How to Reduce Card Interchange Fees

No matter how well you negotiated on your payments contract, signing with a payment processor means signing up for interchange fees. You didn’t do anything wrong. They are simply unavoidable—and completely necessary for any business that wants to accept credit and debit cards. As much of a necessary evil as interchange fees are, there are a few steps that merchants can take to reduce the amount they’re shelling out.

No matter how well you negotiated on your payments contract, signing with a payment processor means signing up for interchange fees. You didn’t do anything wrong. They are simply unavoidable—and completely necessary for any business that wants to accept credit and debit cards. As much of a necessary evil as interchange fees are, there are a few steps that merchants can take to reduce the amount they’re shelling out.

However, it’s important that you first understand just what interchange fees are. The simplest answer that we can give you is that they are the wholesale cost of completing a credit or debit card transaction. Once the transaction is being processed and the merchant and the customer both have their respective shares of the deal (money and product), the merchant’s bank and the customer’s bank are still working to complete the transaction. The merchant’s bank will at this point give the customer’s bank a portion of the merchant discount fee they held at the time of the sale—that’s the interchange.

Unfortunately, past that it is wholly dependent on the card company. Visa, American Express, Discover, and Mastercard all have their own unique take on interchange fees, and their explanations are much more complicated than ours—think big wordy graphs with numbers that are just trying to confuse you.

Despite the confusion surrounding interchange fees, there are only three primary factors that you have to take into account when you are looking for ways to reduce your fees: merchant type, acceptance environment, and the cardholder’s choice of payment card.

Merchant Type

Every industry has a different way of processing card payments, but whether you’re a restaurant, a retail shop, a non-profit, or anything in between, everyone has to pay interchange fees. However, interchange fees often differ between industries due to the conventional ways card payments are accepted in those industries.

For example, when a customer uses a card on an online store, the merchant authorizes the card at the time of the order, then settles the transaction when the order ships out. A coffee shop, on the other hand, has no need to hold funds over any period. As such, the ecommerce merchant and the coffee shop owner can expect to pay different interchange fees.

When applying for their merchant account, each business is assigned a Merchant Category Code (MCC) by their processing provider. That code will determine the interchange rates charged by the card network, so it’s important to ensure that your business is classified correctly. In most cases, you won’t find anything amiss but some businesses, particularly non-profits, may find that they’re paying higher interchange rates than they need to.

Card Acceptance Environment

Interchange fees are also determined by the method by which a card is accepted. These rates differ primarily because certain transaction methods are at higher-risk of fraud than others. To protect themselves from this risk, card networks charge higher interchange fees. Luckily, this is something that you can easily change to help reduce your interchange fees.

All it takes is accepting payments using the safest method available to you. If you have a card reader and are instead manually entering card digits into an online system, you’ll pay for that. If you have an EMV chip reader and are asking customers to swipe, you’ll pay for that too.

It’s not just the hardware that affects these rates. Think about an online store--there’s no way to have the customer insert their card into a reader. The only way you can accept a card is to have the customer punch in the card information for you. That doesn’t mean you can’t reduce interchange on these transactions, though.

For merchants who are restricted in how they can accept cards, we recommend having systems in place that take further steps to confirm the identity of the card user. An example of this is Address Verification Services (AVS), which checks the address of the person using the card against the address that the bank has on file to lower the risk of fraud (and your interchange fees).

If you’re looking to up the security of your physical terminal, consider using readers that require a PIN or signature before a transaction can be completed. Similar to card-not-present transactions, there are varying interchange fees for PIN debit vs. signature debit transactions. Though both are technically processed as debit transactions, PIN debit purchases are routed through the debit network while signature debit transactions are run through the specific credit card company’s network.  Essentially, it comes down to the cost of your average purchases. Signature debit is generally more cost effective for businesses that process smaller purchases while PIN debit often benefits those that process larger ones.

Better yet, one of the easiest ways to decrease your interchange rates is to install updated hardware that accepts chip cards if you haven’t yet. Staying on top of industry security guidelines may be tough, but it will keep your interchange rates as low as possible.

Choice of Card

Unfortunately, this is another factor that you won’t have much control over—that is, unless you want to restrict the type of card your customers are welcome to use. When it comes to credit and debit cards, the cost of a transaction can vary greatly. Debit cards, which pull money directly from a checking account and deliver it to a merchant account, are the least costly cards to accept. Credit cards with their inherent risk will be more costly, with rates increasing as the card rewards increase—somebody has to pay for all those airline miles!

We advise against restricting consumer choice, so we wouldn’t recommend cutting off certain card types because they’re too costly. Instead, we’d recommend that you keep a careful eye on the type of cards your customers are using so you can better know what to expect when it comes to interchange fees and budget properly for them.

Just for B2B or B2G: Transaction Level

This won’t apply to most businesses, however, if you are a business that runs a lot of transactions on business or government cards there is a way to reduce interchange on those transactions. B2B and B2G businesses can utilise Level 2 and Level 3 transactions when they process business, corporate, or purchasing cards.

Essentially, the interchange rates for these transactions are lower because the involved business or government organizations take on the risk rather than the card network. Merchants will have to invest more time into these transactions due to the large amount of customer information required, but if you’re looking to save—and you often handle these types of transactions—Level 2 and Level 3 transactions should not be overlooked.

A Word of Warning: Interchange Padding

Processors know that interchange fees are a black box to consumers. While we know the factors that go into interchange rates, the rates themselves are unpredictable and constantly changing. As a result, many merchants accept them blindly.

Sadly, this has led to some processors employing a shady tactic known as “interchange padding.” Basically, processors will charge additional fees disguised as interchange in your monthly statement. Spotting these fees is nearly impossible if you’re not comparing the statement side by side with current interchange rates. Finding padded interchange in your statement is another good way to reduce what you’re paying each month, but can be a painstaking and time-consuming process.

If you’re concerned about your interchange fees, consider requesting statement audits through SwipeSum Premium services. As part of these audits, we will review your processor statements as often as you like to check for interchange padding and other erroneous fees. If you’d like to learn more about SwipeSum Premium services, contact or call us at (314) 390-1461.

Michael Seaman

Michael Seaman

Michael is the co-founder and CEO of Swipesum. A veteran of the payments industry, Michael and his brother Stephen have led Swipesum since its inception in 2016. In his free time, Michael enjoyes time with his three children.

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