Credit card processing fees are inevitable, but savvy merchants can minimize costs. The best way to do this is to optimize your payment processing infrastructure.
For instance, merchants can lower their interchange fees by actively promoting debit card payments because these transactions are less risky for the bank/card network than POS (point-of-sale) or MOTO/online orders.
Cost
Credit cards are a vital part of many consumers’ shopping experiences. For merchants, offering these payment methods allows them to cater to a broader customer base and improve overall conversion rates. Unfortunately, this convenience has one drawback: the cost of processing card payments. Known as interchange fees, these percentage-based charges are charged by card-issuing banks and credit card payment networks (Visa, MasterCard, Discover) to cover costs associated with processing transactions, managing fraud risk, and maintaining infrastructure.
Interchange fees vary by card-issuing banks and the type of transaction. For instance, merchants with a higher merchant category code (MCC) are subject to higher interchange fees than those with lower MCCs. Additionally, the card-issuing bank’s own cost of operation impacts the fees. For example, corporate and government cards typically charge more than consumer cards.
Although merchants cannot avoid paying interchange fees, there are ways to minimize their impact. For starters, they should focus on reducing their total swipe fee costs by using a credit card processing service that offers a pricing model that can save them money on these expenses. In addition, they should be proactive about ensuring that their transactions are qualified to the lowest possible interchange categories. This can be achieved by addressing downgrades to more expensive ones or adjusting how they process cards to qualify for the lowest categories as often as possible.
Impact on Sales
Credit card companies charge merchants fees when a credit or debit card purchases goods and services. These fees are necessary for running the payment networks and provide valuable protection for consumers. However, they can be difficult for small businesses to manage.
So, what is an interchange fee? Interchange rates are based on many factors, including the type of transaction, the merchant industry, and the payment frequency. For example, recurring transactions generally have lower interchange fees than one-time purchases.
As a result, merchants need to optimize their payment processing operations to ensure they pay the lowest possible interchange rates. This can include actively promoting debit cards (which have lower rates), adjusting how credit cards are accepted, and optimizing the overall payment infrastructure to minimize charges and chargebacks.
In addition, implementing cash discounts and providing full transparency to customers about the interchange fees can help merchants offset these costs. While this requires careful consideration and may be subject to local regulations, it can be an effective way for small businesses to manage their interchange fee expenses.
Customer Satisfaction
Offering more payment methods is critical to boosting customer satisfaction and increasing conversions. Regardless of the type of products you sell, customers appreciate the ability to pay using credit and debit cards online. This means you’ll be able to offer more convenient options and may see an increased revenue stream.
But while it might seem like a no-brainer to accept multiple forms of payment, the actual cost of accepting these transactions can be hidden from merchants. Interchange fees are a big part of the price of maintaining payment infrastructure, and they’re also a toll for consumers who use those services.
Interchange rates vary by transaction amount and card type. For example, a transaction that involves a tiny purchase will generally have higher interchange rates than one that includes a large sum. This is because smaller transactions are considered riskier for the card issuers, who use the fees to offset that risk.
While reports of possible fee hikes have sparked concern for merchants, choosing a payments partner that prioritizes transparent pricing can mitigate some of that pressure.
Compliance
Almost every business that accepts credit or debit cards pays interchange fees. These fees are a necessary buffer against the risks that financial companies assume when offering consumers credit cards. These fees can sometimes be substantial, especially for high-volume retailers.
Many different factors impact these fees, including the type of transaction (credit vs. debit), the card network, and the merchant’s MCC code. Other variables can include whether the card is consumer or business-issued and whether the card carries rewards features. These fees are also often adjusted by regulation, with some countries having lower rates than others.
As cards have become the dominant form of non-cash payment, they’ve generated significant revenues for businesses that issue them. Some large banks are pushing to change the current system, arguing that it gives neobanks and their fintech partners unfair advantages over traditional banks.
The good news for small and midsize merchants is that they can find ways to reduce or even offset these fees. For instance, they can negotiate with their payment processors to avoid paying higher interchange rates and take advantage of lower processing rates available for certain transactions. Alternatively, they can implement a surcharging program that allows them to pass the cost of credit card processing onto their customers.
