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How Interchange Fee Affects Merchants and Their Business

You may have heard that accepting credit cards at a business comes with hefty costs. And if you are a newbie merchant or a beginner in the world of credit card processing, you may be wondering what transaction fees are and how they impact your operational cost. The truth with this is that you will pay a range of processing fees every single purchase of your customers using their credit card. This processing fee is extensive. The largest portion or about 90% of these processing-related charges in your monthly merchant statement goes to interchange fees. So, the big question in your mind probably right now is “what is interchange fee?”

This article, however, will give you more than defining interchange fees. You will also understand where interchange reimbursement fees come from and the factors that go into deciding what fees you’ll pay for a given transaction.

Credit Card Interchange Fee Defined

Interchange reimbursement fee, widely known as an interchange fee, is the underlying cost of a credit card sale. The most basic cost you as a merchant have to pay for the “convenience” of accepting credit cards. There is a set of categories used to define the rates for every card transaction. Likewise, the fees vary on several factors, which you’ll usually have little or no control over. When you accept a credit card, you typically pay a combination of three payment fees—transaction, flat, and incidental. And every party involved in a credit card transaction charges one of those types of fees. The parties involved are:

Credit card association

Companies such as Visa, Mastercard, and Discover which dominantly control the credit card brand and ecosystem.

Credit card issuing bank

These are the banks that issue credit cards. Do take note that there are instances that the association and issuing bank are the same, like American Express.

Credit card processor (acquiring banks)

These are the companies that communicate with all relevant parties to ascertain safe and accurate transactions.

Merchant account providers

These companies handle the service end, everything from sales to support to complementary software.

Chosen payment gateway

These are software portals that digitize and manage online transactions.

To make it sound simpler, here’s the flow of interchange fees. When a customer pays using a credit or debit card, the card issuing bank charged the merchant’s bank account a fee to settle. This fee is intended to cover costs and risks in processing the credit card payment. The amount of the fees are a percentage of the transaction amount, often bundled together and appearing as a single amount on bills received by the card processor used by the merchant.

How Interchange Fees are Calculated

There are many complex variables go into computing the interchange fees that merchants pay. Some credit card companies simplify these charges by converting the interchange fees into a percentage of the total sale (including taxes) plus a flat rate per transaction. This percentage generates a substantial amount per year in the United States alone. These fees are regularly adjusted by card companies based on the changing costs and risks of processing these transactions. Visa and Mastercard, for instance, adjust their fees twice a year—April and October.

Interchange Fee Depend on Transactions

There are three main factors to calculate interchange fees. The first factor is the type of card used in the transaction. Debit cards have less risk to process; thus, requires the lowest interchange fees. Cards offering perks and rewards for cardholders usually offset those rewards by charging higher interchange fees to merchants. This may sound unfair to merchants but the truth is this is a win-win deal. Cards with perks and rewards often entice customers to spend more at the store, hence benefiting merchants overall by increasing customer spending. The second factor is the business industry and size. The bigger the businesses the more leverage they have to negotiate lower fees. Finally, card not present transactions such as online orders involve higher fees as there is more risk involved.

In a Nutshell

Interchange reimbursement fees are the dues charged by the card issuing bank to the merchant to cover the costs and risks associated with approving and processing card payments. These fees are made up of several individual fees and are computed using varying intricate and changing factors. Likewise, fees can differ based on the card used, the size of the business where it is used, and whether the card was presented to the merchant during the purchase. However, the privilege of a merchant to accept credit cards as a form of payment almost always outweighs the costs they pay for the interchange fees. 

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