Interchange fees are established by card networks to cover the costs and risks of processing payments made using a debit or credit card. The rates for interchange fees vary widely and are influenced by several factors. For Merchants, many of these factors cannot be directly controlled or influenced.
Concerning the interchange fees for debit cards, the average interchange fee stood near $0.23 and $0.24 for transactions made over all networks in 2015, according to the Federal Reserve. However, these numbers do not include transactions that are exempt from Federal Regulations, such as transactions made using prepaid debit cards and cards issued via government programs. These averages also incorporate transactions of all values, including high-value transactions. Transactions of smaller value can have lower interchange fees.
The processing fees for credit cards are heavily dependent upon credit cards networks, but the rates also vary depending on circumstance. At the end of 2016, American Express had the highest average rates for processing fees, while Visa, MasterCard, and Discover were relatively comparable. The following credit card processing fees (including interchange) are reported by ValuePenguin, a financial resource provider. These percentages are deducted from the value of credit card transactions based on the network:
- MasterCard: 55% – 2.6%
- Visa: 43% – 2.4%
- Discover: 56% – 2.3%
- American Express: 50% – 3.5%
Interchange fees may be higher or lower depending on the following influences:
- Payment amount
- Card Program Type (rewards, basic, credit or debit)
- Card network (Visa, MasterCard, or American Express)
- Card Issuer
- Merchant’s business type
- Method of capture (online or using a POS terminal)
In the past, Merchants of all sizes have attempted to lower their interchange fees. There are several strategies for doing this, but new payments technologies represent the best chance for Merchants to save on interchange costs.
Strategies to Lower Card Processing Fees
Most of the traditional strategies to lower interchange and card processing fees are heavily dependent upon the decisions of those parties that collect revenue directly from processing fees, such as card networks and card-issuing banks. Here four of the most effective strategies:
1. Negotiate with Processors
Merchants can negotiate with processors to obtain lower card processing rates by using their transaction volume as leverage and by proving that they add considerable value to the card network. While this strategy can be successful, it is usually only possible for large Merchants who handle a large volume of transactions at a high dollar amount.
Smaller Merchants can lower fees by ensuring their payments are processed by large banks instead of small ones. Small banks usually defer their payment processing to larger banks who process payments in-house. This creates overhead costs that can be passed down to the Merchant.
2. Increase Security
Merchants can lower their interchange fees by increasing security measures at the moment of payment capture and elsewhere. Debit card transactions that are accepted without PINs or other authentication information will process at a higher interchange rate because the transaction incurs more risk for the card network.
Credit Card payments that are entered and accepted without authentication information, such as address, zip code, or a CVV/CID, will also process at higher processing rates.
To optimize security to lower fees and reduce the risk of card fraud, Merchants should accept chip cards for card-present transactions, if possible, and require additional authentication information for keyed, or card-not-present, transactions.
3. Use an Integrated Payments Solution
By implementing an integrated payments solution, such as a billing platform, Merchants can accept payments through a variety of methods using the same, consolidated system. Using an integrated payments solution ensures that there is less risk of payment exceptions. Payment exceptions that do occur can be managed efficiently.
An integrated payments solution can also reduce the frequency of data entry errors and reduce the risk of fraud, which lowers interchange rates.
4. Use an Incentive-Based Card Steering Solution
To have a direct influence over the card types they accept, Merchants can implement an incentive-based payment card/tender-type steering solution. This type of payments technology can calculate the cost of processing a card before the payment transaction is completed, then offer customers alternative card options that involve lower processing fees for the Merchant. These alternatives are presented alongside certain incentives, such as a discount on the transaction or a coupon for a future purchase, to encourage the customer to select a more optimal payment choice.
Incentive-based card steering technology can be configured to the needs of each Merchant. Most payments systems can determine certain factors in the payment process, such as the card network that the card belongs to and whether or not it is a debit or credit card. But new technology can now determine more elusive factors, such as the size of the card issuing bank and whether a credit card is a rewards card or a basic card.
As part of an integrated payments solution, an incentive-based card steering solution can help Merchants save money on their card processing costs in the long term and lead to lower interchange fees. It also provides Merchants with more influence over the card payments they receive, instead of being completely subject to the decisions of acquiring banks, issuing banks, and card networks.