In the credit card processing industry, “interchange” fees make up most of the transaction costs. They understand how these fees work and can help you make sense of your monthly statement and save money by choosing a processor with a pricing model that minimizes costs.

Factors Affecting Interchange Fees

As a merchant, you make it take a lot of work to pay the processing fees on your monthly statement. Understanding the fee structure and how it can vary from transaction to transaction can help you save money, mainly if your processor uses interchange plus pricing.

Interchange is a set amount charged by credit card networks for each transaction. These fees are typically a percentage of the transaction value. The rate varies based on several factors, including whether the transaction is a consumer or corporate/government-issued credit card, if it’s swiped or keyed, and other specific transaction details. Depending on these factors, a transaction can be “upgraded” to a lower interchange rate or downgraded to a higher one. This is called padded interchange, and it can be done without the processor telling you about it.

Hundreds of individual fees go into a single bundled “interchange” charge on your credit card processing statement. Still, a simple way to think about it is in terms of multiple tiers offering different rates based on transaction type, sale category, and other factors. These tiers mix interchange types, scheme fees, and your processor’s markup. Interchange fees are non-negotiable, but there are ways to minimize them by choosing a processor that offers tiered pricing.

How Interchange Fees Are Calculated

After every sale, businesses must pay a transaction fee to the card-issuing bank to accept customer cards. This is called an interchange fee or reimbursement fee and is the basis of most fees charged by merchant service providers.

The fee amount varies depending on the payment method (credit vs. debit) and the merchant’s Merchant Category Code (MCC). This four-digit number defines what kind of business you are. The rate can also vary by country and even transaction type. For example, a business selling goods online may be considered higher risk than one selling goods in person at their store and thus could incur a different rate.

To determine the actual cost of a transaction, businesses must also factor in a processor’s margin and other fees. However, you can understand how these fees are calculated. In that case, you can make sense of your processing statement each month and save money by shopping for the best payment processors with lower interchange rates.

While you can’t control what card brands and the banks they work with set, you can influence the rates you’re paying through a fee structure like interchange-plus pricing or subscription pricing. In addition, knowing more about what factors into these fees can help you negotiate with a processor and ultimately get the lowest rates available.

How Interchange Fees Are Determined

After every credit or debit card transaction, merchants pay an interchange fee. This fee, often a small percentage of the transaction amount, is charged by payment processing companies to cover some of the cost associated with the financial risk the card-issuing bank takes when it funds a purchase.

Interchange fees are necessary, but they can be costly for some businesses. While these charges are unavoidable, there are some smart strategies that businesses can implement to minimize their impact.

When it comes to interchange rates, many factors impact how much you pay for each card transaction. For example, whether a card is used for a business or personal purchase, how the transaction is processed (in-person vs. online), and the type of card used (credit cards generally carry higher interchange rates than debit cards) all affect how much you’ll pay for each sale.

These fees are complex and non-negotiable, but they are usually broken down into three parts by your processor: Interchange, assessments, and markup. This breakdown helps to simplify the total charge on each invoice you receive from your payment processor, as it can help you understand what you’re paying for and what you can do to minimize these expenses.

How to Avoid Interchange Fees

While it’s not possible to avoid paying interchange fees, it is essential to recognize the value they bring to your business. They enable you to accept more payment methods, boost customer satisfaction, and increase sales. Interchange fees also allow payment networks and card-issuing banks to cover the costs associated with maintaining infrastructure, managing fraud risk, and providing cardholder benefits.

Interchange rates are non-negotiable and set by credit card brands. They publish a fee table with dozens of different categories, each with specific requirements that must be met for a transaction to qualify. While processors can’t lower the fees charged by card associations, they can reduce your interchange rate by avoiding padded interchange and settling transactions daily.

Another way to reduce your interchange costs is to choose a flat-rate processing fee structure with a third-party processor. This fee structure bundles hundreds of interchange categories into a few tiers based on transaction type and sales category and sets fees per tier. This can be an excellent way for high-volume sellers to save on credit card processing rates. However, merchants should be aware that a flat-rate processing plan may not consider lower interchange for debit cards or certain types of credit card transactions, so choosing an appropriate fee structure based on their business needs is essential.