If you have ever looked at your credit card processing statement and wondered what you are actually paying for, you are not alone. Terms like CPS Retail, Merit, OptBlue, World Elite, and downgrades can make it feel like your statement is written in another language.
The largest portion of what you pay to accept cards is something called interchange. Once you understand what interchange is, your processing costs become much easier to understand.
What Is Interchange?
Interchange is the base cost of accepting a credit or debit card. It is a transaction fee charged between banks for processing credit and debit payments. These fees are designed to cover handling costs, fraud risk, and card reward programs. They are typically structured as a percentage of the sale plus a small fixed fee, such as 1.80% plus $0.10 or 2.40% plus $0.10.
When a customer pays with a card, your bank deposits the funds into your account. The customer’s bank takes on the risk of fraud and non-payment. The card network, such as Visa, Mastercard, American Express, or Discover, routes the transaction between the banks. Interchange rates are set by the card networks and cannot be negotiated by processors or merchants.
Why Interchange Rates Vary
Not all cards cost the same to accept. The rate depends on several factors.
Type of card
Basic debit cards are usually the least expensive. Standard credit cards cost more. Rewards cards that offer cash back, travel points, or airline miles cost the most. Those reward programs are funded in part by interchange, so the better the perks for the customer, the higher the cost for the merchant.
How the card is accepted
Transactions that are tapped, dipped, or swiped in person generally cost less. Transactions where the card number is typed in manually or entered online usually cost more because they carry greater fraud risk.
Debit versus credit
Debit cards are typically less expensive than credit cards. Debit cards issued by large banks are capped by federal law at 0.05 percent plus 21 cents, with a possible additional 1 cent fraud adjustment. Debit cards from smaller banks are not capped and may cost more.
Industry and risk
Some industries experience higher fraud or chargeback levels than others. Online businesses, subscription models, and high-ticket merchants may fall into higher-cost interchange categories due to increased risk.
Understanding the Card Networks
Each card network has many different interchange categories depending on card type, transaction method, and data provided with the transaction. Properly processed, in-person transactions typically qualify for lower interchange categories than manually entered or delayed transactions.
Interchange Is Only Part of Your Cost
Interchange usually makes up 70 to 90 percent of your total processing expense. The remainder includes network assessment fees charged by the card brands and your processor’s markup.
Ways to Lower or Control Your Effective Interchange Costs
You cannot negotiate interchange or network assessments, but you can take steps to avoid paying more than necessary.
- Use a physical card reader whenever possible. Tapped, dipped, or swiped transactions are categorized at lower interchange levels than manually entered transactions.
- Batch daily. Make sure your terminal or point-of-sale system settles transactions every day. Waiting more than 24 to 48 hours can cause transactions to fall into more expensive categories.
- Use address verification and security tools for online sales. Entering the billing ZIP code and using CVV verification helps transactions process at better rates and reduces fraud risk.
- Understand your card mix. If a large percentage of your customers use premium rewards or corporate cards, your overall effective rate will naturally be higher. The goal is to ensure those transactions are processed properly, not to avoid accepting them.
- Review your pricing structure. While interchange cannot be changed, your processor’s markup can. Transparent pricing models make it easier to see what you are actually paying and whether there is room for improvement.
The Bottom Line
Interchange is not random. It is a structured system based on card type, transaction method, industry, risk level, and the quality of the transaction data provided. You cannot change the rules set by the card networks. But you can make sure your transactions are processed in the most cost-effective way possible and that you are not paying unnecessary markup on top of interchange. Understanding how interchange works is the first step toward making informed decisions about your payment processing costs. You can contact PSS Payments for additional details or if you have more questions.