There are several fees associated with accepting credit card payments at your business, and the interchange rate should be one that every retailer is familiar with.
However, despite the major role these fees play in the retail business, interchange rates can often cause confusion, and many retailers don’t understand just how much it adds to their credit card processing fees, or how they are even calculated. This article aims to explain some of the confusion that surrounds these fees and details, as well as how to figure out your Visa interchange rates.
Understanding Interchange Rates
Interchange rates cover the cost of transfer fees between the merchant bank and the issuing bank or credit card companies. The interchange rates are unique to the individual card company, and Visa refers to them as Interchange reimbursement fees.
As a merchant, you won’t pay these fees directly, however, you will pay them in the form of a merchant discount. These charges are applied as a percentage of each sale plus a flat fee, which varies depending on multiple factors, including the nature of the transaction.
Typically, credit card fees can be charged at anything up to 3 per cent, while debit cards have a fee of around 1 per cent. Interchange rates have stayed consistent over recent years, however, it can be difficult to understand exactly how much you are paying per transaction as they usually get charged in bundles.
Fluctuating Interchange Rates
To add to the confusion, there are several variables that can influence your interchange rates so they won’t always stay at the same levels. As an example, changes in the cost of transferring money and the level of risk associated with your business can all affect how much you are charged. In addition, credit card companies alter their interchange rates at regular intervals. Visa does this in April and October every year.
What Is The Purpose Of Interchange Rates?
Although the retailer loses a small fee per transaction, interchange rates offer good value to the business owner, and the small percentage a retailer pays is considered worth paying in exchange for the ability to accept credit cards. This is because of the boost this can give to your business through increased sales, and clearing times for card payments are quicker than checks, which helps to improve cash flow.
The three main purposes of interchange rates are:
- The cost of processing the payment and using the banks facilities.
- Cover the cost of interest free periods; interest free periods are an obvious benefit to the retailer as they encourage consumers to buy more.
- A guarantee against fraud.
What Influences The Amount You Pay?
There are numerous factors that influence your interchange rates. Such as:
- The industry you sell in and the type of items you sell. For instance, there are different fees for food stores, general retailers, the restaurant trade and small ticket items.
- The size and scale of your business. Typically, larger companies are in a much better position to negotiate so they can get better prices from their merchant services provider. Smaller enterprises usually get less favorable terms so they pay more per transaction.
- The type of customer you are selling to. There are different fees for business customers and individuals.
- The type of card and the method of payment. For example, debit cards transactions attract a lower fee due to reduced risk of fraud, while card holder not present credit card transactions have a higher fee because of the increased risk. Reward cards also tend to have a higher fee.
- Whether the transaction is online or offline. Online transactions are costlier as e-commerce transactions are associated with a higher risk of fraud.
Reducing Your Visa Interchange Rate
As your interchange rate reduces the amount of profits you can make on each transaction, you might be interested in exploring ways on how you could reduce them: Here are some tips:
- First, keep track on how much you are paying in fees. Keep up to date with the latest changes to Visa’s interchange rates. These are published bi-annually and they are made available online.
- You can ask your merchant service provider to charge interchange rates as they occur individually, rather than as part of a bundle. This will help you track the amounts you are being charged.
- If you own a larger company with significant monthly fees, there should be room for negotiation with your payment processor, however, even smaller companies might be able to get some leeway if they are prepared to negotiate with their merchant services provider – ask if this is an option.
- Consider the types of payments you accept as some charge higher fees than others. However, if you limit the amount of credit card/debit card payments you accept, this limits customer choice and could impact on your profits.
Examples Of Interchange Fees
The examples below are based on Visa’s check card for debit transactions in April 2016:
- Retail – 0.80 per cent + 15 per transaction.
- Small ticket items – 1.55 per cent + 0.04 per transaction.
- Restaurant sales – 1.19 per cent + 0.10 per transaction.
- CPS/ E-commerce – 1.66 per cent + 0.15 per transaction.
So, on a typical transaction of $100 on an e commerce sale, a retailer would pay $1.77 as a basic interchange fee, however, as multiple factors are used to calculate the fee, additional charges can often be incurred.
For the latest prices, download the interchange fees from Visa so you have a clear picture of your basic transaction fees, or request the updated rates when they are released in April and October. If you want to get a clear understanding of how interchange rates work in practice, there is an online calculator where you can work out the fees yourself. It is available here.
Understanding your Visa interchange rates and what influences them will help you to get a clearer idea of the amount you are paying in credit card processing fees. Carefully monitor your fees for Visa interchange rates and if you feel you are paying too much, discuss the situation with your merchant services provider.