The Impact of Average Interchange Fees on Small Businesses
Credit card processing fees are a fact of life for most businesses that accept customer payments. These fees, also known as interchange and assessment charges, are a big part of the total cost of doing business.
Some factors that affect interchange fees include the type of transaction: Online, keyed-in, mail order, or invoice transactions are higher risk and therefore charged a higher rate.
Increased Risk of Fraud
Depending on your business’s industry, the type of credit cards you accept, and the number of monthly transactions, your card processing company may charge you different starting rates for your interchange fees. This is done to offset the risk of fraud and chargebacks, which can be more costly for businesses like online stores or those that take payment over the phone. Other factors that influence the rate you pay include the card brand (Visa vs. American Express), the amount of the transaction, and whether it was swiped, inserted, keyed in manually or not present (such as payments made through contactless cards or online or over-the-phone).
Some of these fees vary by the card network, with debit cards typically costing less than credit cards because they are based on funds that have already been verified and approved. Also, fees differ based on the card type, with premium rewards credit cards generally having higher costs than everyday business credit cards. Finally, the size of a transaction and how often you receive them can also impact your average interchange fees, with larger purchases and one-time versus automatic recurring payments usually bringing higher fees.
Studying interchange rates can be a real snooze-fest, but it’s important to understand how these hidden fees affect your business. Otherwise, you could pay too much and miss out on profits and customer loyalty.
Increased Customer Dissatisfaction
Credit card processing fees—interchange rates—are a substantial part of the costs of processing debit and credit cards. These fees are paid to card-issuing banks for each transaction and cover the risks, costs and potential fraud involved in a card payment, along with various other charges for handling the card payments.
The fees vary by card network and type of transaction. Currently, Visa and MasterCard are the dominant players in the market, with both companies setting the swipe fee rates that their merchants must pay. This lack of competition is why NRF is asking Congress to pass the Credit Card Competition Act. This bill would help to drive down swipe fees by forcing card networks to allow competing payment processors access to their network.
In addition to the high swipe fees, many small businesses face other processing costs. For example, some restaurants have responded to the increased prices by implementing surcharges or cash discounts. Others are using a pricing model called interchange-plus, in which the processing cost is spelled out as one small fixed per-transaction fee plus a monthly subscription fee.
These strategies can help to mitigate some of the impacts of high swipe fees, but they can also erode customer satisfaction and loyalty. After all, research shows that customers are far more likely to remain loyal to a company that meets or exceeds their expectations during service interactions.
Decreased Profits
The costs associated with credit and debit card processing can be a real drain on your business. Many small businesses need help to balance these fees with other operating expenses and can be easily stung by unexpected increases in swipe fees.
The issue is that these changes in fees can take time to understand. They can also be difficult to challenge because many factors determine what your company will pay – including how the transaction was completed (card-present vs. card-not-present), the type of card used and more.
Knowing the facts is important before reacting to the 2022 swipe fee changes from Visa and Mastercard. While many merchants are angry that these changes will cost them more money, it’s important to remember that these increases won’t impact all businesses equally. Visa and Mastercard will raise fees for certain purchase categories while lowering them for others. Decreased fees for electronics retailers, apparel stores and online purchases will offset the increase for restaurants, hotels and daycares.
Another thing to keep in mind is that interchange fees are not negotiable. However, your merchant services provider should be able to offer you an interchange-plus pricing model that includes your interchange rate with their markup. This will give you more control over your overall processing rates.
Decreased Customer Loyalty
Customer loyalty is an essential factor for businesses, as it can help to reduce marketing costs and increase sales. However, relying too heavily on loyalty strategies can create a risky situation for businesses, especially if their competitors can lure away customers with better offers.
Loyal customers are more likely to purchase from a business repeatedly, which can significantly reduce the cost of marketing and advertising. Also, loyal customers are more likely to recommend the business to their friends and family, which can dramatically increase new business.
Unfortunately, the cost of credit card processing can be a major obstacle for small businesses, and the average interchange fees need to be helping to alleviate this problem. The good news is that there are steps that small business owners can take to combat these high costs, including educating their customers on the fees, implementing credit card rewards programs, and offering discounts or cash-back options to encourage customer loyalty.
The best way to lower credit card processing costs is to find a merchant services provider with lower rates. However, even if you are still looking for a lower fee structure, there is no reason not to offer credit and debit cards, as most consumers expect. Instead, you can mitigate your transaction processing costs by encouraging customers to use debit and PIN cards, focusing on card-present transactions over card-not-present ones, and comparing the rates offered by different merchant service providers.