What is a merchant interchange fee?

For a credit card transaction, the merchant interchange fee is a fee charged by the issuing bank to the acquiring bank. When the acquiring bank then pays the merchant for the transaction, the interchange fee is deducted from the payment.

Interchange rates are set by the credit card networks (mainly Visa, Mastercard, Discover, American Express in the U.S.) and vary depending on a wide range of factors. Interchange rates are changed either annually, or, as with Visa and Mastercard, semiannually.

Interchange fees are not the only fees applied to a merchant account, but they are one of the most significant. When reviewing merchant account offers, understanding how the interchange fees compare and how different rates will affect your overall card processing expense is important.

Factors that affect the interchange fee you will be charged include:

  • The card network. Card networks have different rates and rate structures. Technically, American Express does not charge an interchange fee, but it does charge what is known as a discount rate, which amounts to the same thing.
  • Type of business.
    • High risk businesses pay a higher interchange fee than low- and medium-risk businesses. Our company specializes in helping high risk merchants obtain merchant accounts with the most favorable terms possible, so please contact us for help if you are applying for the first time or have a merchant account with less than desirable terms.
    • American Express fees vary depending on the type of business.
  • Card type. Credit and debit cards carry different interchange fee rates.
  • Transaction type.
    • Recurring payments may have a different rate than one-time purchases.
    • CNP (card not present) transactions have higher rates than POS (point of sale) purchases because the risk of fraud is greater.
  • Transaction volume. Very large merchants with a high volume of credit card transactions may carry enough clout with the banks to negotiate lower interchange fees.

From the information above, it becomes obvious that knowing what the exact interchange fee percentage will be over all your credit card transactions is difficult. The mix of cards you accept, the types of transactions you process and several other variables will change the overall amount of fees you will be paying.

Interchange fees are always charged to merchant accounts and adhere to a formal (and rather complex) structure. While very large merchants can obtain lower rates, negotiating these rates away is not possible. This makes interchange fees different from many types of fees charged by payment processors, such as fees for account setup and cancellation, which can be negotiated.

You may not want to alter your pricing or marketing strategy based on interchange fees, but understanding the nuances of how these fees work is helpful. Does it make sense to charge higher prices for online (CNP) transactions than POS (in-store) transactions because interchange fees are higher for online transactions? Probably not — but, knowing there is a difference could affect how you set pricing across the board, or what products/services you promote online and in the store.

Need help evaluating your interchange fees or finding ways to reduce them? Contact us now!

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