Demystifying interchange fees

Aug 3, 2021 by Mark Fisher

Interchange fees are inherently tied to the legacy payment system. In fact, if you're a business owner, there is a 100% chance that at some point you've been paid with a credit card, and – you guessed it – that means you've also been subjected to pay a transaction fee for the process of accepting that payment from your customer. While most merchants accept interchange fees without batting an eye, the truth is that very few businesses truly understand what interchange rates are or how they work. As a result, that means most of them are missing out on critical information that can help boost their company's margins, ROI, and revenue in the long run.

However, by gaining more visibility into the interchange system, you and your finance team can see exactly how it's impacting the wellbeing of your company and its ability to scale without limits.

Here, we'll be taking a deep dive into what interchange fees are, how they're calculated, and, most importantly, how you can transition to a fully digitized payment model that allows you to break up with them altogether.

What are interchange fees?

Simply put, an interchange fee is a transaction fee that your business is forced to pay every time one of your customers uses a credit card to make a payment, and they usually end up costing you somewhere between 1.3% and 3.5% of your sale. Let's break that down a bit further: when a credit card payment takes place, your bank (the merchant's bank, also known as the acquirer) sends out a payment request to your customer's bank (also known as the issuer) through the card network. Your bank has to then go through a number of processes to ensure it can either accept or reject the request by verifying that 1) the payment is not fraudulent, and 2) the payer has enough money to cover the transaction that's being made. After this information is determined, your customer's bank transfers the money over to your bank, and you're charged an interchange fee to pay your customer's bank to do this work behind the scenes.

Often, as a merchant, you'll receive your bill for your interchange fees as a single, bundled amount that your payment processor charges you. However, 48% of all merchants are given no visibility into the breakdown of these bundles, and there can be 300 separate interchange fees that make up the single interchange fee you're required to pay.

Credit card networks justify these fees by saying that they're used to pay the card-issuing bank for the convenience of handling the cost, combating any potential fraud, and taking on the risk that's inherently tied to approving the payment. While this information is true, there is also more to the story: interchange rates have been rising steadily over the years, and the card networks can continue to raise them unchecked. As a result, businesses like yours are subjected to punitive cost structures and you will inevitably miss out on over 3% of your revenue stream – just so your money can change hands.

How are interchange fees calculated?

Credit card networks are entirely in control of determining interchange rates, and they do so by turning interchange into a flat rate that's then added to a percentage of the total sale (including taxes). There are a number of different variables that are taken into consideration when the card networks determine interchange fees:

  • Card type: Different cards have different interchange rates. Because debit cards have PIN numbers, the card networks see them as a more secure method of payment, and thus, they have lower interchange rates for merchants.
  • Payment type: Point-of-sale transactions are considered to be less risky than card-not-present sales because, in a point-of-sale transaction, one of three things happen in order to make the transaction more secure – customers can give their signature, enter their PIN, or insert their chip to verify that the transaction occurred with their permission.
  • Business type: Interchange rates change depending on what type of business you have and even how big your business is. Bigger businesses can often sway credit card companies to lower their rates while SMBs are usually completely at the mercy of the card networks.
  • Location type: If your bank is in a different country than your customer's bank, you'll inevitably have to pay a higher fee to cover the increased number of processes that have to occur to verify the transaction and ensure it can be made.

To date, merchants inevitably end up paying the card networks almost $100 billion in interchange fees each year, and that number will continue to rise. In fact, even though the Durbin amendment was enacted to limit interchange fees on debit card payments, there is no such limit on credit card payments. That means interchange rates can be raised at the will of the card networks, and businesses that are essential to the health of our economy as a whole will continue to be forced to participate in a system that's designed to limit their growth.

Can you accept payments without paying interchange fees?

Because interchange rates are so inherently tied to our financial system, few businesses know that it is possible to break up with the card networks for good and accept payments without paying any transaction fees at all. However, that number is growing every day. Paystand is pioneering a new payment model – Payments-as-a-Service – that treats money like software and makes it possible for businesses to send and receive payments in a way that's cashless, feeless, and intuitive. We swap interchange fees for a flat monthly rate and even help you automate your entire cash cycle so you can put your revenue on autopilot. Our customers save an average of 50% on receivables over a 3-year period and see a meaningful increase in their ROI.

Interested in learning more? You can schedule a demo today.