Why Merchants Need to Pay Attention to Credit Card Interchange Fees

If you’re a business owner that takes credit cards, you know every transaction you process incurs interchange fees. And while many companies believe interchange fees are just part of doing business, you may not understand how those fees are structured, why they increase and how to reduce them.

The reality is you may be paying more than you should for credit card processing.

Payroc is one of the only platforms in the payments industry that allows businesses to choose how much to pass along interchange fees for credit cards, in the form of a surcharge.

Let’s look at how interchange fees work.

What Are Interchange Fees, and How Do They Work?

Interchange fees make up the majority of your processing cost and are calculated based on a percentage of transaction volume plus a per-transaction fee. These fees vary based on several variables:

• Network — The credit card issuer associated with the payment. For example, Visa, Mastercard, and Discover charge similar fees, while American Express tends to be priced higher.
  
  
• Card Type — These include debit, credit and rewards cards. Each are processed at different rates according to risk.
  
  
• Transaction Type — This pertains to whether the credit card is present or not present, and whether it’s swiped, dipped or tapped. EMV in-person transactions are typically processed at a lower rate.

Within the interchange process, there are entities who play different roles and can be considered “winners” or “losers” in the payment acceptance process, when it comes to fees.

The Four Players in Credit Card Transactions

• Issuing Banks/Card Brands — These are the clear winners, mostly because the card brands set interchange rates and both entities always collect fees for each transaction. They each compete for market share, and the more of their cards that are used, the better these companies do.
  
  
• End Consumers — Even though they’re the ones paying for the transaction, consumers are also winners. Why? Because they often receive some type of reward (in addition to the goods they’ve purchased), such as miles, cash back or points.
  
  
• Acquirers — Most of the time they’re winners for providing this service; however, if a merchant is mispriced or interchange rates go up, acquirers can find themselves on the losing end of the equation.
  
  
• Merchants — Even though merchants earn money for selling a good or service, and offer convenience by accepting cards, they are also typically the biggest potential losers. They must pay for the ability to accept credit card payments, and they must pay for the card rewards given to consumers. But they can be winners too!

Interchange fees aren’t static. In fact, they’re adjusted approximately every 90 days, which can result in a sudden spike in a merchant’s monthly fees – which can be yet another reason for merchants to feel like they’re potential losers.

The important word here is “potential.” Merchants can offset and distribute the interchange fees, creating a scenario where every player involved in the transaction is a winner. To take advantage of that scenario, the first thing to do is look at your pricing plan.

Understanding Pricing Plans

How your pricing plan is structured impacts interchange fees and how to offset them. For example, companies with a flat-rate pricing plan aren’t subject to individual card price fluctuations; they pay the same flat rate regardless. But if they're on an interchange plus plan, it’s a different story.

If you are on an interchange plus pricing plan, you could switch over to flat-rate pricing and guarantee the same rate every month, regardless of card price fluctuations. The other choice is to surcharge credit cards,  where you pass the interchange fee back to the end consumer.

How Surcharging Works

When merchants use a surcharge program, they can pass a portion or all of the interchange fee on credit cards to the customer. The type of surcharge program determines how much of the fee is passed along and the type of transactions involved. For example, compliant surcharging applies only to credit cards. Even though debit cards are not surcharged, merchants will still see their overall effective rates decrease.

At Payroc, we offer our clients and merchants choices that include surcharging.

How Payroc Helps Reduce Merchants’ Interchange Fees

Payroc has a suite of options that fall under a program we call Payroc Choice.

• ConsumerChoice is a dual-pricing program that gives customers the “choice” between the advertised card price or a discounted cash price. Both prices are displayed on the payment device in card-present environments. In card-not-present environments, customers see a card price and an ACH price, which is similar to cash payments. This program is very advantageous to merchants because they can reduce their costs across the board, associated with credit and debit card acceptance.
  
  
• RewardPay is our compliant surcharging platform, which surcharges credit cards and does not surcharge debit cards. This typically reduces a merchant's cost of overall card acceptance by about 50% to 70% compared to traditional flat rate or interchange plus pricing plans.
  
  RewardPay also puts the choice in the consumers’ hands. Pay with a credit card, incur a surcharge, and earn reward points – or pay with a debit card and pay the list price. This offers a win-win for merchants, consumers, issuing banks and acquiring banks.

So how do merchants know whether they should take advantage of dual pricing, surcharging or cash discounting?

When to Take Advantage of Interchange Fee Reduction

It's generally a good idea to review your processing statements every six months to determine if your costs are in line with your expectations when you signed your provider agreement. If your fees have gone up or if you're paying more than you think you should, it might be time to look at alternative pricing options.

Payroc can help merchants conduct that analysis. Our analysts can review merchant statements and identify:

• What they're paying
• What price plan they're on
• What their monthly costs are
• What their rate is
• How much savings Payroc can offer

We can then deliver a side-by-side comparison of several of our options to determine the best pricing plan and how the three fee savings options will impact costs this month, this year and over the next three years. We consistently save merchants hundreds or even thousands of dollars each month.

To find out more about how Payroc can save your company money and pass along interchange fees, reach out to our sales team today.