Interchange management: Deciphering the total cost of accepting credit cards

Few business owners have time to analyze the intricacies of calculating merchant services expenses. Much like an electric bill, the typical process for reviewing a merchant services statement is checking the total fees for consistency with prior months and filing it away. Most merchants accept merchant services expenses as a cost of doing business and choose to focus their energy on initiatives that generate revenue.

“The truth is, there is a great opportunity to manage and reduce the overall cost of accepting credit cards,” says Michael Cooney, Corporate Trainer at TransFirst.

Smart Business spoke with Cooney to learn more about how to manage expenses related to interchange fees and cut costs by as much as 30 percent.

How are interchange fees calculated?

The total cost for merchants to accept credit cards is divided into three separate categories: The process, the card association (Visa, MasterCard, Discover, AMEX), and card-issuing bank (interchange). Interchange makes up 70 to 90 percent of the total cost paid by the merchant, and most processors fail to educate merchants on ways to minimize interchange expenses.

Interchange fees are paid to the bank that issues the card to the customer. The specific interchange rate for each transaction is established and regulated by the card associations.

There are two variables that determine the interchange rate for each transaction. The first is the type of card presented by the customer. The major card types are debit, consumer credit, consumer rewards and commercial/B2B. Debit cards carry the lowest interchange rate because the average transaction size is lower and transfer of funds is verified and completed instantly. Lower risk to the issuer with a transaction equals lower interchange for the merchant. Commercial/B2B transactions carry the highest interchange rates because the average transaction size is significantly higher than a consumer transaction.

The second variable that determines the interchange rate is how the merchant processes the transaction. Because the card-issuing bank carries significant responsibility and liability for resolving discrepancies and fraud, merchants are rewarded (or penalized) based on their environment and behavior when processing transactions. Swiped transactions are lower risk than card-not-present transactions, so it is always advised to swipe whenever possible. However, many business models make it impossible to swipe transactions in person. In a card-not-present business model, it is especially important to understand the guidelines for interchange qualification. This environment has the greatest opportunity to reduce interchange expenses with the right processor and processing solution.

Which industries have the greatest opportunity to reduce interchange expenses?

B2B/B2G merchants that accept transactions in a card-not-present environment, such as phone orders or online, have the greatest opportunity to reduce interchange expenses. These merchants typically process commercial and General Services Administration cards, which offer the opportunity to obtain lower interchange rates by providing additional data with each transaction. For example, an auto parts manufacturer that ships products across the country can include data such as an invoice number, tax amount, duty amount or shipping costs. The more information that can be provided means less risk to the card-issuing bank and allows a transaction to qualify at a more favorable interchange rate.

How can business owners take action to reduce merchant services expenses?

It can be challenging to identify opportunities for improvement on the monthly billing statement because there is no standard format or regulation on how processors disclose the breakdown of the total fees. This is the greatest barrier merchants encounter when evaluating their existing statement and fees. Simplicity on a statement usually means more expensive. A merchant statement should clearly disclose the three components of pricing — processor fees, association fees and interchange. Working with a trusted adviser to audit these expenses is a great way to understand how the costs are determined and what can be done to minimize the expense.

Insights Banking & Finance is brought to you by Manufacturers Bank