Interchange Fees | B2B Finance Glossary

Oct 20, 2023 by Zazil Martinez

What Are Interchange Fees?

Interchange fees, or “swipe fees,” are fees a merchant must pay every time a retailer processes a credit or debit card payment. Interchange fees are designed to pay card issuers for their work when accepting, processing, and authorizing card transactions.

For example, when a customer makes a purchase using their debit or credit card, many things need to happen on the backend to ensure that this payment goes through, namely, requesting and receiving payment authorization for ensuring there are enough funds in the customer’s account to make the payment, fraud protection, and finally, processing the payment itself. A small portion of the interchange fee goes toward the credit card processing service, and the rest goes to the bank or credit card company tied to the card that the customer uses to make the purchase.

Typically, interchange fees include a small fixed fee plus a percentage of the total sale; however, these fees and rates vary depending on the merchant category code associated with the business making the transaction, which company has issued the card to the consumer, and the credit card processing service that allows the entire system to keep running.


How Do Interchange Fees Work?

Interchange fees can cost merchants between 1.3% and 1.5% of their sales. Let’s break that down even further: when a credit card payment takes place, your bank (which is also known as the acquiring bank or merchant acquirer) will send out a payment request to your customer’s bank (also known as the issuing bank or the issuer) through the card network. From here, your bank is required to go through myriad processes to make sure that it can either accept or reject the request by verifying two things:

  1. The payment itself is not fraudulent.
  2. The customer has enough money to cover the payment that they intend to make.

After this information is determined, your customer’s bank transfers the money to your business’s bank, and you are charged an interchange fee to pay your bank to do this work behind the scenes.

Merchants are typically billed for interchange fees in a single, bundled amount by their payment processor. However, 48% of all merchants are given zero visibility into the breakdown of these bundles, and there can be as many as 300 separate interchange fees that make up the single interchange fee that merchants are required to pay.

Card networks justify interchange fees by stating that they are used to pay the card-issuing bank for the convenience of handling the cost, combating any potential fraud, and taking on the risk inherently tied to approving the payment. While this statement is true, there is still 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 subject to losing revenue to these punitive cost structures – just to receive customer payments.


How Are Interchange Fees Calculated?

Credit card networks are entirely in control of determining interchange rates. They make this possible by turning interchange into a flat rate added to a percentage of the total sale (including taxes).

Keep in mind that several different variables are taken into consideration when the card networks determine interchange fees:

  • Card type. Different cards have different interchange rates. Because debit cards have associated PINs, the card networks see them as a more secure payment method; thus, they have lower interchange rates for merchants.
  • Payment type. Point-of-sale (POS) transactions are considered to be less risky than card-not-present transactions because, in a POS transaction, one of three things must happen to ensure the transaction is secure: customers must provide their situation, enter their PIN, or insert their chip into the payment terminal to verify that the transaction occurred with their permission.
  • Business type. Interchange rates will change depending on what kind of business a merchant has or even how big that 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 that it can be made.

To date, merchants inevitably end up paying the card networks almost $100 billion in interchange fees yearly, which will continue to rise. 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 will continue to be forced to participate in a system designed to limit their growth.


Is it Possible to Accept Payments Without Paying Interchange Fees?

Because interchange rates are so deeply tied to our financial system, few businesses even consider the possibility that they have the option of working with alternative payment methods that are cashless, fee-less, and instant.

Paystand’s payment model – Payments-as-a-Service – is designed to create a B2B payment system that eschews transaction fees altogether. We swap interchange fees for a flat monthly rate and even help you automate your entire cash cycle so that essential AR processes can be free of monotonous manual labor and paper-heavy processes. Plus, our customers save an average of 50% on receivables over three years and see a meaningful increase in their ROI.

If you’re ready to break up with interchange fees for good, schedule a time to speak with one of our payment experts here today.