An interchange fee is a fee that businesses pay to accept credit cards. They are typically a percentage of the total transaction amount, plus a fixed fee. For example, a common interchange fee structure is 1.5% + $0.10 per transaction.
Interchange fees are set by the card networks (Visa, Mastercard, etc.) and are paid to the issuing bank of the customer's credit card. The card networks use interchange fees to cover the cost of processing credit card payments and to fund rewards programs and other benefits that come with using their cards.
How Are Interchange Fees Calculated?
The interchange fee that a business pays is based on a number of factors, including the type of card being used, the cardholder's country of residence, the type of transaction, and the size of the transaction.
The card networks have different interchange fee schedules for different types of cards. For example, Visa's interchange fees are higher for premium rewards cards than for basic credit cards. Mastercard's interchange fees also vary depending on the type of card, but they use a different fee structure than Visa.
The cardholder's country of residence also affects the interchange fee. In general, businesses pay higher interchange fees for cardholders from outside of their home country.
The type of transaction also affects the interchange fee. For example, business-to-business (B2B) transactions typically have higher interchange fees than business-to-consumer (B2C) transactions.
Finally, the size of the transaction affects the interchange fee. In general, businesses pay higher interchange fees on larger transactions.
What Are The Different Types Of Interchange Fees?
There are three main types of interchange fees:
- Card-present (CP) fees: These are fees that businesses pay to accept credit card payments when the customer's card is present. CP fees are typically lower than card-not-present (CNP) fees.
- Card-not-present (CNP) fees: These are fees that businesses pay to accept credit card payments when the customer's card is not present. CNP fees are typically higher than CP fees.
- Cross-border fees: These are fees that businesses pay to accept credit card payments from customers who are outside of their home country. Cross-border fees are typically higher than domestic interchange fees.
How To Reduce Your Interchange Fees?
There are a few ways that businesses can reduce their interchange fees. One way is to offer discounts or cash back incentives to customers who pay with cash or debit cards. This can encourage customers to use methods of payment that are less expensive for businesses to accept.
Another way to reduce interchange fees is to negotiate with your credit card processor. Credit card processors typically charge a markup on interchange fees, so there may be some room for negotiation.
Finally, businesses can use a combination of the above methods to further reduce their interchange fees.
Interchange fees are an important part of accepting credit cards as payment. By understanding how they work and how they are calculated, businesses can save money on credit card processing costs. Additionally, by offering discounts or cash back incentives to customers who pay with less expensive methods of payment, businesses can further reduce their credit card processing costs.
While interchange fees are an important part of the credit card processing fee structure, they are not the only fees that businesses pay. In addition to interchange fees, businesses also pay assessment fees, which are set by the card networks, and processor fees, which are set by the credit card processor. To learn more about these other types of fees, check out our article on credit card processing fees.