How to Reduce Interchange Rates and Fees

As a merchant, it’s imperative that you offer the payment methods customers use and expect. A 2021 survey conducted by PYMNTS.COM found that credit and debit cards continue to reign supreme. Despite the latest payment technology like mobile wallets and contactless options, today’s modern consumers still prefer to make purchases with credit and debit cards, as well as cash. While businesses can increase revenue and improve customer checkout experiences by accepting card payments, they need to understand and be aware of credit card processing fees known as interchange rates. This article will discuss what an interchange fee is and how to reduce these non-negotiable payment fees. As an added bonus, this can also help improve customers’ card data security and thus, mitigate fraud.

When a credit card or debit card transaction is processed, the funds are sent from the issuing bank (the customer) to the acquiring bank (the merchant). Major card associations, such as Visa, Mastercard, and Discover, will facilitate this card process. These associations will collect a fee from the merchant’s bank, which is called interchange fees. Interchange fees are non-negotiable and vary in cost for each card brand. Typically, the interchange fee is based on the percentage of the transaction plus a fixed amount. Even though card associations determine these fees, the issuing bank receives the fees. Indeed, these fees are designed to cover the costs of any potential risk involved in approving customers’ card payments.

• Card type – Debit, credit, rewards, business, etc. Credit cards are deemed higher risk compared to debit with PINs, which is why they have higher interchange rates. Reward cards may also have higher rates to pay for card benefits.
• Card process method – Cards can be dipped, keyed, swiped, or tapped, which determines how risky a card transaction will be. For instance, a card that was swiped and given a signature at a POS is less risky compared to a card-not-present (CNP) transaction.
• Data – Transactions should contain as much data as possible, which can show that the transaction is less risky. In turn, a low-risk transaction will generally have a lower interchange fee compared to transactions with minimal data provided about a customer’s card.

While interchange rates and fees are non-negotiable, there are steps that you can take to reduce these necessary processing fees. It’s important to note that some factors can be changed while others cannot. Merchants have the ability to adjust how much data is provided for every transaction. Since interchange fees make up the biggest costs of business processing fees, lowering these fees will significantly save money.

Interchange optimization refers to the process of adjusting transaction conditions based on best practices, which will help a merchant qualify for the lowest interchange rates. Let’s take a look at how businesses can achieve these lower costs.

It’s considered a best practice for businesses to settle their card transactions every day. By doing this, it will be easier for card associations to classify recent transactions for the right interchange programs. If merchants put this important task off, it’s possible that card brands may classify these transactions under other programs with much higher costs.

Manually keyed-in transactions like mail and telephone order transactions are considered high risk and thus, are given some of the highest interchange rates. As a result, it’s a good idea to avoid or limit the number of keyed-in transactions.

With the shift in shopping preferences, more businesses are offering options for customers to reserve products online or over the phone. This allows customers to place orders whenever it’s convenient for them and then pay in-store later on. Indeed, these card-present transactions have the lowest interchange rates because the risk of fraud is the lowest compared to card-not-present transactions (online and keyed-in). Since it’s easier to use a stolen card for card-not-present transactions, these transactions have much higher interchange rates.

If your business accepts and processes online payments, you may want to consider using 3-D Secure (3DS). Card brands offer this service to merchants to help mitigate the risk of fraud by authenticating cardholders before a transaction is processed. Another key fraud protection tool is network tokenization, which is offered by payment networks that tokenize sensitive cardholder data. Since these tools enhance payment security and help prevent payment fraud, this is an effective way to receive lower interchange rates from card brands like Mastercard and Visa.

Have you heard of interchange “padding?” This is when a payment processor adds additional costs to your interchange fee without telling your business. These rates are typically listed as just interchange fees, and businesses will just assume that these extra costs are also non-negotiable. Since it may be too complicated to identify these hidden fees, it’s recommended to work with a payment advisor who can assess how you are being billed for these rates.

When accepting payments, it’s recommended that you provide as much data as possible regarding your cardholders. There are three different data levels that merchants can submit, which include the following.

Level 1: Basic Retail

• Account number
• Authorized amount
• Billing ZIP code
• Card Verification Value (CVV)
• Expiration card date

Level 2: Order Detail

• Invoice number/customer code
• Level 1 data
• Sales tax amount
• Sales tax indicator/ID

Level 3: Comprehensive Line Item Detail

• Discount
• Freight/shipping costs
• Level 1 and 2 data
• Line item description, quantity, unit, etc.

When looking at the above lists, it’s important to note that Level 2 and Level 3 data apply to transactions made with business credit or purchasing cards. Generally, if a transaction contains higher data levels, this will have a lower payment fraud risk. In turn, these types of business-to-business (B2B) or business-to-government (B2G) transactions will have lower interchange rates.

Merchants are assigned a Merchant Category Code (MCC). Card brands will create these codes, which are based on the type of products or services a business offers and its specific industry. Certain categories receive lower interchange rates, such as charities. Thus, it’s a good idea for businesses to ensure they are classified under the correct category code so that they are paying the correct fees.

As you can see, lowering your interchange rates is possible. While these fees are required, there are usually opportunities to reduce the rate, even by a little. When you consider how many transactions you accept and process over the lifetime of your company, small reductions can add up to huge cost savings over time. If you are interested in learning more about how to better protect and secure your customers’ payment data, contact IXOPAY today. Our cloud tokenization platform protects the world’s most sensitive data, helping businesses achieve PCI compliance and maintaining business operations.