Paying with cash is becoming a rarity. Customers today expect to have the option of paying via credit or debit and many will even leave a store or choose one merchant over another because they can pay with plastic as opposed to paper currency. And, with mobile payments on the horizon, merchants need to not only understand the opportunity, but also the associated costs of accepting credit and debit.
For many businesses, especially smaller merchants, the reticence to accept credit cards stems from the associated costs with accepting credit and debit cards from their customers. After all, it’s not free. One of the primary merchant expenses associated with credit and debit card acceptance are interchange fees. Usually these are fees that a merchant's acquirer or merchant services provider pays to card-issuing banks. Other costs to the acquirer include processing fees (paid to the processor for running the transactions and settling funds), as well as assessments and association fees (paid to Visa, MasterCard and Discover).
The rates for each interchange category are complex as each credit card and transaction type has a specific cost that creates a grouping of over 700 rates. Thus the interchange category under which any single transaction falls will depend on various factors, including the processing environment of a business (such as retail, phone order, internet, etc.); the merchant’s card acceptance method (swiped, keyed, online, etc.); security information sent along with transaction (such as address verification, CVV2, tax amount); and the card brand and type accepted (such as debit, credit, rewards or corporate).
Card brands must maintain a precise balance in establishing interchange rates, balancing the costs for merchants to make credit card processing cost-affordable for merchants while still supporting the acquirers need to invest monies collected to promote consumer adoption and usage. Additionally, card brands like MasterCard and Visa must work to maintain their overall value by considering the amount that people spend on their credit cards, the total number of cards in use and the type of accounts that people prefer to use.
Example: Visa Interchange
When Visa customers use a personal non-rewards credit card in a retail storefront, the interchange rate is 1.51% + $0.10. If that same customer came back and used their debit card, the interchange rate would likely be 0.05% and $0.21. If the customer came back a third time and used a rewards card, the rate would be 1.65% and $0.10. So, as you can see, the environment and type of card play a part in the cost of the transaction.
Example: MasterCard Interchange
The interchange rate for MasterCard charges in a supermarket environment costs 1.48% + $.10 for each transaction. However, supermarkets may qualify for a reduction to 1.07% + $.05 if they have a minimum of $6 billion in combined sales with various MasterCard accounts, such as the consumer Credit Core Value card, World Elite MasterCard and the Enhanced Value World card.
Example: Discover Card and American Express
Discover Card’s interchange rate for its retail core card is 1.56% + $.10. Furthermore, the company’s principal qualifications for the rate require that the cardholder is present with his or her physical card along with single electronic authorizations. Additional qualifications include that the transaction must be settled within one day of the initial approval. Also, the magnetic stripe data must be complete. For the company’s debit core account, the interchange rate is 1.02% + $0.16, and when the card is not present, Discover Card charges 1.87% + $0.10.
American Express offers a discount rate plan and a flat fee plan. The company will assign you the best plan based upon your business type and transaction patterns. With the discount rate, the company will charge you the same percentage regardless of the card type.
Control Factors over Interchange Rates
There are several factors that will allow you to establish more control over your interchange rates and overall credit card processing expenses such as:
- If you’re a retail merchant, limiting card acceptance to card present and only processing those transactions (eliminating phone and online ordering)
- If you’re a keyed merchant (mail order/telephone order), or Internet merchant, inputting as much information as possible at the time of the sale (e.g. address verification, accurate billing information, order #, etc.)
- Providing your financial institution/payment processing provider with the most comprehensive and accurate data
Of course, there are factors that are beyond your control as well, such as the type of card that your customer uses, the card brand, and the card owner, which may make your rates vary as the interchange fees are different for debit card owners, businesses and corporation or municipal agencies.
Paying with plastic is an expectation that most U.S. consumers have, and some will leave your store for another if you don’t accept credit and debit cards. But, credit card processing isn’t free and there are a lot of options in terms of getting started. Be judicious in your selection and look at the longevity of the company, the quality and availability of their service and support teams and their commitment to being a trusted advisor.
When you set up your account, your payment processing or merchant account services provider will work with you to help you understand all of the associated charges and fees. While the business value of accepting credit and debit nearly always outweighs the financial investment, it’s important to ensure that your service provider clearly reviews the fees and associated costs so that you choose the options most suited to your business and overall goals.