upwards of 2.89%. The more risk, the higher the interchange rate. Instances where a card is either swiped or dipped will cost less than a transaction processed during a phone call, or made through a website since these transactions are less prone to fraud.

Why do I have to pay a processor on top of interchange?

Visa and Mastercard won’t do business directly with the majority  of merchants unless they are the size of Costco. Since credit card transactions can be disputed for a fixed period of time, and since fraud exists, there is a risk associated with each transaction. Processors fill in that gap by accepting the risk for a small fee on top of the interchange rate. Fees above interchange are also completely unregulated, which is why two merchants with the exact same business type, volume and credit history could have two wildly different rates. Ultimately, the cost above interchange is whatever the processor and the merchant agree to.


Top 5 things businesses should know about credit card processing

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5. All Payment Processors have the same fixed cost

There are hundreds of processors, independent sales offices and sales agents. It’s a little known fact that all of us have the same fixed cost for accepting Visa/MC/AMEX, etc. This cost is called “Interchange”. The rates are established and regulated by the Federal Reserve of the United States. They are updated and posted on the individual credit card company’s websites each April and October, the most important thing to understand for the merchant is what you are paying on top of that cost, and what you are getting in return.

4. Find the right fit

The best advice is to pick a payment solution that is right for you. If you are a small volume merchant processing less than $2-3,000 a month on credit cards, your best option is usually a basic, “flat rate” provider. Stripe, Square and Paypal are good solutions for these merchants because they are easy to setup and have no monthly, PCI or hidden fees. On the other hand, if you are doing a higher volume, or a large amount of transactions each month, those “flat rate” providers could end up costing you significantly more! Educating yourself on Interchange and industry pricing trends will help you find the best fit for your business.

3. Get the right #paymentstacks

Businesses accept payments in a variety of ways. In person, on the go, over the phone, through a website, custom software, or with a mobile device, the possibilities are endless! Start by mapping out the most ideal solution for you and your customers. Next, do your research to find the best tools to help you achieve that goal. While saving money is important, it’s not worth frustrating your customers or creating more headaches for yourself!

2. Understand PCI compliance and security

Payment data security is paramount for any business. If you or anyone you know has had their card stolen, you understand how painful that process can be. For merchants, it is much worse! Not only can it  irreparably damage your reputation, there are a number of fines and other penalties you may be responsible for. Merchants are often on the hook for the lost products or services from fraud as well. There is also the possibility of PCI card violation fines that can start at $5,000 per record breached! It’s essential that businesses get serious about PCI Compliance!

1. Do your research

Finding the right payment processor takes time and research, but it is well worth the effort! For example, an eCommerce company who chooses a partner without data portability (ability to move saved customer cards) could end up having to lose the data, or pay thousands of dollars more to make the switch. Merchants need to be sure they have thoroughly researched and understand the fees, technology, security and service before they decide to use a credit card processor.

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