Understanding interchange fees

Interchange fees are charged by card-issuing banks to merchants who process credit card or debit card payments. For example, if you sell t-shirts online and decide to accept credit card and debit card payments from customers, you’ll be responsible for these fees.

As an ecommerce business owner, you won’t pay the interchange fee directly as the card-issuing bank will take care of it and you’ll repay them. You accept a credit or debit card payment from a customer and your bank will then deposit the funds into your account. Next, the card-issuing bank will withdraw the money from the customer’s account, deducting the interchange fees and distributing the remainder to your bank.

Sometimes, you have to spend a bit of money to meet — or exceed — your revenue goals. Offering a variety of payment methods creates a frictionless checkout process that can lead to satisfied, loyal customers. This is because many customers prefer to pay via credit card or debit card over other payment methods. Accepting credit and debit card payments can also increase profits significantly.

Why do interchange fees exist?

The purpose of interchange fees is to cover the costs associated with accepting, processing, and authorizing card transactions. Interchange fees guarantee you receive payment, help cover the cost of fraud protection, and provide a convenient buying experience for your customers.

Interchange fees — also known as discount rates or swipe fees — were introduced by Bank of America in the 1970s, with Mastercard quickly following. The banks said the fees were intended to pay for the risk of providing credit to customers. In time, other credit card companies such as Visa and Discover began to charge interchange fees as well. Eventually, these fees became the norm and were accepted by many merchants because they contributed to the success of their businesses.

How are interchange fees calculated

Credit card companies set their own interchange fees. Most of them are calculated as a percentage of the sales price plus a flat fee. On average, these fees range between 1 and 3% of the total value of a transaction. Each year, US merchants pay out billions of dollars in interchange fees.

Since interest rates and market conditions change often, interchange fees are adjusted on a regular basis. For instance, card issuers like Visa and Mastercard change their rates in April and October every year. Other credit card companies may set their fees annually. So, the interchange fee you may pay this month may be different than the fee you’re responsible for next year.

Factors that affect interchange fees

There are a number of factors that affect interchange fees including:

• Card type
  Since debit cards with secure PINs are less risky, they tend to come with lower fees than credit cards. Credit cards with cash back, points, airline miles, or other rewards often have higher fees so issuers can pay for these perks. However, these rewards cards may encourage customers to spend more.
• Card brand
  Each card brand sets its own interchange fees — so you’ll pay a different rate for a Visa transaction than you would for a Mastercard one.
• Card owner
  The user of a credit card or debit card can impact the rate you’ll pay, ranging from individuals, businesses, corporations, or government agencies.
• Industry
  Interchange fees vary by business type. Generally speaking, traditional retail businesses pay the lowest rates. Ecommerce merchants, direct marketers, and B2B merchants usually face higher fees.
• Business size
  The larger your business is, the more power you’ll have to negotiate lower fees with banks and credit card companies. This is because you’ll likely process a higher volume of transactions every billing cycle. However, if your business is on the small side, you’ll likely pay the rate you’re given as there isn’t as much room for negotiation.
• Transaction type
  With most modern credit cards enhanced with a scannable microchip, point of sale transactions are less risky and have lower fees than transactions that require PINs or signatures. As an ecommerce merchant that accepts online payments, you can expect higher rates.

In a perfect world, you would be able to accept credit card and debit card payments without paying a dime. Since this isn’t the case, you can think of interchange fees as the cost of doing business and keeping your customers happy.

If you’d like to keep track of your interchange fees, save money on payment processing, and grow your revenue potential, Adobe Commerce can help. Schedule your free demo today.