Every credit card transaction generates a fee for the payment networks like Visa and Mastercard, the merchant’s payment processor (the acquirer), and the issuing bank. Those fees often appear as one bundled amount on your processor’s statements.

The exact amounts vary depending on what your business qualifies for. This is called interchange category qualification.

Interchange Rates

Credit card payment processing is a complex process. Each transaction goes through a series of checks before the money is deposited in the merchant’s account. The fees that pay for this process are known as interchange rates. These rates are negotiated between the card companies and issuing banks and are not controlled by a merchant.

Understanding what are credit card interchange fees is essential for your business. Interchange rates are based on the amount of risk involved in each type of sale. Debit cards (essentially taking money from a customer’s checking account) have lower rates because they represent a low risk. In contrast, premium rewards credit cards have higher rates since the bank is essentially lending money to customers and needs to cover any losses with these transactions.

The location and method of a sale also impact interchange rates. In-person transactions with a physical swipe carry lower rates than phone, online or mail orders. In addition, the type of card program (e.g., rewards, airline miles, corporate purchasing) will impact the rate applied.

Some networks also charge an additional “processing fee” for each transaction, usually a flat amount per sale. This is different from the acquirer markup, and the card scheme fee, and a good payment processor will separate these fees so you see exactly what’s being charged for each transaction. The best way to do this is through a transparent pricing model like Interchange++ or Blended.

Interchange Categories

Every credit card transaction involves many different parties: a consumer, a merchant and a credit card company. Credit card companies charge interchange fees to cover the cost of their extensive systems that transfer money between consumers and businesses, as well as other services like rental car insurance, warranty protection and credit card rewards.

Interchange fees vary by card association, transaction type and even the cardholder’s location (e.g., USA or Canada). The type of sale (card-present vs. card-not-present) and the industry classification (MCC) also impacts rates, with higher fees for online or keyed-in transactions that are more likely to be fraudulent. Interchange rates can also vary on whether the card is a Visa, Mastercard or American Express. The latter is typically a premium product with added perks, which means the cards cost more to maintain for banks.

These factors are why many small businesses pay more in fees than larger companies, and the Durbin Amendment limits how much payment processors can charge per transaction. But the fee structure is complicated, so it’s important to understand how these fees work. You’ll often see them bundled in one percentage-based amount on the bills your payment processor hands you. Still, about 300 individual interchange fees make up that single “single” fee.

Interchange Optimization

Credit card processing fees can add up quickly and cut your bottom line. It’s important to understand how these fees are determined and what you can do to save on them. Interchange optimization, the process of ensuring that your credit card transactions are categorized and routed correctly to minimize downgrades and ensure your interchange rates are as low as possible, is one of the best ways to reduce transaction fees.

Most merchants need the option of negotiating interchange rates set by card-issuing banks to compensate them for the risk and expense of transferring funds between different financial entities in the system. However, larger corporations can negotiate rates with their processors based on the volume of transactions they execute daily.

Some payment processors offer a “pass-through” pricing model that separates the interchange rate from their markup, making it easier for merchants to see the true cost of processing each transaction. 

If you need to get on a pass-through pricing model, it’s critical to research and finds a processor that will help you achieve optimal interchange rates. A good way to do this is by working with a partner that enables you to take advantage of Level II and Level III processing, which are known to significantly lower transaction fees.

Interchange Surcharges

Many small businesses need clarification about credit card interchange fees. These are transaction fees charged by the card-issuing bank to cover operation costs, fraud and bad debt risk, and other expenses associated with approving a payment. They are also used to fund the card’s benefits, such as extended warranties and rental car insurance.

The card-issuing companies set interchange rates, often appearing as a single, bundled fee on your payment processor’s bill. These fees are also controversial and have been the focus of several Senate hearings in the United States. For example, the card-issuing company may charge different rates for debit cards versus credit cards because of the level of risk involved in each type of transaction. Debit transactions typically have lower fees because the card-issuing bank checks whether a customer has funds in their account before authorizing the transaction. On the other hand, credit card transactions are considered a form of credit and involve higher levels of risk since the bank is lending money to the customer.

Unfortunately, most merchants don’t have the option to negotiate card network rates. Large corporations such as Walmart are The only merchants with enough power to negotiate rates. Luckily, there are a few ways to reduce your processing rates without paying the card networks’ interchange fees.

Jane