The knowledge and understanding of how credit and other payment cards work is essential to any modern business. If you are currently running a business, you are probably using POS machines to support credit card transactions. The technology may be convenient, but are you aware of the different fees associated with it?
Interchange fees are transaction fees that a merchant’s bank account must pay whenever a customer purchases your goods or services via credit or debit cards. This fee is connected to any cashless transaction that your business enters with your customers, so it is important that you fully understand its concept.
How are Interchange Fees Charged to Me?
Whenever a card transaction is made, several entities are involved in the movement of money from the customer’s bank account to your own merchant account. Each entity involved in the transaction generates a fee for their services, which are pooled into one amount your bill, which are then labelled as interchange fees. These financial entities are your card-issuing banks, payment processors, credit card payment networks, payment gateways, and the bank where you registered your merchant account.
Is My Interchange Fee Fixed?
To answer this question, your interchange fees are dynamic, which means that the value may change depending on different factors. Each change affects your interchange fees, no matter how small or large these fluctuations may be. The factors that affect your interchange fees include:
- The costs of moving and transferring money
- The time value of money depending on current currency rates
- The relative risks involved in the transaction
Most of these changes can be attributed to credit card companies, such as MasterCard and Visa. They use these individual factors in order to assess the correct rates of interchange fees. Most changes happens twice a year, once in April and once in October.
In order to simplify computing interchange fees for merchants, credit card companies introduced a flat rate plus a percentage of the sales total after taxes for the fee. Billions of dollars are paid in the United States alone by merchants in order to cover these fees every year. On average, merchants pays up to 2% of the total purchase amount on interchange fees.
Transactional Factors that Affects Interchange
The transactional factors that affect interchange fees are:
The Card Type. The type of payment card used by a customer during a transaction affects the accompanying interchange fee for that transaction. Debit Cards with PIN codes generally have lower rates than credit cards. This is because the risks carried with debit card transactions are generally lower than those of credit or reward cards.
The Size of your Business and your Industry. The size of your business can affect the rate of interchange credit card companies give you. For example, corporations and Fortune 500 companies are given lower interchange fees due to the large amount of customers that they are expected to get.
Transaction Type. Depending on the type of transaction involving a payment card, the rate of interchange fee may change. Transactions performed with a POS machine yield lower transaction fees due to having less risk associated with it. Cash not present transactions such as online and mobile payments may incur higher charges due to higher risks with them.
Interchange fees are just one aspect of your business, and it is our responsibility to fulfill for the privilege of having cashless and even transactions outside your store. Remember, these profits may have largely been made due to cashless transactions in the first place.
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