What Are Interchange Fees?

How do interchange fees work?

When you sign up with a payment processing company, it typically lists its interchange fees. Starting fees are usually expressed as a percentage of a transaction amount – including taxes – plus a flat rate. 

While processing companies often include starting rates for different card issuers, interchange fees vary between companies and are usually set using a series of formulas.

For example, a processor may charge a certain starting rate for cards issued by Discover vs. Capital One. They may also raise costs based on how many transactions you plan to process in a month, the average size of your transactions, whether you’ll be accepting credit cards in person or over the phone, and the industry in which you operate. 

Once you agree to the interchange fees and start processing payments, the processor will deduct interchange fees automatically 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% of the transaction value. Rates for debit cards are lower – around 0.3%. That said, interchange fees vary based on card issuer, transaction type and your industry. If processors consider your industry high risk – with a high likelihood of fraudulent transactions or chargebacks – then your fees could be markedly higher.

These transactional factors impact 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 chargebacks, but even churches and philanthropies pay interchange fees on their card transactions.
• Transaction type: Taking a credit card over the phone is much riskier than in-person transactions, where vendors can verify the cardholder’s identity. Processing fees are thus higher to compensate for this risk.
• Frequencies: Some card issuers – like Discover – charge different fees for one-time vs. 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 pay these fees, including churches and charities. 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 deducted automatically from your merchant account before the net sales proceeds are sent to your company’s bank account.

How to avoid interchange fees

Some transactions may incur higher transaction fees if they fail to meet the criteria to qualify 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. Debit cards charge lower interchange fees than credit cards.
• Use an address verification service (AVS). AVS reduces the risk of fraud. If your processor knows you’re checking customers’ IDs, you may get charged lower fees. Visa and Mastercard also offer lower interchange rates for merchants who conduct an AVS check 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 the amount of chargebacks. This way, the consumer will easily recognize the transaction.
• 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 fee costs. 

If you really want to avoid interchange fees, there’s only one way to do it: Don’t accept credit or debit cards. Depending on your industry, not accepting credit cards can hurt your bottom line even more than the fees. 

Interchange fees may be a fact of life for your small business – especially if you sell goods and services to the public, which expects the option of paying by plastic.