Decoding the Interchange Enigma: What ISVs and Merchants Need to Know
Interchange fees represent a substantial operational cost for businesses accepting card payments. While these fees are a necessary part of the payment ecosystem, a deep understanding of their structure and influencing factors empowers payment processors to optimize payment strategies and minimize expenses.
The payment processor’s acquiring bank pays interchange fees to the card-issuing bank for each transaction. This fee covers the costs associated with issuing and maintaining cards, providing rewards, managing fraud and bad debt, and the inherent risk assumed by issuing banks. However, the complexity of interchange fee schedules can make it challenging for processors to understand precisely what they are paying and why.
Several factors contribute to the variability of interchange fees:
Card Type: Credit cards typically carry higher interchange fees than debit cards. Premium cards with reward programs incur even higher costs due to the benefits they offer cardholders.
Transaction Type: Card-present transactions, where the card is physically swiped or inserted, generally have lower fees than card-not-present transactions (e.g., online or phone orders). This difference reflects the increased security measures associated with in-person transactions.
Merchant Category Code (MCC): Interchange rates are often categorized by industry. Businesses in specific sectors, like supermarkets or gas stations, may have lower rates due to high transaction volumes.
Payment Network: Each payment network (Visa, Mastercard, American Express, Discover) establishes its interchange fee schedule, which can vary significantly.
Transaction Size: The lesser-thought-about factor that can frequently impact the cost-effective rate the most is transaction size. Higher transactions often pay much less in interchange fees due to the fixed per-transaction fee. As the transaction volume increases, the impact of the per-transaction fee decreases.
Understanding these variables is crucial for merchants seeking to optimize payment processing costs. While eliminating interchange fees is not possible, strategies can help minimize their impact:
Payment Processor Selection: It is vital to choose a payment partner with transparent, detailed interchange data and to ask how your payment processor optimizes interchange. A good question is, “Do you support network tokens?” Using Visa Network tokens can save you up to 10BP on Visa Consumer Credit Interchange.
Regular Review: It is best practice to periodically review interchange data to verify that transactions are clearing at the best rate possible and work with your processor to fix any downgrade issues. Does your processor pass level 2 data for business cards? This can save up to 75BP on those transactions.
Staying Informed: Interchange rate updates occur twice a year, typically in April and October. Understanding the update's impact on your business costs and reviewing interchange data after updates is essential. Errors can occur when updates are made that could downgrade interchange and improperly increase rates. For example, an update on international fees could accidentally get applied to domestic cards, which would likely have more hits on the fee.
Strategic Card Acceptance: Merchants can subtly encourage using lower-cost payment methods, such as debit cards. However, your business needs to understand whether debit cards are more affordable. Debit cards may be more expensive if the average transaction is $6 or lower.
By understanding the intricacies of interchange fees and implementing strategic payment management practices, ISVs, and other payment processors can gain greater control over their processing costs and improve their bottom line. This proactive approach to payment optimization is essential for long-term financial health. RPY innovations can help; we provide an in-depth review of payment costs, including interchange and other processing fees.
