Interchange fees play a major role in credit card transactions and have a big effect on how much businesses spend when it comes to processing card payments, indirectly affecting consumers as these fees have an ultimate impact on the cost of goods or services. So what exactly are credit card interchange fees?

Interchange fees are charged by card networks to the merchant's bank to cover the issuing bank’s operational costs. High interchange rates increase transaction expenses for merchants, meaning businesses need to engage in different cost optimisation strategies to balance minimising consumer effect while also decreasing their own negative impact. 

Understanding and managing interchange fees effectively is essential for businesses wanting to create a financial ecosystem that allows them to maintain their industry competitiveness and consumer satisfaction in their pricing structures.

Demystifying interchange fees

Interchange fees are transaction fees that merchants are charged when accepting card payments from customers. Whether payments are taken online by an eCommerce business or in person at a physical store, the merchant will be charged a payment processing fee. 

Processing payments comes with costs, as credit card companies have extensive systems in place to securely and safely collect money from consumers and send it to merchants. Interchange rates are how these credit card companies charge for that service.

Although interchange fees are often thought of as a single per-transaction fee, they’re actually an amalgamation of charges from:

• The card issuer: the customer’s bank or credit card company

• The card network: e.g. Visa, Mastercard, Discover, American Express

• The acquirer: the merchant’s bank or payment facilitator 

For merchants, interchange fees play a large role in determining the expenses associated with each transaction a customer makes with them. Higher interchange rates mean increased transaction costs, potentially driving them towards increasing the prices of their products or services for consumers. 

Determining factors for interchange rates

Due to the ever-changing costs of moving money and risk involved in making transactions, issuing banks and payment providers regularly adjust their interchange rates. For example, Mastercard and Visa usually change their rates twice every year in April and October. 

Interchange fees are determined by many complicated variables. To simplify the fees so merchants can understand the formula, credit card companies usually offer interchange fees as a flat rate plus a percentage of the sales total (including taxes). In the US, the average rate is about 2% of the purchase amount per transaction. 

Some card providers, such as American Express, charge higher interchange rates than others. However, this markup is passed back to customers through the many rewards and benefits that Amex cards offer. Customers using cards that have a rewards program attached to them tend to spend more in their transactions to gain access to the rewards. With their higher spend value, accepting these cards at your business can actually be a positive strategy for increasing sales, regardless of the higher interchange rate. If you choose not to accept these cards at your checkout, you should probably prepare to feel some friction from your customers!

Let’s explore the different factors that impact how an interchange rate is set. 

Credit cards versus debit cards

Credit cards have higher interchange rates than immediate debit and prepaid cards, as there is a higher level of risk for the issuing bank in letting your customers purchase with them. 

Card schemes

Your customers will be charged a different interchange rate depending on the card scheme they’re using, for example, Visa or Mastercard. 

Card-present versus card-not-present

Card-present (CP) transactions (where the customers can actually present their physical card) have lower interchange rates than card-not-present (CNP) transactions. This is because the risk of fraud is lower when the customer’s card is physically present. 

Examples of CNP transactions include online payments and in-app payments. CNP transactions are a common target for card fraud, because it’s difficult for the merchant to verify that it’s the actual cardholder making the purchase.

Consumer cards versus commercial cards

If your customers are using commercial cards, they’ll be charged a higher interchange fee than if they were using a card designed for an individual. 

Where the transaction is taking place (transaction regionality)

If the bank that issued the card is in the same country as where the transaction is taking place, there will be a cheaper interchange rate than if it were a cross-border transaction. 

For international transactions, businesses should be aware of additional foreign exchange charges when collecting payments from overseas customers. Some payment processors charge upwards of 2% per transaction for currency conversion. 

If your business conducts cross-border business, check out the Airwallex to see how you can enjoy a more cost-effective multi-currency checkout. Collect multiple currencies directly into your multi-currency account without being subject to currency conversions, and save a significant amount on each international transaction. 

Merchant category code (MCC)

Your business’s assigned MCC can also affect the interchange rate you receive. For example, if you’re a business providing utilities, a travel agent, a streaming service or charity, you may be granted a lower interchange rate in Australia and the US by Visa and Mastercard, in comparison to businesses who don’t fall into these categories.

We dive into more detail on the factors that influence interchange rates here.

Strategies for merchants to optimise interchange fee expenses

When it comes to cost optimisation regarding interchange fees, there are a few ways merchants can reduce their expenses and improve their bottom line. 

Choose an effective payment processor

The right payment processor for your business will depend on:

• Your industry

• The volume of your transactions

• Your customers’ needs and their payment processes

• The types of transactions being made with your business, e.g. recurring or once-off

• The average size of the transactions being made with your business

• Your business’s geographical reach

For example, if you are an eCommerce business, it may be best to prioritise online payment gateways, especially if you operate internationally. With a solution like Airwallex, you can enjoy hyper-competitive processing fees on both domestic and foreign transactions, and while boosting your global acceptance rates by allowing your customers to easily pay with their preferred local payment method and currency.

Minimise chargebacks by using secure transaction methods

Using a fraud protection tool like 3-D Secure (or 3DS) can help to protect you from criminal fraud and put you in good stead when negotiating your interchange rate with your bank. This system is used to validate buyers at the checkout stage, creating an additional layer of security for online transactions. 

Pre-chargeback programs are another way to minimise high-fee chargebacks being claimed against your business. These programs automatically refund disputed transactions at a much lower cost than a traditional chargeback, helping you to resolve these disputes before they even turn into chargebacks. Examples of these programs include Visa Rapid Dispute Solution and Mastercard Collaboration. 

Surcharge programs

Surcharge programs offer you the option to pass on the cost of credit card processing fees to your consumers, by adding an amount to the transactions that covers this cost. This can reduce the financial burden on your business and also give you more control over your transaction costs. However, surcharge costs need to adhere to specific legal regulations and card network guidelines, and it’s also important to consider the potential impact this change may have on customer satisfaction and loyalty. 

Pricing models and their impact on interchange fees

There are three main pricing models when it comes to payment processing, and all can have differing levels of impact on your business. 

• Interchange+: This model involves the card network passing the actual interchange fee to your business, along with an additional markup or fixed fee from the payment processor. It’s a choice for transparency, as you can see the exact interchange fee as well as the added markup. This can be an especially good choice for larger businesses with higher transaction volumes, however, keep in mind that it can lead to quite complex pricing structures. 

• Flat rate: With this model, you’ll pay a fixed percentage fee per transaction, regardless of the card type being used or the interchange fees. It's straightforward and easy to understand, and can be a great choice for small businesses and startups. However, it might not be the most cost-effective option for high-value transactions or if your customers often use premium cards, as the same rate applies regardless of the card's actual interchange cost.

• Subscription based: This model involves paying a monthly or annual subscription fee to your payment processor in exchange for their services. The transaction fees might be lower or fixed per transaction, and you’ll probably also have to pay a subscription fee. This model might be best if your business has quite predictable transaction volumes, as it offers cost predictability and potentially lower fees for higher transaction volumes. However, for businesses with quite sporadic or low transaction volumes, a subscription fee might not be cost-effective.

Read our comparison between Interchange+ and flat rate pricings in our article here.

Adapting to industry trends and regulations

For businesses, staying on top of interchange fee schedule changes and industry trends can empower you to engage in more strategic management of your payment processing, ensure you’re staying compliant and competitive, and make sure you’re providing the best payment experience for your customers. 

Many customers love to take advantage of credit card rewards programs, which can have both positive and negative impacts for merchants. Interchange fees are used by credit card companies to fund the rewards offered to their cardholders, such as cashback or rewards miles. 

This relationship forms a cycle: higher interchange fees generate more funding for rewards programs, boosting card usage, which then boosts interchange fee revenue for issuers. However, the benefits from rewards can come at a real cost for merchants, especially when premium cards with higher interchange fees are used. This can have an impact on profitability, so if this is the case for your business, you may consider surcharging or finding a better option for your financial situation. 

Strategic management of interchange costs

Making sure your business team understands and manages credit card interchanges rates is vital when it comes to improving your bottom line and conducting effective cost optimisation. Proper strategic management of interchange rates can reduce your costs and help your business succeed. 

To accept payments from customers in 180+ countries, while saving on costly processing fees, and safeguarding yourself against fraud, learn more about Airwallex's comprehensive offerings here.