What Merchants Say About Interchange Fees for Credit Cards
If you’re a protector of a business’s revenue and reading that didn’t give you goosebumps, then one of the following statements probably rings true:
- “I’ve never heard of them.” -> You’re in for a wild ride.
- “I may not have a clear understanding.” -> You aren’t quite sure how it impacts you or your bottom line.
- “I’ve got this; I’m a pro.” -> You’re already minimizing interchange fees for credit cards in 100% compliance with laws and rules.
Seem a bit heavy-handed? Glad we’ve caught your attention.
Credit card interchange fees are avoidable, yet businesses still dole out up to 3.5% of every credit card transaction to the issuing bank. These merchants aren’t taking advantage of credit card surcharging or passing interchange fees off to the end consumer—more on this later.
The Role of Interchange Fees for Credit Cards
Banks charge interchange fees (or transaction fees) to cover the cost of credit and debit card processing. This covers the risk of fraud, failed transactions, and the logistics of processing a payment.
Here’s how it works:
- A merchant accepts credit or debit cards as a payment method.
- The purchase amount is processed through a card network (i.e., Mastercard, Visa).
- The card network then deposits the funds with the issuing bank (bank who issued card to the customer) or rejects the transaction altogether.
The twist: Issuing banks withhold the cost of the interchange fee. Up to 3.5% of each sale is withheld from the merchant as a cost of doing business. Translation? Merchants take on the interchange fee to complete the transaction.
A further twist, merchants cannot use surcharging to avoid interchange fees on debit card purchases. Fortunately, debit card interchange fees cap out at $0.21 plus .05% of the transaction total, a fraction of the cost of a credit card transaction fee. For comparison, the average credit card interchange fees total 1.81% of the sale.
Disadvantages Created by Interchange Fees
There are legitimate disadvantages for companies that don’t employ a cash discounting or surcharging program. Prime among them is the revenue taken directly from their pocket to pay for transaction costs.
Consider this: A business earning $200,000 annually from credit and debit card sales could save around $2,700 per year by minimizing card processing fees—assuming 50% of sales are made using credit cards with a 2.7% fee.
Now consider the advantage of employing surcharging to save thousands of dollars by having the consumer take on the cost of “doing business,” as we referred to above. In most states, a surcharge is a perfectly legal line item to add to a bill of sale if a credit card is used.
(Disclaimer: Massachusetts and Connecticut do not currently allow surcharging. Learn more about various state merchant interchange fee regulations here.
Merchant Hesitations and Motivations
Perhaps by this point, surcharging feels like a legitimate counter to one of your loss leaders: interchange fees for credit cards. That’s great!
But it’s important to take a look at both sides of the coin. Surcharging is a fantastic way to recover revenue, but like everything, it comes with some nuances to consider.
- Customer confusion: Some customers may not understand credit card transactions are a more significant expense to the merchant than debit or cash.
- Customer distrust: There may be a certain mistrust or anxiety caused by cash discount programs, especially without educating the consumer.
- Lack of understanding: Some merchants have a general grasp of surcharging but a firm understanding of specifics such as non-compliance or other consequences.
Merchants are valid in worrying about customer perception of surcharging. In fact, a survey of cardholders showed that 58% claimed they “would not pay a surcharging fee” if presented with one.
The disconnect? 85% of consumers report paying a surcharging fee when presented with one.
Merchants who avoid offering cash discounts or implementing surcharges for fear of adverse consumer reaction may actually have nothing to worry about.
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