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What Are Interchange Fees?
Learn how interchange fees, also called swipe fees, can affect the overall cost of doing business.
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If you’re working with a credit card processor to accept debit and credit card transactions from customers, you’re probably paying interchange fees. These fees are how credit card processors make their money, and for businesses that want to accept card-based transactions, they’re an inescapable reality. However, understanding interchange fees and how they work can help you shop around for the best deals from credit card processors.
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In this guide, we cover everything you need to understand about interchange fees for processing credit cards. We’ll also review typical swipe fees and ways to lower your payments.
What are interchange fees?
Interchange fees are the costs you pay your payment processor each time a customer makes a purchase using a credit or debit card. These fees, sometimes called swipe fees, are set by credit card companies, and they average about 2 percent of the transaction amount plus up to a 30-cent flat fee per transaction.
How do interchange fees work?
When you sign up with a payment processing company, it typically lists its interchange fees. The starting fees are usually expressed as a percentage of a transaction amount, including taxes, plus a flat rate.
Although processing companies often include the starting rates for different card issuers, interchange fees vary among companies and are usually set via a series of formulas.
For example, a processor may charge a certain starting rate for cards issued by Discover and a different rate for cards from Capital One. They also may raise the fees based on how many transactions you plan to process each month, your average transaction size, whether you accept credit cards in person or over the phone, and your industry.
Once you agree to the interchange fees and start processing payments, the processor will automatically deduct the interchange fees from all the payments you process and then transfer the resulting balance to your business bank account.
How much are interchange fees?
On average, interchange fees for credit card purchases are around 1.81 percent of the transaction value. Rates for debit cards are lower — around 0.3 percent. That said, interchange fees vary based on the card issuer, the transaction type and your industry. If processors consider your industry at a high risk of fraudulent transactions or charge-backs, your fees could be markedly higher.
These transactional factors affect interchange fees:
- Card type: Fees for accepting Visa, for example, are lower than those for American Express, which is partly why not all stores accept Amex.
- Industry: Some industries, like nightclubs, present a higher risk of fraud or charge-backs, but even churches and philanthropies pay interchange fees on their card transactions.
- Transaction type: Credit card payments made over the phone are much riskier than in-person transactions, where vendors can verify the cardholder’s identity. To compensate for this risk, processing fees for phone transactions are higher.
- Frequency: Some card issuers, like Discover, charge different fees for one-time payments than for automatic recurring payments.
Who charges interchange fees?
Your company’s services provider, also called a payment processor, charges interchange fees. In some cases, this may be a bank or a credit union. Most often, it’s a credit card processing company, such as Stripe, PayPal or Square (read our Square review).
Processors charge these fees for verifying a customer’s funds, processing the transaction and protecting your business against loss from fraud.
Who pays interchange fees?
If your organization accepts credit or debit card payments, you must pay interchange fees. Even government agencies, churches and charities pay these fees. However, these organizations can often negotiate lower credit card processing fees.
Every time you process a credit card transaction through the processor, the processing company collects a small fee from that transaction. The fees are automatically deducted from your merchant account before the net sales proceeds are sent to your company’s bank account.
How to reduce or avoid interchange fees
Some transactions may incur higher transaction fees if they fail to meet the criteria for lower rates. Follow these tips to reduce or eliminate interchange fees:
- Don’t accept credit cards. The only way to completely eliminate interchange fees is to only accept cash or checks.
- Encourage customers to use debit cards. The interchange fees for debit cards are lower than those for credit cards.
- Use an address verification service (AVS). AVS reduces the risk of fraud. If your processor knows you’re checking customers’ IDs, your fees may be lower. Visa and Mastercard offer lower interchange rates for merchants that conduct AVS checks on credit card transactions.
- Settle transactions as soon as possible. The longer it takes to settle transactions after authorization, the higher the interchange rate.
- Include customer service information in transactions. Providing as much information as possible on customers’ statements will reduce charge-backs because customers will easily recognize transactions.
- Use swipe transactions instead of manual entry. If you require customers to present cards in person instead of over the phone, you’ll lower your total interchange fees.
If you really want to avoid interchange fees, there’s only one way to do it: Don’t accept credit or debit cards. However, not accepting credit cards can hurt your bottom line even more than the fees.
Don’t let interchange fees cost you an arm and a leg
Interchange fees are inevitable if you want to accept debit and credit cards. However, you can lower these fees by looking for a good deal. By following the tips above to reduce interchange fees, you can minimize the cost per transaction while still accepting the forms of payment your customers have come to expect.
