What Are Interchange Fees and How Are They Calculated?

Interchange fees are charges credit card networks impose on businesses that accept credit card payments. Your business will pay the interchange fee alongside a merchant service provider fee and whatever other charges a network may apply when accepting payments. 

Credit card networks produce these interchange fees to ensure their networks and the banks that issue their cards are properly reimbursed. The effort also covers possible risks of chargebacks, fraud, and other concerns. The work is to help customers feel protected and secure from possible unexpected losses when using credit cards.

By paying an interchange fee, you will ensure you will receive payment for the transactions you process. You will also cover the cost of all fraud protection tools a card network provides.

How the Interchange Fee Works

The interchange fee is planned through a few steps:

  1. A business will process a credit card transaction.
  2. The acquiring bank will calculate an interchange fee. The acquiring bank is the merchant’s bank that provides access to the card network. The fee is calculated over many parameters surrounding the deal.
  3. The acquiring bank will pay the interchange fee to the card-issuing bank. The card-issuing bank is the group that provided the card the customer uses in the payment.

A merchant service provider will facilitate the interchange fee process. It will review the fee for the transaction and add a proper merchant fee alongside the initial charge.

How Is the Interchange Fee Calculated?

You can calculate the interchange fee for a transaction by reviewing a few terms surrounding the deal. The interchange rate is calculated over these factors:

  • How the card is processed – You will experience a lower rate if the card is present. A card-not-present transaction has a higher rate due to the added risk of someone impersonating the actual cardholder.
  • Data submitted with the exchange – You could get a lower rate if you provide extra details on a transaction. These include a CVV entry, AVS data, and other factors on a sale. You will show your transaction is legitimate, thus reducing your overall rate.
  • Merchant category code – Every business is represented by a distinct code. The code will vary by industry and the type of product sold. Each code features a distinct interchange rate.
  • Type of card – Debit cards have lower interchange rates because they entail payments directly from a bank account.  Cards that offer reward programs will have higher rates, as a card network needs to cover the expenses of running such schemes.
  • Type of card owner – A business or corporation will have a higher interchange rate, as that entity is more likely to spend extra and have multiple copies of the same card. An individual won’t have as high of a rate, as that person has more control over how one’s card is being used.

Every card network has unique terms for how it will calculate an interchange rate. Check with whatever card networks you support to see what terms they use and if they can provide you specifics for your rate.

How Can These Fees Influence Your Business?

Interchange fees will make it harder for you to keep your cash flow in check. You’re not collecting everything in a card transaction like you would through a cash or check payment.

For example, you might process a transaction worth $200. But there is an interchange rate of 2.3% plus 10 cents. You would spend $4.70 in interchange fees here, meaning you would get $195.30 out of that $200 order.

The interchange fee also pairs with a merchant fee. A merchant service provider that processes your transactions will add an additional fee on top of the interchange rate. In this example, the MSP could have a rate of 0.5% plus 5 cents, increasing the total to 2.8% plus 15 cents. At this point, the $200 transaction will return $194.25, with the remaining $5.75 being split among the card-issuing bank, the card network, and the MSP.

Can You Get a Better Rate?

While you can negotiate better merchant fees with your service provider, you will be unable to negotiate a better interchange fee with a card network. You’ll have to cover the rate that the network provides you based on your business field and the card types you accept.

You can still get a better interchange rate for your transaction if you follow a few points for getting your work ready. Here are a few tips to consider:

  • Use the Address Verification Service when handling CNP transactions. You can confirm that the address on a card matches the address of the person purchasing something. The process reduces the risk of chargebacks and therefore keeps your interchange rate down.
  • Settle your transactions as soon as possible. Settle them at least three days after each sale to help you collect your funds and ensure the transactions are final.
  • Get the merchandise out to your clients as soon as possible. Ship everything within seven days of authorizing the transactions. You will show you are prompt and direct when supporting your clients if you send out the merchandise soon enough.
  • Provide the order numbers and authorization IDs for each purchase when you settle the transactions.

While you cannot avoid interchange fees when accepting credit cards, you can reduce their impact on your business if you use the right tips. Be certain when handling cards that you recognize the unique terms you’re entering and that you have a plan for whatever works.

You can be certain when finding your interchange fee that it will be accurate and reflective of how your business operates. Every industry has a unique interchange fee to cover, and each credit card network will plan different rates. Be aware of how you’re spending money on your interchange fees and that you have a merchant service provider that will help you handle the fees you are spending the right way. The work should be about ensuring you have a plan for covering the costs.

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