Interchange fees or swipe fees are those that are paid by merchants each time a credit or debit card transaction takes place. Financial institutions – banks tend to charge these fees to accept and handle the risk associated with card transactions.
Credit card companies usually set swipe fees and periodically review them. At the onset of this year-2020, the average was 1.81% and 0.3% for credit card and debit card transactions, respectively.
Where Do These Fees Come From?
In any transaction, credit card processing fees come in three forms:
- Swipe fees are usually charged by the client’s bank.
- Processing fees charged by your payment provider for carrying out the transaction.
- Card scheme fees are charged by the card schemes for using their network.
Each time a credit/debit card is swiped at a terminal, it communicates the information to the processing company. It’s the responsibility of the issuing company to route the transaction across the card-issuing bank to enable the transaction. During this same period, the swipe fees are calculated.
Depending on certain parameters, the card-issuing bank will charge the credit card processor the interchange fees. In turn, the processor will select a way of passing the fee down to the business responsible for making the payment from the customer.
How Is The Rate Determined
As previously stated, these fees are set by financial institutions – usually credit card companies. This includes the American Express, Visa, Discover, and MasterCard. These bodies typically revise the rates semi-annually, usually in October and April.
As an addition to the swipe fees, credit card processing companies could decide to add other fees as part of processing fees, which are passed down to retailers.
It’s common for different types of cards from the same issuing company to have different interchange fees. Furthermore, how the transaction takes place may also influence the rate of fees.
Another factor that may influence the fees is the size of the merchant shop. Larger retails are in a better position to negotiate better rates than smaller businesses.
Types Of Swipe Fees
Usually, the fee structure starts with the merchant’s preference; the business size often plays an important role in the final percentages. Below are the various fee structures:
- Interchange ++ Rate
As a merchant wanting a transparent way to view your processing fees, this is the best choice. It shows the basic client fee breakdown. Please keep in mind that the fees tend to fluctuate a lot if you select this option, especially if you are accepting an internationally wide range of cards.
As the term suggests, interchange indicates that you get charged on a per-transaction basis. This means that processing and scheme fees remain the same. The swipe fee gets added and could change accordingly.
- Blended Rate
As an alternative to the previous structure, blended rates don’t vary per transaction. They are fixed. The greatest advantage of this kind of fee is that it’s fairly simple and possesses the possibility of offsetting higher swipe fees.
Are Swipe Fees Negotiable?
Unfortunately, as far as fees go, processing fees are the only ones that you can negotiate with the credit-issuing bank. The swipe fees are not. Although you can negotiate the processing cost, please note that you can’t negotiate a rate below the interchange cost. This will be equated to asking for free service.
Interchange fees are necessary in the business world. They are part of a process that facilitates credit card transactions. They are characterized by a top-down arrangement, where they are set by credit card issuers and passed down to business merchants – who, in some instances, choose to extend the trickle-down effect to the customers.
The fees are non-negotiable and unavoidable, at least as long as you wish to accept credit or debit cards in your shop. They are a small price to pay as they offer flexibility in terms of payments.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.