For every payment your business processes by card, your business pays a series of fees. One of these is an interchange fee, which is collected by the payment’s issuing bank. While interchange fees aren’t necessarily flexible on your provider’s side, they are something you can take steps to reduce. In this article, we take a look at interchange fees and how you can optimize your payments to lower the cost of this component.

What fees do you incur on every payment you make?

On each payment you accept, whether it’s in person, over the phone, or online, you pay the following fees:

• Authorization fee, which is collected by the gateway – an encrypted platform that acts as an intermediary during your transaction
• Transaction fee, which is collected by the processor – your merchant services provider
• Assessment fee, which is collected by the card network – such as Mastercard or Visa
• Interchange fees, which are collected by the issuing bank

Ultimately, these fees can amount around 2% of the total of every transaction.

What are interchange fees specifically?

Interchange fees are collected from you – the merchant – by the cardholder’s bank and cover the cost of the risk associated with approving a payment. While these fees are determined by the card brands and are non-negotiable, there are different levels of interchange fees based on key factors, including the information that you submit every time a payment is made. In fact, there are over 300 different interchange rate levels that could be applied to your payment processing.

What impacts your interchange fees?

Your interchange fees are going to be impacted by a variety of factors, not all of which are in your control. However, some decisions that you make, as a merchant, will determine what you’re charged.

Interchange fees can be determined by card type, and which types of cards carry more risk for the bank:

• Debit versus credit
• Corporate versus personal
• Rewards and travel cards
• Card brand

The fees are also determined by the way the card was used during the transaction:

• In person, online, or over the phone
• Inserted with a chip, tapped, or signed for with a cardholder signature

In this example, a cardholder signature would be seen as the least risky transaction, whereas a purchase made with card-not-present (CNP) carries the most risk.

Finally, the fees are also determined by the data sent along with the transaction. The fewer details sent, the higher the fees typically are. This is where your business has room to make decisions that can lower your fees without taking measures to limit your customers, such as reducing the card types you accept.

How do you optimize your interchange fees?

Depending on the nature of your operations, your business can qualify for a lower interchange rate by working with your payment processor to optimize the data you send every time a transaction is made.

Many businesses that accept basic retail transactions, as well as other CNP transactions, will only be able to send what is known as Level 1 (L1) data. However, organizations with larger corporate or governmental clients can often optimize the information they send to secure the best rates.

Standard L1 transaction data includes very basic information, the amount paid, the card number, and the date. However, there are two additional levels; L2 and L3, that include more data and reduce fees. L2 adds data like customer codes and sales tax amounts for a discount around 0.50% lower. L3 data includes details such as product quantity and item descriptions for a discount of up to 1.0% lower. In order to optimize your interchange rates, you must be working under a payment processing structure that allows for the capture of this information.

If you can optimize, you should.

Not every organization is eligible for submitting L2 and L3 three data. Unfortunately, these businesses may face higher merchant services fees than others.  However, if your business is in the position to optimize your interchange rates, you can expect to save significantly. With payment processing fees eating up a considerable amount of every transaction, you need every advantage that you can get.