Whether you’re selling online or in-person, it’s important to learn about interchange fees. They significantly impact the cost of accepting card payments.
Understanding interchange fees enables merchants to effectively manage processing costs, negotiate better rates, make informed decisions about card acceptance, and ensure compliance with payment industry standards. Ultimately, understanding what interchange fees entail helps you make smarter decisions that improve financial performance and customer experience.
TL;DR
- Credit card interchange fees are paid by the merchant’s processor directly to the card-issuing bank (the bank that issued the card to the customer) to cover liquidity, fraud risk, and card benefits. Card networks (like Visa and Mastercard) do not keep interchange fees; instead, they collect separate assessment fees.
- Interchange fees themselves (not processor markup) are non-negotiable and they’re charged whenever a merchant accepts credit card payments. That said, these fees can vary based on several factors like card brand/type, transaction location, etc.
- Merchants can also offset the costs associated with credit card processing by implementing credit card surcharging (where permissible) using a solution like CardX or processing through a subscription-based processor like Stax Pay.
What are credit card interchange fees?
Credit card interchange fees are the fees paid to the card-issuing bank (through the merchant’s processor) every time a merchant processes a credit or debit card payment. These fees help cover the issuing bank’s costs, such as fraud risk and card benefits.
The anatomy of credit card processing fees
Let’s break down the nitty-gritty of credit card processing fees—because understanding where your hard-earned money goes when you accept card payments is crucial for any business owner, especially a small business. There are a variety of different fee types associated with processing credit card payments.
Interchange fees
First is interchange fees. They’re the heart and soul of credit card processing. These fees are paid to the card-issuing bank (think your friendly neighborhood Bank of XYZ) by the processor and are typically a percentage of the transaction amount plus a fixed fee. They can vary based on factors like the type of card (debit, credit, rewards, etc.) and how it’s processed (swiped, dipped, or typed in).
Assessment fees
Assessment fees go directly to the card networks—primarily Visa, Mastercard, and Discover—for utilizing their network infrastructure. (American Express operates similarly through its network fee structure). These fees are a small fraction of a percent (typically around 0.13% to 0.15%) applied to your total monthly volume.
Processor markup
This is where your payment processor comes into play. Most processors charge a markup on top of interchange and assessment fees, which covers their services, technology, and the convenience. This markup can be a fixed fee per transaction or a percentage of the total amount, depending on your processing agreement.
Additional fees
Generally, processors toss in other fees, like monthly statement fees, gateway fees, or chargeback fees if customers dispute a transaction. Make sure you read the fine print on your processing agreement to know what you might be dishing out for these extras.
Can you decrease interchange fees?
While you cannot negotiate the baseline rates published by Visa and Mastercard, you can directly lower the interchange rates you pay through data optimization.
Card networks assign transactions to different interchange categories based on risk and information provided. By optimizing how transactions are processed—such as prompt settlement, utilizing Address Verification System (AVS), and automatically passing Level 2 and Level 3 data on B2B transactions—merchants can move transactions from high-cost “downgrade” tiers to the lowest possible interchange rates.
Strategies to lower your credit card processing costs
Because there are many factors that go into determining how much you’ll end up paying in processing, there are strategies you can follow to lower the overall costs of credit card processing.
1. Negotiate with payment processors
While you can’t negotiate interchange fees, you can negotiate the fees charged by your payment processor or merchant services provider. Be proactive in discussing your processing rates, and ask for competitive pricing, especially if you have a high transaction volume.
2. Optimize payment channels and acceptance strategies
While card network rules require you to accept all valid cards of a brand you support (you cannot choose to decline high-reward Visa cards while accepting basic ones), you can encourage lower-cost payment methods. Steering customers toward debit cards (which typically carry lower interchange rates) or ACH/eCheck payments for large B2B invoices dramatically lowers your processing expenses.
3. Regularly review and compare processing statements
Periodically review your payment processing agreements to make sure you are getting competitive rates and that there are no hidden fees.
4. Switching to a processor with lower fees
It’s important to periodically explore different payment processing solutions, such as payment gateways or integrated systems, that might offer more competitive rates and better efficiency. The payment processing landscape changes fairly frequently, so you may no longer be getting the best available deal.
5. Batch out daily to avoid interchange downgrades
Batching transactions daily doesn’t group multiple purchases into one per-transaction fee, but it is critical for preventing costs from spiking. Card networks require transactions to be settled within a specific window (typically 24 to 48 hours after authorization). If you delay batching, transactions “downgrade” to higher, riskier interchange categories (like Standard or EIRF), increasing your costs. Daily batching ensures you qualify for the lowest possible target interchange rate.
6. Upgrade payment hardware and gateways
Outdated POS equipment that relies on manual key-ins or magstripe swiping exposes your business to higher interchange rates and non-EMV fraud liability. Modern terminal hardware and gateways support chip (EMV), contactless payments (Apple Pay/Google Pay), and tokenization— qualifying your transactions for lower card-present rates while helping reduce your exposure to chargebacks.
Alternative solutions: Introducing CardX by Stax
CardX by Stax takes a distinct approach by enabling merchants to offset the cost of acceptance by applying a credit card surcharge to cardholders who choose to pay with credit (known as surcharging). It is important to note that card brand rules prohibit applying a credit card surcharge to debit card transactions. CardX automates this at the point of sale by dynamically detecting card types—surcharging only eligible credit cards while processing debit cards without an added fee.
It’s important to note that the permissibility of credit card surcharging varies by state and is subject to state law and card brand rules. You should review local laws and card network guidelines to ensure compliance while clearly disclosing the surcharge to cardholders.
There are several potential benefits to the credit card surcharging model.
Immediate reduction in transaction costs for the merchant
Offsetting the cost of acceptance can significantly impact a company’s bottom line, allowing them to allocate resources more efficiently, invest in growth, or offer competitive pricing to their customers.
Compliance support for surcharging regulations
CardX’s model offers peace of mind when it comes to compliance with surcharging regulations. Navigating the complex legal landscape surrounding surcharging can be a daunting task for businesses. CardX by Stax not only provides the technical infrastructure to implement surcharging but also helps businesses stay compliant with local and regional laws, as well as card network regulations.
Flexibility and adaptability: Working online, in offices, and in-store
One of the key advantages of CardX’s model is its flexibility and adaptability to various business settings. Whether you operate primarily online, in office environments, or in physical stores, CardX can seamlessly integrate with your payment systems. This adaptability ensures a consistent and user-friendly experience for both merchants and customers, regardless of the sales channel.
Beyond surcharging with CardX, merchants who absorb processing costs can dramatically cut overhead by partnering with a processor like Stax Pay. Unlike traditional processors that charge variable percentage markups on top of interchange, Stax utilizes a direct membership model—giving merchants access to direct interchange rates with 0% processor markup* for a flat monthly subscription.
*Subscription prices are determined by processing volume and do not include cents per transaction.
Comparing direct reduction vs. surcharging
So, what’s the difference between direct reduction (the merchant absorbing card processing fees) and surcharging? There are three main areas you need to compare when considering switching from one form to the other.
Financial implications for the business
Direct reduction impacts profit margins, possibly requiring price adjustments, and can affect tax reporting. It’s more expensive, at least up front, to the business than surcharging.
Feedback and reactions from customers
Credit card surcharging can help maintain profit margins and offers pricing transparency but may yield mixed customer reactions. Because direct reduction is the most common form of credit card payment processing for businesses, customers may be put off by the additional fee and may need to be educated about how surcharging helps growing businesses.
Long-term sustainability and adaptability
Sustainability-wise, direct reduction can strain profits, necessitating adjustments. Credit card surcharging can help recover costs but requires compliance with regulations and customer education for long-term success.
Businesses should weigh these factors when deciding between these payment processing approaches.
Wrapping up
There are many pricing model options available to merchants these days when choosing a processor, from interchange-plus, to subscription style, to flat-rate pricing. Stax Pay and CardX make payment processing fees simple for businesses—by helping to lower overall processing costs and offsetting the cost of acceptance through credit card surcharging (where permissible).
FAQs about credit card interchange fees
Q: What are credit card interchange fees?
Credit card interchange fees are paid to the card-issuing bank (through the merchant’s processor) every time a credit card purchase is made. They help cover the issuing bank’s costs, such as fraud risk and card benefits.
Q: Who determines the interchange fees?
Interchange rates are set by card networks such as Visa, Mastercard, and Discover, and are published in rate tables that apply to all merchants. American Express uses its own fee structure.
Q: Is it possible to decrease credit card interchange fees?
Baseline interchange rates are non-negotiable because they are set by the card networks. However, merchants may qualify for lower interchange categories by settling transactions promptly, using Address Verification System (AVS), and passing Level 2 and Level 3 data on B2B transactions.
Q: How can I lower my overall credit card processing costs?
While baseline interchange fees cannot be decreased, the overall costs of credit card processing can be lowered. Strategies include negotiating fees with payment processors, optimizing payment channels and acceptance strategies, regularly checking and comparing processing statements, switching to a processor with lower processor fees, batching transactions daily, and upgrading payment hardware and gateways.
Q: What is surcharging in payment processing, and who offers this model?
Credit card surcharging is a model where merchants apply a surcharge to cardholders who choose to pay with credit, to help offset the cost of acceptance (where permissible). CardX by Stax offers this model, helping businesses maintain their profit margins.
Q: What are the benefits of the surcharging model in credit card processing?
The surcharging model offers several benefits such as immediate reduction in transaction costs for the merchant, compliance support for surcharging regulations, and flexibility/adaptability to work online, in offices, or in physical stores.
Q: What factors should be considered in deciding between direct reduction and surcharging?
In deciding between direct reduction and surcharging, businesses should consider the financial implications for the business, customer feedback and reactions, and long-term sustainability and adaptability.
Q: What are assessment fees in credit card processing?
Assessment fees go to the card networks such as Visa, Mastercard, or American Express. They are usually a small percentage of the transaction value.
Q: What is the role of a payment processor in credit card transactions?
The payment processor charges a markup on top of interchange and assessment fees, which covers their services, technology, and convenience. This markup can be a fixed fee per transaction or a percentage of the total amount, depending on the processing agreement. Stax Pay eliminates the markup in favor of a monthly processing subscription.
Q: What is “CardX by Stax” and how does it work?
CardX by Stax is a payment processing solution that implements a credit card surcharging model, applying a surcharge to cardholders who choose to pay with credit. It helps businesses maintain their profit margins and offset the cost of acceptance. It also helps businesses stay compliant with local and regional laws, as well as card network regulations.
