By Rinki Pandey December 13, 2025
Interchange fees are a substantial part of the expense involved in accepting credit payments, but many small businesses are not aware of how interchange fees are charged. With every credit/debit card transaction, a part of that amount is charged to the customer’s bank as an interchange fee.
Though small, interchange fees add up quickly and, in turn, impact a small business’s profits. A clear understanding of interchange fees, their calculation, their purpose, and their impact on every transaction will help small businesses make informed decisions about their finances without copying anything extra.
How Interchange Fees Work
Interchange fees refer to the small amounts that are charged by banks when a customer uses a credit card or a debit card to make a payment. This amount charged on every transaction takes a certain percentage of the transaction amount, along with a fixed fee.
These fees are in place for a couple of key reasons. Firstly, these fees are used to cover costs that are associated with the use of credit cards, their management, as well as the risks that businesses take when extending credit. They also serve as an incentive for banks to continue promoting credit card usage, which is vital for development in the payments industry.
Secondly, a percentage of this amount goes towards the development of a secure environment that prevents credit card fraud. These fees charged to businesses are distinct from processing fees, which are charged to facilitate a transaction when it passes through a third-party processor.
How are Interchange Fees Determined?
The interchange fees are determined by a number of factors, but all card networks operate on their own sets of rules. Visa, MasterCard, Discover, and American Express all post their fees, and it all depends on a number of easy variables that can cause the total amount that a company has to pay to change.
Firstly, the type of card used has a major role here; for example, rewards, business, and premium cards incur higher fees than regular debit and credit cards. This is because those cards offer a higher amount of benefits and costs that are usually taken care of by a higher interchange fee.
Secondly, a business’s industry of operation can also affect the interchange fee. This is due to the fact that all businesses use the Merchant Category Code, but some codes are classified as high-risk industries; these industries often face a higher number of expenses compared to other businesses.
Thirdly, the amount of a purchase also matters in determining interchange fees. Higher purchases result in generating higher interchange fees. Every card network adjusts interchange fees twice a year, even though every interchange fee calculation formula takes all of the factors mentioned above into account.
In the European Union, interchange fees for consumers using cards are limited to 0.2 percent for debit cards and 0.3 percent for credit cards, but different rules apply in America. Visa, Mastercard, and Discover have different rules regarding their interchange fees, which are determined by card type, type of purchase, and type of business. American Express, on the other hand, operates slightly differently, as it has been known to facilitate transactions as either a card network or an issuing institution.
Interchange Fees and Their Impact on Business
The interchange fees can also influence how a business runs, especially where most of the sales are in card transactions. This is because interchange fees form a direct expense that businesses incur as part of every card transaction. This amount is a significant expense for businesses that make most of their sales in card transactions.
These charges can also affect pricing decisions. To keep up with this expense, a company may have to increase its prices, introduce a minimum threshold for payments using cards, or implement a different pricing model. This change in pricing can also affect how consumers perceive a company and their decision to purchase.
Another area that suffers from this effect is cash flow. The interchange fees are always subtracted from a company’s funds before they reach their bank account. This means that companies always get a little lower amount of their sales proceeds, which cuts a significant amount from their budgets.
Effective Means of Lowering Interchange Fees
Reducing interchange fees will not always be easy, as it has to be determined by the card networks. However, there are ways for businesses to optimize this expense. The best way for a business to do this would be to negotiate with the processor, particularly if it processes a high volume of transactions. A high volume would provide better leverage in negotiating for a better rate.
Another way would be to select a processor with a compensation structure that aligns with your goals. This would eliminate unnecessary expenses.
Additionally, businesses can also cut fees by streamlining their card transaction processing. Fast transaction processing, preferably in 24 hours, would help businesses comply with lower rate conditions set by the card networks. Employing secure ways of processing transactions, such as encryption and tokenization, not only ensures the security of customer information but also entitles a business to better rates.
Another effective alternative would be to encourage payments using debit cards or cash, as debit card transactions are known to incur fewer charges, and cash transactions incur no charges; it’s a great way for you to lower processing fees. This method further has a slight advantage in certain areas, as it becomes possible for a credit card surcharge to be imposed on card transactions, hence mitigating the impact of high interchange charges.
Finally, it would be important to review processing statements on a regular basis. This is important because interchange fees are prone to changes every now and then, and in most cases, twice a year.
Link Between Interchange Fees and Growth
A flat rate pricing structure for credit card transactions can literally be the simplest solution when it comes to a small business. There are no complicated rate matrices, no surprises, and no need to consider a different interchange rate every day of the week. Such a structure would suit most small businesses, especially those that process under ten thousand dollars per month.
However, as a company grows, things change. If it crosses ten thousand a month in processing volume, and especially if a company processes six- and seven-figure amounts, a flat rate can become very costly. The reason is simple: most transactions aren’t always the same. Some credit cards have higher charges, but many are lower than a company’s flat rate. A company that never examines this situation runs a risk of overpaying every month.
This is where interchange pricing becomes valuable. Instead of being charged a flat rate, it costs this business the actual rate of the transaction, plus a small markup from the processor. This model provides true savings for growing businesses.
Let’s look at this with a simple example. A company might think that their merchant rate keeps things easy for them as long as it means dealing with ten thousand credit card transactions a month. But when businesses look at how credit card interchange costs are divided, this often brings a large discrepancy. If a business has a combination of high-cost transactions as well as low-cost ones, which total is less than the flat rate, then most likely it’s overpaying credit card companies by tens of thousands of dollars a year. Some merchants report saving as much as thirty percent in interchange rates.
A necessity for businesses that conduct transactions exceeding ten thousand dollars a month would be to examine their paperwork for payments and ask for a breakdown analysis. This easy step could help to streamline costs, reveal surprise charges, and provide funds for further business expansion. While flat rates are tempting, as a business’s volume grows, it steadily deducts from profits without your notice.
Comparison of Interchange Plus with Tiered Pricing and Flat Rate Pricing
When determining which credit card processing options are most effective in paying for their services, most businesses consider and weigh three options: interchange plus, tiered, and flat rate. These processing options function in three distinct ways, requiring that a business consider which method best suits their processing needs.
Interchange Plus vs Tiered Pricing
Tiered pricing used to be common in the past, but most merchants no longer use it, since it provides a lot less transparency. In tiered pricing, all transactions are sorted into three different groups: qualified, mid-qualified, and non-qualified. However, it should be pointed out that it is up to the credit card processor to assign transactions to which group. These companies usually lead with their lowest “qualified” rate in large fonts, but most transactions are processed in higher-cost groups.
On the other hand, interchange + pricing reveals exactly what a company has to pay. The cost of interchange, as dictated by the credit card companies, along with a small markup, is easily visible. There are no hidden levels, no ambiguous rules. This translates into most companies being charged a fairer rate.
Cost of Sales vs Revenue
Flat rate pricing is the easiest pricing structure for a business. Irrespective of which card a customer swipes, a fixed rate has to be paid for every transaction. Small businesses find this pricing structure rather useful, as it’s easy to estimate expenses every month. However, it has some drawbacks. Flat rate pricing would prove costly for companies with many transactions, as well as their debit card users, since debit cards always incur lower interchange fees. Since flat rate pricing does not work like this, a company would end up paying extra.
In interchange plus pricing, it charges for transactions based on their actual costs. This means that businesses get to take advantage of cheap transactions rather than being charged a flat rate. Though it involves a little bit of understanding, this method of pricing mostly translates to savings for businesses that transact higher amounts of money, as well as for those that have different types of cards. Flat rate also gives a predictable statement every month, but interchange plus offers clarity and savings, especially with a growing business.
Conclusion
A good knowledge and clarity of interchange fees can help small businesses make informed decisions when it comes to payments. With a good understanding of interchange fees, businesses can make informed decisions when it comes to pricing structures. With this understanding, small businesses can cut down their expenses, and as a result, they will take home a bigger share of their profits.
FAQs
What are interchange fees?
Interchange fees are fees that are set by card networks for every transaction involving a card. These fees cover the costs of protecting against fraud when using a card.
Who pays interchange fees?
These charges are paid by the business that accepts the card. This means that a third-party payment processor takes care of this for them.
Are interchange fees different for different types of cards?
Yes, different cards have different interest rates. The rewards and corporate cards are a little expensive compared to others.
Can small businesses cut interchange fees?
These costs are unavoidable, but you can mitigate your total costs by making informed decisions in pricing models and enhancing data quality.
Why are interchange fees important to small businesses?
These have a direct bearing on your profit margin. Knowledge of these concepts will help you make an informed choice of the most cost-effective means of payment.