Understanding Interchange Rates

One of the biggest shocks eCommerce businesses discover is that payment processing can quickly become confusing and costly. Having the ability to process card payments opens up the doors to more business, but it also opens up a can of worms: interchange fees.

What Are Interchange Fees?

Interchange fees, sometimes known as interchange rates, are an expense associated with each processed credit card transaction. The “rate” associated with each transaction varies based on the card that was used for the transaction, the type of transaction (e.g. card-present or card-not-present), and your merchant category code.

Interchange fees are a normal component of tiered or interchange-plus models, while flat-rate models have one combined fee for all transactions.

Breaking Down Interchange Fees

Card Type

Certain cards come with higher interchange rates. Basic consumer debit cards have lower rates (usually around 0.5%), while rewards/cashback, travel, corporate, government, and pre-paid cards can have rates up to 3%.

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Transaction Type

For most businesses, there are two primary transaction types: card-present and card-not-present.

Card-present transactions, where people are swiping or tapping their cards in person, are considered as having a lower-fraud risk, so they often have lower interchange fees. However, card-not-present transactions, which involve either keying in a person’s card over the phone or accepting online payments, are higher-fraud risk, so have higher rates.

Merchant Category Code (MCC)

One easy way to save money when processing payments is to ensure your Merchant Category Code (MCC) is correct.

Your MCC is highly impactful because it influences your interchange rates, depending on which payment model you use, as well as your credit rating. Higher-risk merchants have to pay higher interchange fees. Sometimes, you can control your risk category, but other times, it’s more challenge based on your business model or the industry you operate in:

Businesses that accept subscriptions are at a higher risk because there is higher risk of chargebacks.
Supplement, adult content, travel, gaming, CBD, credit repair, and other (relatively) unregulated industries will be considered higher-risk.
If you’re a newer business, you may also be established as a high-risk merchant until you start processing more transactions and prove your credibility.

Beyond Interchange: Assessment & Processor Markups

Two other transaction-based fees you will notice on your statement, beyond interchange fees, are assessment and processor markup fees.

To break it down: interchange fees are what is paid to the cardholder’s bank, assessment fees are paid to the card network, and processor markup fees are paid directly to the processor.

Assessment Fees

Assessment fees vary based on the card network (Visa, Mastercard, etc.) and the type of transaction being processed. Generally, card-not-present and cross-border transactions will result in higher assessment fees, which are determined by the card network. Assessment fees will not vary based on pricing model, whether that’s tiered, interchange-plus, or flat rate.

Processor Markup

In flat rate and tiered plans, processor markup fees may change (with minimal notice), but with interchange-plus models, this fee will remain the same. It’s fully controlled by your processor, and its visibility to you will vary based on your plan. In tiered plans, the markups will vary based on whether the processor determines the transaction is qualified (meets all criteria), mid-qualified (meets some criteria), or non-qualified (doesn’t meet criteria). Non-qualified transactions will have higher processor markup fees.

The markup won’t ever change based on card type, but your processor can update the fee at any point. If you’re under a flat rate model, the fee will be blended with assessment and interchange, making it harder to assess when processors decide to change their fees. Likewise, in tiered plans, the interchange and processor markup fees are not labeled separately.

Processing Fees in Action

Here’s an example of processing fees in action:

Cost at Time of Transaction – $50
Interchange Fee (2%) – $1
Assessment Fee (Visa, 0.10%) – $0.05
Processor Markup (.30% + $0.10) – $0.25
Total Fees – $1.30
Net – $48.70

How these fees are presented to you will, again, vary based on the type of model you have. Interchange-plus is the only pricing model where the processor markup fee is 100% transparent.

Ways to Save Money

Determine which pricing model fits based on transaction volume: Interchange-plus can work better for bigger businesses processing higher volumes of transactions, while smaller businesses that don’t consistently process transactions may be fine with a flat rate model.
Implement Surcharges: Interchange fees can be higher based on card type, so you might consider implementing surcharges on company cards, rewards cards, or other premium cards that come with higher interchange rates. Before implementing any surcharge, be sure you understand surcharging rules set by your state and the card networks you frequently work with.
Dispute chargebacks: Chargebacks are expensive challenges for merchants. If you know the chargeback is incorrect, don’t let it slide. Whether you win or lose the dispute, you’ll be charged either way, but if you win, you’ll keep the original net from the transaction, minus the fees associated with the chargeback
Work with the right processor: There aren’t a lot of honest and transparent payment processors. One of the most common hidden costs for businesses is processors changing their markup fees, and if you’re not paying attention to your net payments on your merchant statements, these fee changes are easy to miss.