How Customer Payment Choice Affects Your Interchange Fees

How Customer Payment Choice Affects Your Interchange Fees

As a Merchant, the interchange fees you pay for accepting debit and credit cards depend upon a number of variables, including the rules of credit card networks, the method of capture for the payment, your Merchant category code, and more. But the most significant variable concerning your interchange fees is the type of payment your customer chooses.

In most cases, you only have so much power over your customer's choice of payment. Some Merchants refuse to accept credit cards belonging to certain networks because they invariably result in high interchange fees.

However, accepting a wide range of card payment types can increase your customers' satisfaction, leading to faster payments and more revenue. To accommodate every customer payment preference while also saving on costs, you may need a payments solution that ensures you receive a higher volume of payments via lower cost cards, without sacrificing the acceptance of multiple payment types.

Interchange Fees are Influenced by Customer Payment Choices


Depending on your customer's payment choices, there can be a wide range of interchange fees. In fact, there are thousands of different interchange rates that are all influenced by several factors. For some merchants, Interchange fees are reported separately from other fees charged by the merchant's acquirer. For other merchants, Interchange fees are bundled with all the fees that Merchants pay to their acquirer. Specifically, interchange is the portion of funds paid by the Merchant's acquiring bank to the card issuing bank, the costs of which are then passed down to the Merchant.

Interchange fees and other processing fees will differ depending on the networks involved in payment processing, such as Visa or MasterCard, and the selection of different electronic payment methods:

ACH Transfers


Usually less costly than accepting a debit or credit card, an ACH payment does not involve card networks as it is a 'direct debit' from a customer's checking account.

ACH payments require a customer to input bank account information in a payment portal or to initiate payment through their bank itself by inputting Merchant account information. As such, this payment method isn't always available, or viable, for certain Merchants. For example, brick and mortar Merchants rarely rely on ACH payments because of the circumstances of in-person transactions, instead deferring to checks. E-commerce Merchants can accept ACH payments, but customers may be hesitant to input their bank account information.

Although ACH transfers represent the highest dollar amount of all transactions in the United States, they are more conducive to B2B transactions and bill payments. The Federal Reserve's 2016 Payments Study indicated that ACH credit and debit transfers represented 23.5% of all noncash payments in the United States. Consumers use ACH far less often for payments than they do debit and credit cards.

Merchants in the e-commerce space, Property Managers, HOAs, and Billers among others can include an ACH option for their transactions to potentially save on processing costs.

Debit Cards


Debit cards are currently the most popular payment choice of consumers. Debit cards that are swiped or inserted into a POS terminal with a PIN result in reduced interchange fees because the security risks of processing such payments are lower. Key-entered/card not present debit card payments generally cost more because of the security risk, but Merchants who accept card not present debit card payments online can mitigate these costs by asking for additional security information, such as the full billing address or zip code.

Current laws place a cap on the debit card interchange fees charged by large card issuing banks, but cards issued by smaller banks may result in a larger interchange fee.

Because debit cards are the preferred payment method of consumers, most Merchants are wise to accept them as a payment option. To lower the costs of debit card acceptance, Merchants can implement new payments technology to ensure that they receive more security information per transaction. Payments technology can also ensure that Merchants have a better chance of receiving payments through lower cost debit cards.

Credit Cards

When a customer chooses to pay with a credit card, they will generally use one of two types of credit cards: a rewards credit card or a basic credit card.

Rewards credit cards grant consumers points, airline miles, cash back offers, or other bonuses. When compared to ACH payments, debit cards, and basic credit cards, rewards credit cards usually result in the highest rates of interchange for Merchants.

Basic credit cards generally cost less to process than rewards credit cards, resulting in lower processing fees. But they can still be more expensive for Merchants than debit cards and ACH.

Merchants can Encourage Optimal Payment Choices

Payments technology enables Merchants to encourage customers to make payment choices that cost less to process. This benefits the Merchant in that it lowers the overall costs of accepting multiple payments; it benefits customers by offering them cash incentives, such as immediate discounts, and non-cash incentives like coupons and promotional offers.

Incentive-based card steering uses payments technology to calculate the cost of processing a presented payment type at the time of sale. It does this in real-time, then offers alternative card choices to the customer that can save the Merchant on interchange fees. When a customer selects an alternative payment choice, they will receive one of many benefits, such as a discount on the transaction total, a discount on future purchases, or a coupon for reduced-rate services.

For example, if a customer initially presents a rewards credit card for payment, an incentive-based card steering solution will calculate the cost of processing it, then offer alternative choices, such as a basic credit option or a debit card option. These choices are accompanied by incentives for the customer. If the customer chooses, they can still pay with their rewards credit card. Choices may include different payment methods, such as ACH or a debit card, and cards in a different payment network, such as MasterCard or Visa.

With this technology in place, customers retain their abundance of payment choices, but with more transparency into the costs that those payment choices imbue upon the Merchant and the option to select alternative choices for their own benefit. Merchants can retain significant cost savings over time by employing this technology in every transaction.

Merchants need a solution that gives them more influence over their card payments.  To learn more, fill out the form below and download the eBook.