Fee Optimization

Credit cards are the preferred payment method for so many consumers that most merchants consider accepting them to be non-negotiable—which means that credit card processing fees have to be considered an unavoidable cost of doing business. However, the rates you pay are not always set in stone.

Different transaction types come with different interchange rates, and merchants may have more options than they realize when it comes to finding ways to process transactions in a way that minimizes interchange fees and other processing costs. How can merchants save money by optimizing their credit card transaction procedures to pay the lowest interchange rates possible?

Credit cards may be fast and convenient to use, but they require a lot of behind-the-scenes infrastructure to function, as every retailer knows.

That infrastructure is provided by card networks, banks, payment processors, and merchant service providers. Of course, none of them are performing their functions out of a sense of altruism.

In large part, they are paid for their work out of the credit card processing fees that get charged against every transaction that gets processed.

Merchants agree to pay these fees when they sign up with these companies, but nothing obligates merchants to pay higher fee rates when cheaper options are available. It’s just that merchants don’t always know about these alternatives, which may require different processing procedures than the typical retailer is used to.

While not every transaction will be eligible for lower interchange rates, knowing how to optimize can ensure that you won’t overlook opportunities to save money when they come up.

What Are Credit Card Processing Fees?

Most merchants pay about 1.5% to 3.5% of each transaction amount in credit card processing fees, with rates for e-commerce merchants and other card-not-present retailers falling on the higher end of the scale. What merchants are actually paying is a combination of several different fees, sometimes collectively referred to as the “discount rate.” It usually consists of the following fees:

• Assessment fees, which are paid directly to the card network.
• Interchange fees, which are collected by the card networks and paid to their issuing banks. Interchange fees are usually the largest component of the discount rate.
• Processing fees, which the merchant pays to their acquirer or payment processor.
• Other fees, such as foreign transaction fees, that may be charged under certain circumstances.

Each fee can have a variable pricing structure. Many providers will offer tiered pricing, which offers lower rates for transactions that “qualify” by meeting certain criteria, or a flat rate scheme that charges the same percentage on all transactions. It’s also possible to find subscription plans where you pay a fixed monthly rate no matter how many transactions you process. Of course, when you’re locked into a flat or fixed-rate plan, it’s not always possible to optimize for lower rates.

How Are Interchange Fees Calculated?

The largest portion of credit card processing fees, and the ones that merchants have the best chance of optimizing, are the interchange fees. These fees are collected by the card networks, which also set the rates, but they remit the funds to their issuing banks to compensate them for the risks and expenses they take on as part of the role they play in the credit card processing system.

Interchange rates can vary a lot depending on things like the merchant category, the type of card being used, the environment in which the transaction is being processed, and the dollar amount.

For example, card-not-present transactions are charged higher interchange rates than card-present transactions, and business-to-business or business-to-government transactions may qualify for special rates that are lower than normal retail transactions.

How Can Merchants Get Lower Interchange Rates?

Often, merchants base their transaction processing operations around speed and convenience. They may not even realize that by processing transactions in a different way, they could qualify for lower rates.

Merchants can optimize their interchange rates when they have a tiered pricing plan, understand its terms and rate structure, and seek out the lowest possible rate for any given transaction.

Transactions that include a CVV and billing address, for instance, are often cheaper to process than ones that do not include this information.

Purchasing cards are capable of providing higher-level transaction data at the point of sale, which can qualify the merchant for even better rates. When customers can include purchase order numbers and tax IDs with their authorization, the likelihood of fraud is greatly diminished and card networks can justify charging a lower interchange rate. Settlement timing can also affect interchange rates. You generally get the best rates by settling batches within 24 to 48 hours.

Some payment processors offer an “interchange-plus” guarantee where they promise to always use the most cost-effective way to process any given transaction. In other words, they’re offering to do interchange optimization for you as a service. This can potentially be an effortless way to get the best rates, but you should still do your own research and review periodically to ensure that you’re actually getting the best deal.

One of the best ways to reduce the costs of payment processing is to enlist the help of a company that specializes in exactly that. Some companies offer to find ways to cut your costs without the need to switch processors, and will conduct a free analysis of your merchant account to show you exactly where you could be saving money.

Merchants should also be mindful of ways to avoid other costs and fees associated with credit card transactions. Chargebacks, needless to say, are one of the big ones.

On average, chargeback fees can run anywhere from $20 to $100 per dispute, which can add up quickly and take a big bite out of your revenue. Any plan to optimize your interchange rates should run parallel with a strategy to prevent chargebacks if you really intend to bring costs down.

Conclusion

Credit cards can be kind of a double-edged sword. By providing customers with their preferred convenient payment option, they can definitely increase your sales, but they come with a lot of added costs that can pile up and turn into a huge problem if you stop paying attention to them—chargebacks being the classic example.

With interchange fees, the stakes are lower. If you ignore them, you aren’t risking a crisis that could get your merchant account revoked, but you could be throwing lots of good money away if you’re processing a higher percentage of your transactions at a higher tier than you should.

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