Interchange fees are a massive part of your credit card processing costs. Card brands like Visa and Mastercard set these fees, changing every April and October.
Typically, these fees are bundled into your payment processing cost and are non-negotiable. However, there are some ways to reduce your interchange fees and save money.
Know Your Fees
If you’re shopping for a payment processor, it’s essential to understand how credit card processing fees work. Multiple factors impact the fee structure, and knowing what they are can help you save money.
Interchange is the bulk of your credit card processing fees. It is the wholesale processing fee set by the card networks (Visa, Mastercard, Discover) and covers the banks’ operating costs and risk of fraud. Interchange fees vary by card type, cardholder, and transaction environment. For example, Visa rewards cards may be charged different rates than Business Visas or American Express.
Aside from the interchange, you will also pay assessment fees. The card network passes these onto your processor. It can be based on various factors, such as the cardholder’s location or whether or not you use an address verification system to reduce fraud. You can lower your assessment fees by maximizing the number of swiped/chipped transactions and by settling transactions as quickly as possible.
Tiered pricing can be helpful in that it simplifies the process of calculating your fees by showing you what you’re paying for each type of card. However, a significant drawback is that tiered fees must be more transparent, and you might pay more than you need to. Ideally, you want to find a payment processor that offers interchange-plus pricing so that you know exactly what you’re paying for each transaction and what markup is being applied.
Look for a Flat-Rate or Tiered Plan
If you’re in the market for a new payment processing provider, look for one that offers a flat-rate plan. This non-variable interchange-plus model lets you see your total swipe fees and negotiate them downward.
The flat-rate model can be more expensive than tiered pricing, but it’s often easier to understand and can help you avoid hidden fees that can accumulate over time. Combining a flat-rate payment processor with your point of sale is typically easier for one integrated payments solution.
When looking for a flat-rate or tier plan, it’s essential to consider the other fees that can increase your processing costs. For example, if your business is classified as a high-risk MCC (merchant category code) for card payments like financial services, travel, or gambling, your merchant account can be charged higher interchange rates than other MCCs. These higher rates can add up quickly and increase your overall processing fees.
While many aspects of credit card processing fees cannot be negotiated, there are still ways to save money on your interchange rate, especially with a suitable processor. For example, many businesses can reduce their interchange costs by ensuring all of the proper transaction data and each credit card payment are sent. By leveraging the depth of integration that solutions like Versapay provides, information such as invoice number, order number, sales tax, and customer code can be automatically sent along with each transaction to help ensure it qualifies for lower interchange rates.
Look for a Blended Approach
The best way to cut credit card processing fees is to take a blended approach. Depending on your monthly volume, this can be a very cost-effective method. Tiered or bundle pricing should be avoided, as the processor dictates the bucket you will be charged rates (and makes money hand over fist).
Interchange fees make up the lion’s share of merchant processing costs. These fees flow through the credit card networks (Visa, MasterCard) and eventually get paid to the card-issuing bank. They are based on the relative risk of the transaction and can be affected by several factors:
How the transaction was processed (e.g., swiped or keyed-in): Card-issuing banks view in-person POS transactions as less risky than online, invoice, or phone-based CNP transactions. Providing additional data on the transaction, such as a tax-id number or item commodity code, can help you qualify for a lower interchange rate.
Your MCC or Merchant Category Code is a four-digit number used to classify business types into market segments for simplicity in IRS reporting. It impacts how much you pay in interchange fees. In general, business types considered high-risk by card-issuing banks (like financial services, travel, and hospitality) have to pay higher interchange fees. You can reduce your MCC by minimizing chargebacks.
Negotiate
As a business owner, it’s essential to understand the three components that make up credit card processing costs: interchange fees, assessments, and markups. The good news is that, whereas fixed costs are non-negotiable, the processor’s markup is up for grabs. Businesses can significantly reduce their processing rates by focusing on negotiating this fee.
To negotiate lower fees, a merchant must be seen as adding value by having a high transaction volume or providing an innovative payment solution. It also helps to encourage customers to use cash or debit instead of cards, as this will reduce processing fees by reducing the number of disputes and fraud claims.
For businesses that can’t eliminate or avoid card payments, implementing a surcharging program may help offset processing fees. However, this can be difficult to implement and may result in lost sales. Another alternative is to incorporate processing fees into advertised prices and discount customers if they pay with a cash or debit card.
The best approach for reducing credit card processing fees is to negotiate the interchange-plus model, which details all charges transparently and makes it easy to separate the payment processor’s markup from the interchange and assessment charges. This can distinguish between paying competitive rates and being buried under expensive, hidden fees.