Understand how credit card processing fees work and choose the best pricing model for your client base, whether you want a transparent solution that separates interchange from your markup or a more straightforward blended pricing model.
Understanding how credit card payment fees work is crucial for businesses and software providers. Fees vary by industry, location, and merchant category code (MCC).
How Interchange Fees Are Calculated
There are many moving parts when a consumer purchases with a credit or debit card. The transaction must be authorized, checked for fraud, and processed to complete the sale. Interchange fees cover the cost of these services.
These rates are set by credit card payment networks such as Visa and MasterCard. The acquiring banks then pass those fees to the merchant’s bank account. Merchants can pass these costs on to their customers as surcharges or absorb them as a business expense.
The interchange pricing the acquiring bank charges for processing credit and debit cards varies by business type, location, and payment methods. For example, a debit card transaction is usually less expensive than a credit card transaction. Moreover, the fees for in-person swipe transactions may be lower than those for online or mobile payments.
Small businesses often need help understanding their processing costs, especially those associated with credit card fees. The pricing models used by their processors are complicated, and they need to be more transparent. For instance, some processors use a blended model that mixes all the fees they charge (like the interchange plus model described above). The result is a confusing picture of transaction costs for the merchant.
Interchange Rates by Industry
Many business owners need to understand how interchange rates work fully, and it’s easy to get ripped off by merchant services providers who charge hidden fees. Fortunately, there are ways to avoid these sneaky charges.
Interchange fees are transaction fees that businesses pay when accepting credit card payments. These fees are based on the type of payment, the amount of the transaction, and other factors. Depending on the industry, these fees can vary significantly.
Credit card companies (such as Visa, MasterCard, and American Express) set the interchange rates passed on to businesses that accept their cards. These rates are updated periodically and can be a percentage of the transaction, a flat fee per swipe, or a combination of both. Different rates apply for various card types; some transactions are considered riskier than others.
A merchant service provider’s markup on top of interchange is another way businesses are charged hidden fees. This markup is typically the provider’s profit and is a common source of confusion for small business owners.
Some payment processing companies offer a simple pricing model that bundles interchange and markup into one flat rate. This is a good option for new or small businesses. However, this pricing structure only allows merchants to benefit from the lowest interchange rates.
Interchange Rates by Location
Many fees go into processing credit card payments, and it’s essential to know them so you can plan accordingly and save money long-term. Interchange rates are set by card-issuing companies and revised periodically, and they’re based on everything from the type of transaction to the merchant category. There are also different interchange rates based on where your business is located.
The purpose of interchange fees is to offset the risk that credit card issuers take when they extend credit cards to customers. The fees are charged to the acquirer (the processor you choose) and then passed on to the bank issuing the credit card to cover the service’s cost. These fees vary by credit card brand, with reward and commercial cards typically carrying higher rates than standard bank-issued cards.
Some acquirers offer a “blended” rate, where all your processing costs are combined into one flat fee. This can be a good option for some businesses, as it provides more transparency into your actual processing costs. The downside is that the blended fee may need to be higher to offset high interchange rates, which could lead to higher than necessary transaction charges.
Other acquirers offer an “interchange-plus” pricing model, which separates your processing costs into an interchange rate plus a markup. This is often a better option for some businesses because it allows them to benefit from low interchange rates and save more on their overall transaction fees.
Interchange Rates by Business Type
All merchants are assigned a four-digit merchant category code (MCC) that can influence their interchange fees. Merchants with a higher MCC are considered at a higher risk by card networks and are charged a higher rate than those with lower MCCs. Additionally, the type of payment method can affect your interchange fees. Card-not-present transactions (online or over the phone) have higher rates than card-present transactions (those swiped at a POS terminal). And rewards cards generally come with higher interchange fees, as these fees cover the costs associated with the extra benefits offered to customers who use them.
The country where your transaction takes place can also impact your interchange rates. Rates are cheaper for domestic transactions, where the card-issuing bank is in the same country as the merchant. Conversely, cross-border rates are more expensive because of the additional complications that can arise with these types of transactions.
Understanding these hidden fees can help you plan for the cost of accepting credit card payments and save money long-term. In addition, it can help you avoid unnecessary add-on charges from processors and MSPs that may be trying to hide these fees from you. If you’re unhappy with your current processing rates, look for an MSP offering transparent pricing and lower interchange fees.