Modern-day card readers and payment processors are designed with intelligent technologies, ensuring the funds are deposited quickly into the merchant’s bank account. Therefore, they don’t have to wait days to receive the funds. Furthermore, card and online transactions are safe and secure with top-notch security protocols and end-to-end encryption technologies.

So, if you want to fine-tune your financial strategies and payment procedures, start accepting card transactions or other contactless modes of payment. It will boost your customer base, client satisfaction rates, and sales. However, business owners should be prepared to pay significant payment processing fees to accept card transactions. The payment processing charges mainly include interchange fees set by credit card companies.

Consider negotiating with your payment processor to get the best rates and reduce interchange fees. This article will discuss how interchange fees and payment processing costs work and provide various tips and tricks for lowering interchange rates and fees with American Express.

Understanding Interchange Fees

The card networks impose interchange fees on merchants for accepting and processing card payments. These charges compensate the card issuers for the credit risks involved and to ensure transaction security and efficient payment processing. Multiple factors determine the interchange rates set by these issuers, such as the card network, security protocols implemented, payment processing efficiency, merchant category, and the risks involved.

The final interchange fee is calculated based on this rate. A significant portion of the interchange fees comprises merchant charges for processing credit card payments. Different credit card companies have different interchange rates, so there will be differences in interchange fees charged by Visa, Mastercard, Discover, and American Express (OptBlue).

To sum up, the following factors determine the interchange rates and fees.

• Card network
• The type of card used – debit, credit, or gift cards
• Merchant category, which is determined by the merchant category code (MCC), which helps credit card companies to classify different transactions and purchases based on the merchant type
• Payment processing method – rates will be different for card-present and card-not-present transactions (the rates for the latter type are usually higher due to more significant risks involved)
• Type of card program
• Adoption of security and fraud protection measures by the merchant
• Cross-border transactions

How do Interchange Fees Determine Payment Processing Fees?

Every time the customer uses a debit or credit card to make a patent at the retail store outlet or online payment gateway (during online purchases from the brand’s website or eCommerce portal), the merchant levies a fee, known as the payment processing fee. Business owners must pay this payment processing fee for the processing-related services they receive from different stakeholders, including merchant acquirer banks, card issuing banks, payment processors, payment gateways, and card networks.

These payment processing fees help the above stakeholders to cover the following expenses.

• Handling credit risks
• Managing and processing debit and credit card transactions
• Handling bad debts
• Prevention against fraudulent activities or unauthorized payments.

The Key Components of Payment Processing Fees

A payment processing fee is a total of the following three charges.

1.    Interchange Fee

As discussed above, the interchange fee covers a major portion of the payment processing fee, which goes to the cardholder’s issuing bank. In other words, about 70-90% of the processing fee comprises interchange fees, which, in turn, are determined by the interchange rates set by the card network.

The interchange fee may vary depending on multiple factors, like the type of card the buyers use to make transactions, the merchant category, the payment processing method used to authorize and process a transaction, and many more. This fee covers risks of bad debt, general operating expenses, and fraud. Also, the interchange fees are usually non-negotiable, but you can negotiate the rates with your card network.

2.    Assessment Fee

Card networks, including Visa, Mastercard, Discover, and American Express, charge assessment fees. Assessments are deducted whenever a customer uses a card from one of these card issuers to pay at an online or offline retail outlet. Like interchange rates, these assessments are also pre-determined by the card networks depending on multiple factors, including the card type, payment mode used, etc. Assessment fees are also non-negotiable.

3.    Markup Fee

The merchant is charged a markup fee over their interchange fees and assessments. Various factors, such as industry prices, cost of goods and services, sales volume, brand identity, the merchant’s gross profit, etc., are considered while determining markup fees.

Usually, the merchant’s acquiring bank receives these markup fees. However, these charges are distributed among other stakeholders associated with payment processing apart from the card networks and card-issuing banks. Some of these stakeholders include payment gateway, payment processors, merchant-acquiring banks, and software providers.

All these stakeholders work together to facilitate and process the payment; therefore, they charge for this service as a processor markup. The good news is that the business owner can negotiate some markup fees, although a few others may be charged at a fixed rate.

Tips to Reduce Interchange Fees

While interchange rates are non-negotiable, here are a few tips to optimize these charges.

●      Choose Your Merchant Service Fee Structure Wisely

We have learned that the processing fee comprises three major charges – interchange, assessment, and markup fees. Different payment processors provide varying pricing structures based on the range of services they offer. Merchants can choose a convenient pricing model that matches their business goals and customer demands. The common pricing structures set by the payment processors include the following.

1. Interchange Plus Pricing: This pricing model is most commonly preferred by most merchants. In this structure, the organization can enjoy transparency in the price breakup, as they can see and understand where their money is going. The business owner can view the interchange rates, assessments, and processor markup in an interchange plus pricing structure. Merchants can plan their finances better by clearly knowing their overall credit card processing charges. Many organizations face difficulties in understanding their credit card processing fees. Therefore, the interchange plus pricing structure addresses this issue by offering a highly transparent pricing model. Every merchant can now see where their payment processing charges are coming from. It is hugely beneficial for larger enterprises that generate huge monthly sales volumes. Also, organizations can negotiate their processor markup charges based on their monthly, quarterly, or annual sales volumes.
2. Tiered Pricing: As the name suggests, the payment processor will charge you based on certain tiers or slabs in a tiered pricing model. These tiers are determined by transaction type, card type, and the merchant’s sales category. Each tier will have varying price structures. The downside to the tiered structure is that merchants find it challenging to determine how much interchange fee and processor markup they are paying. Due to this lack of transparency, business owners often pay more than they should. In some cases, merchants generating high sales volumes are segmented under a particular tier category. Organizations can negotiate with the payment processor to categorize them under lower-tier charges.
3. Blended Pricing: A blended pricing structure is when the processor may charge a flat interchange rate, a fixed markup, and a negotiable processing fee. Irrespective of the processing charges, the processor markup remains constant. In a blended model, the merchant finds it hard to get a complete overview of the costs associated, especially the exact interchange fees and assessment fees they are paying. Therefore, the blended pricing structure is a basic model and is a good option for small businesses and startups that are new to the world of payment processing. They can start with this blended model and shift to more transparent and complicated structures after getting used to how payment processors work. As a small business, you can opt for the blended pricing model to start accepting debit and credit card payments. However, choose your processor wisely, as many merchants find this model more expensive than the interchange rates.

●      Adopt the Best Security Protocols

Adopt the most advanced security protocols to streamline your payment processing systems. Comply with top-notch security standards and fraud protection protocols to protect your customers’ sensitive card information. By adopting the best practices in credit card processing, merchants can optimize and improve their interchange fees.

Do you know that you can reduce your interchange fees by improving transaction security? Therefore, leverage the latest technological tools and solutions to streamline your payment processing to ensure your card payments qualify for the best interchange rates. Some popular fraud prevention tools in the United States include card security codes and the address verification system.

However, fraud risks are lower in card-present transactions than in card-not-present (CNP) transactions. To combat this issue, credit card processors are developing more innovative tools to enhance security in CNP payments and to reduce the risks.

One such system is tokenization, which replaces sensitive information with unique symbols or “tokens” that store all vital data while maintaining security. The end device or individual has to decode the encrypted or tokenized data to access the real information hidden under it.

In recent years, significant credit associations have implemented a more secure and protected fee structure that incentivizes merchants (in the form of lower interchange rates) to implement tokenization systems. Therefore, you will be charged a higher interchange rate if you don’t implement this security measure in your payment processing devices.

Furthermore, you can also reduce your interchange fees by minimizing chargebacks and maintaining smooth and efficient payment processing. Merchants can implement best-in-class fraud detection solutions and secure POS terminals or payment gateways to reduce chargeback risks and the hefty costs associated with these disputes.

●      Reviewing Processing Fees Regularly

Merchants should develop a habit of reviewing their processing fees regularly. The best way to study their processing rates and fees is by analyzing their monthly statements. It will help them get a complete overview of the interchange rates they are levied. Therefore, organizations should choose a transparent pricing structure, such as the interchange plus model, which provides the highest degree of transparency in their processing fees.

Moreover, card networks update their interchange rates about twice per year. Therefore, merchants should stay updated on these price reviews and changes to stay informed about where their money is going. You should also check that you are charged based on the newly updated interchange rates and processing fees.

Besides, by reviewing their credit card processing charges, organizations can identify their payment patterns and customers’ demands and buying habits. As a result, they can devise the right tactics to optimize and negotiate these fees more efficiently to get better payment processing rates.

●      Providing Additional Data

Organizations may reduce their interchange rates by providing more information for every transaction. Some payments automatically qualify for reduced interchange fees when the merchant provides additional details. It is known as enhanced data that accompanies every transaction.

Supplying more information, such as government cards, purchasing cards, and corporate credit cards, is sometimes relevant. If commercial cards account for a significant portion of the organization’s transaction volume, it must ensure proper optimization and provision for enhanced data.

There are three categorization levels for interchange fees.

1. Level 1 Processing: This is the default level for all payments. It only requires some basic card details, the transaction date, transaction amount, and merchant data. L1 processing is valid for all types of cards, including debit and credit cards.
2. Level 2 Processing: This level demands invoice header details primarily comprising tax information. This enhanced data can be transferred along with the settlement request or the payment authentication. The L2 processing is valid only for corporate, business, and purchasing cards.
3. Level 3 Processing: In L3 processing, the merchant must submit full invoice data, including line and header items. Organizations can transmit this information with settlement requests to authorize transactions. Level 3 is valid for purchasing and corporate cards only.

Therefore, merchants can minimize interchange fees by integrating Levels 2 and 3 into their transaction submissions. These payment processing levels are vital for calculating B2B interchange rates.

Furthermore, the L3 processing ensures that B2B payments qualify for lower interchange fees. This level also offers a broad range of supporting data, such as shipping locations, merchant’s industry, invoice numbers, and the specifics of line items in the invoice.  By producing enhanced data, merchants can help the issuing banks assess the risks associated with every payment. Therefore, it results in a significant reduction in the interchange rates.

●      Preventing Downgrades

The payment processing solution and the entire payment network establish transaction criteria such as identity verification methods and specific authorization. These protocols protect customers against fraudulent transactions and achieve lower interchange rates.

Merchants that fail to comply with these card security protocols and requirements can cause payment downgrades, which may increase their interchange fees. Some common reasons for transaction downgrades include malfunctioning card readers or POS terminals, the absence of an AVS (Address Verification Service) to help authenticate the card member’s identity, and the inability to provide the necessary additional data. So, business owners should implement these required measures and security protocols to accomplish the payment criteria established by the card networks.

●      Opting for Daily Settlements

Unlike batch settlements, merchants should opt for daily settlement of their transactional funds, which results in minimized interchange rates. Therefore, to qualify for the lowest rates, you should settle the funds within a day of authorizing the payments.

●      Using Surcharge Programs

Depending on the organization’s market position and location, it can impose a surcharge on its payments. This surcharge covers the cost of interchange rates. In other words, instead of the merchants paying for these interchange fees, the customers are paying them.

However, levying a surcharge is not allowed in some countries, such as Europe. Although it is permitted in the UK, it is seldom used. Besides, each card network and state has set its own rules on how merchants should levy surcharges, and every organization should comply with these regulations and requirements if they wish to implement surcharge programs.

How to Avoid Interchange Fees?

The following tips can help you avoid paying hefty interchange fees.

• Choose the right credit card processor. Shop around and compare the fees and services a few processors offers to find the ideal provider for your business.
• Encourage your customers to use debit cards more often than credit cards. You can do so by providing them with additional perks or rewards for using debit cards, such as cashback or rewards points, which they can redeem on their next purchases.
• Optimize card acceptance policies by encouraging buyers to opt for other low-cost payment methods. However, never be forceful in this regard, as it may hamper the convenience factor for your consumers.
• Incorporate and leverage surcharge programs to make the shoppers bear the interchange fees.

Final Words

We hope the above tips and tricks will help you minimize interchange rates and payment processing fees with American Express (or any other card network). While accepting card payments has become a necessity in today’s fast-paced world, where buyers look for convenient payment modes, you should also look for ways to reduce these credit card processing charges. When negotiating interchange rates with your payment processor or card network fails to work, you can try the other methods discussed above to save big on your payment processing fees.