Interchange fees represent approximately 80 percent of the charges a business pays to process credit and debit card transactions. These fees are set by the card brands: Visa, Mastercard, Discover, and American Express and, unless your business is processing billions of dollars each year, interchange rates are non-negotiable.
While you can’t necessarily change the rates, you may be able to change which rates apply to your transactions. The goal is to qualify for the lowest interchange possible. The key to doing this is to understand what factors impact your rate and which of them you can control. In this article, we review those factors and pass along some actionable tips to help you qualify for the lowest interchange possible.
1. Payment Method
There are two types of transactions: card present and card-not-present. Card present payments, such as those made onsite with a physical card or tapped phone, carry a reduced risk of fraud. As a result, the interchange rate for these transactions is lower than if the card is not presented at point of payment.
For multi-channel businesses, there is a higher cost to process payments collected online. That higher cost can be mitigated to an extent by the technology you use and the type of information you collect at point of payment. See points 2 and 3 below.
2. Technology
Make sure to use Address Verification Service (AVS) when collecting online payments. AVS is a tool that compares the cardholder billing address with the address on file at the card issuer. This helps reduce the risk of fraud, which in turn can qualify you for a lower interchange rate.
Technology such as EMV chip cards and contactless payments may also qualify you for a lower interchange due to their enhanced security.
3. Information You Collect at Point-of-Payment
For card-not-present transactions, make sure you are collecting complete information, including full address, expiration date, the CVV number on the card. Failing to collect the CVV number can bump you into a higher interchange rate.
4. Payment Type
Debit card transactions are processed at a lower interchange rate than credit card transactions. They are capped at 22 cents and 0.05 percent of the payment amount. You don’t have a lot of control over whether customers choose to pay by credit or debit. However, you may be able to influence their decision by offering a discount for cash or debit card payments. Carefully consider this option though as credit card customers tend to spend more than those paying by debit card or cash.
5. Settlement Time Frame
The longer it takes to settle the payment, the higher the interchange rate you will be charged. To avoid this, make sure that you settle all payments within 24 hours of the transaction.
6. Card Type
This element affecting interchange rates is one that merchants really cannot control or influence. Credit cards offering miles, loyalty points, cashback, etc. all come with higher interchange rates that go toward offsetting the cost of the rewards.
In addition, card companies set their own interchange rates and some are higher than others. Payments made with American Express, for example, often have higher interchange rates.
Each April and October, the card brands release updates to their interchange rates, fees, and programs. Wind River compiles and publishes these updates to help merchants understand the implications of the changes. To sign up to receive notification of the changes that the card brands have made to their fees, fill out the form to the right, and we’ll share updates with you when they occur.
7. Transaction Details
Business to business payments (B2B), business to government payments (B2G), and some industry types can qualify for lower interchange depending on the details you pass in the transaction.
Level II processing includes the basic transaction information plus things like sales tax and customer ID. Level III processing includes Level II details plus line item information and other details related to the purchase. Both will qualify you for lower interchange, and the savings can be significant. However, only certain payment technologies can support passing that information, so it’s best to check with your payment provider.
Furthermore, some industries such as lodging can qualify for lower interchange rates by sending additional details about the reservation. Again, not all payment gateways can support this data transmission.
8. Merchant Category Code (MCC)
Some industries are deemed higher risk for fraud and chargebacks than others. As a result, the interchange is a higher percentage. For example, grocery stores and gas stations often have lower rates than higher-risk businesses such as travel or gambling services. This is not a rate factor that a business can control.
9. Geographic Location
Payments originating from some geographies may be more costly to process. Cross-border transactions typically carry a higher interchange rate for two reasons: 1) an increased risk of fraud and 2) the costs associated with converting the currency.
10. Transaction Amount
Some interchange is percentage based but others may be a fixed amount per transaction. If it is the latter, smaller, more frequent transactions may be disproportionately expensive to process.
To summarize, there are multiple factors influencing the interchange rate you are charged. Some you can control and some you cannot. For those that you can control, follow this list of tips to ensure you are qualifying for the lowest rates possible.
- Avoid keying-in card data for onsite transactions. Swipe and tap whenever you can.
- For card-not-present transactions, make sure you are collecting the CVV of the card.
- Use Adress Verification tools for online transactions.
- Make sure you are settling all payments within 24 hours.
- Collect and pass Level II and Level III data whenever possible.
- Use EMV chip card and contactless technology.
Ask your payment provider to do an audit of the interchange you are paying to look for opportunities to save you money. If your provider won’t do that, it may be time to consider a new provider. In these times, every penny you can save is important.
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