Interchange or interchange fees are assessed by card networks like Visa, MasterCard, Discover, and American Express. These are transaction fees that the merchant's bank pays each time a customer uses a credit or debit card to make a purchase. Defining interchange is not a simple task. Every time you use a credit or debit card for a transaction, a series of complicated actions occur between your bank, the card-issuing bank, and the merchants bank. A payment processing company facilitates the process, and it all happens in seconds. The terminal screen reads approved, you choose the preferred method for a receipt, and off you go. It lightning-fast and invisible, but it isn free. For the merchants who foot the bill, even the smallest charges can add up quickly. In addition to setting their own interchange rates, card networks charge different rates for different transactions. For example, a merchant pays one rate for credit cards and another for debit cards. Cards with reward programs are charged more than those that dont. You'll also pay higher transaction fees if you bank with a smaller institution like a credit union. With so many card issuers and types of transactions, there are literally hundreds of interchange fees. However, the average hovers around 1.80% for credit cards and .30% for debit.
What are the Costs of Interchange?
Interchange rates are determined by the credit card giants, including Visa, MasterCard, Discover, and American Express. Interchange is defined as the cost of the credit card itself, plus dues and assessments. Typically, they are updated twice a year in April and October, but 2020 was anything but typical! Both Visa and MasterCard issued statements that promised interchange rates would not increase while the economy was in free fall. Scheduled to raise interchange rates in April 2021, merchants, lobbyists, and elected officials successfully convinced them to delay any further increases until April 2022. Check our website to review current interchange rates:
Visa Debit CPS (Regulated) 0.050% + 22¢
Visa CPS Retail + 1.510 % + 10
MasterCard Debit (Regulated) + 0.050% + 22¢
MasterCard Consumer credit¬† ¬† ¬† 1.580% + 10¢
Discover Debit (Regulated) + 0.050% + 22¢
Discover Consumer credit + 1.560% + 10¢
Amex Retail < $75 + 1.60% + 10 c
Amex Retail < $1000 + 1.95% + 10¢
How does Interchange Factor into Costs for Accepting Credit Cards?
There are hundreds of different variables that credit card companies use in calculating the interchange rates you'll pay for credit card transactions. We'll take a look at the basics:
- MCC: Every merchant, regardless of size or industry, has a standardized Merchant Category Code (MCC) assigned by credit card processors. Your primary source of revenue will affect the interchange rate you pay. As you might expect, merchants with a higher risk for chargebacks and other fraud will pay the higher rates.
- Card Type: Cards that offer benefits or generous travel rewards will pay higher interchange rates than those that don't. Guess who's paying for all those extras and airline miles? It's not the issuing bank; it's you, the merchant. Debit cards may not come with all the bells and whistles, but when used with a PIN, they'll incur the lowest rates available.
- Transaction Method: POS transactions where a customer swipes and then signs at a terminal are charged lower rates than an online card-not-present purchase. Restaurant to-go orders entered using a virtual terminal have a specific rate, while tap-to-pay cards have another.
Flat Rate vs. Interchange Plus Pricing
If you don't know the difference between flat rate and interchange-plus pricing, you're probably overpaying for every card transaction that you process. When you sign a flat-rate contract, all of your transactions are charged the same rate, regardless of size. This rate includes the going interchange rate plus the payment processor's flat-rate markup.
Pros of Flat Rate Processing
- Easy to understand because every transaction has the same markup.
- Accept reward cards at no extra cost
Cons of Flat Rate Processing
- Simplicity may come with some unexpected costs. Without detailed billing statements, it's easy for the processor to hide the interchange rate and markup from you.
- You pay the same transaction fee for a candy bar that a neighboring business pays for the sale of a motorcycle. Good for high-volume transactions, not smaller ones.
With Interchange-Plus pricing, you pay the interchange rate plus the processor's markup. This method is more transparent as your monthly credit card statement will list the exact fees that make up each transaction. When you are able to define interchange, interchange plus pricing becomes an easier decision.¬†
Pros of Interchange Plus Pricing
- With detailed monthly statements, you know exactly what you paid for each transaction.
- Some transactions are more affordable. For example, debit card transactions are typically less expensive than credit.
Cons of Interchange Plus Pricing
- It's more complex because each transaction has a different price associated with it. This can make your monthly statements more complex.
- You may notice some higher charges from cards that offer unique benefits and rewards.
Merchants often take interchange fees into account and build them into the price of their goods and services. However, some businesses will add a surcharge or "convenience fee" to customer purchases made with plastic. Check the gas station next time you fill up; there are often two sets of prices displayed, one for cash and debit and the other for credit cards. Surcharges may also show up as a line item on your receipt. This is legal according to federal law but prohibited in 5 states, including California, Florida, Texas, and New York. Once you define interchange, surcharges become more clear as well.
Things to Look out for as a Business Owner
You've got a lot to think about when you're operating a business, and sweating over transaction fees shouldn't be one of them. Think of interchange fees as the wholesale cost that the payment processor has to pay on every credit card transaction. Treati passes on that wholesale cost from the card issuer and adds a nominal, transparent fee. A Treati Payment expert can help you choose the perfect POS system that will help you get the lowest price per transaction, regardless of your customers' payment methods. Don't want to talk to a real person just yet? We get it. Check out our payment calculator to see how much you can save with Treati as your payment processor.