We’ve written a lot recently on credit card processing rates, including what contributes to your overall rate, how interchange fees work, and more specifically about a company that significantly raised their rates for small businesses.
Having a basic understanding of how processing works is a great start toward saving your business money on credit and debit transactions. Even a seemingly insignificant increase in your rates can mean thousands of dollars taken from your bottom line at the end of the year.
A recent announcement from VISA is likely to have a big impact on businesses. They’ve announced a change to their interchange rates set to be rolled out in July and October of 2020 (the COVID-19 pandemic has delayed the initial release already, and may still affect these dates). VISA has yet to say much on the matter, but the rate changes are their most significant in a decade. Let’s dig into some of the details and go over a few of the basics on credit card processing that will help small businesses save money and succeed.
There is a lot that goes into each transaction. And the information is sent to several different people before the money is deducted from the shopper’s account and deposited into the merchant’s.
First, a customer enters their card information. The information is sent from the credit card machine or payment gateway to the card associations, like VISA, Mastercard, or American Express. The appropriate company will assess the interchange rate based on numerous factors.
The processing company will then send the information to the cardholder’s bank (the issuing bank) to make sure that sufficient funds are available.
Once approved, the credit card machine will finalize the transaction and produce a receipt. The payment will typically be deposited into the merchant’s account (acquiring bank) within 24 hours. The final amount deposited will have the interchange rates and any other fees, including the processor’s cut deducted from the final total.
What Factors Go Into Processing Rates?
Every time a credit or debit card is swiped, dipped, tapped, or keyed there is a whole lot going on behind the scenes to facilitate the transaction. And it all happens nearly instantaneously. For the convenience of the service, merchants are charged a fee. This fee is assessed by the merchant’s credit card processor, also known as a merchant service provider.
There are numerous ways of assessing the fees, including a variable per transaction fee, a flat transactional fee, or a monthly subscription. But for each transaction, the same factors contribute to the overall cost of facilitating it:
Card brand (VISA, Mastercard, etc.)
Card type (business, high rewards, etc.)
How the card information was entered (swiped, tapped, etc.)
If the card was present or not
These dynamic factors are what makeup the total interchange fees. Additionally, every processor charges flat fees for several other items:
Processor fees (for the processor itself)
Network/Association fees (for the card networks, like VISA or Mastercard)
Lease or Rental fees (for the hardware)
Payment Gateway fees (for eCommerce payments)
Withdrawal fees (for moving funds)
Businesses might be charged additional one-time fees or incidental fees for set-up, cancellation, chargebacks, insufficient funds, or disputed charges.
What Is an Interchange Fee?
An interchange rate is a fee attached to every credit or debit card transaction. The interchange rates are set by the card networks, but only a small portion of it goes to those networks. The vast majority of the fee goes to the bank that issued the funds for the transaction. They are given this fee for their service of assuming the risk inherent in any transaction.
Interchange fees make up the vast majority of all credit card processing fees. Many factors that contribute to them are fixed, and there’s no scenario in which merchants can completely eliminate the fees. But there are ways to limit them by controlling how your shoppers pay. For instance, it’s cheaper if a shopper taps their card than it is for a keyed transaction.
What Are the New VISA Interchange Rates?
The card networks have long been tasked with determining exactly what the interchange fees will be and what factors will impact them. It is for their assistance with regulating the industry that they get a small cut of the interchange fee applied to each transaction. Altogether, U.S. merchants pay over $100 billion each year in interchange fees, up from about $70 billion in 2010. It’s a lucrative business.
VISA recently announced its biggest change in interchange rates in over 10 years. According to Bloomberg, VISA announced that it’s “adjusting its default U.S. interchange rate structure to optimize acceptance and usage.”
VISA has yet to be too forthcoming about the specifics of the change, but already, credit card processors are scrambling to adjust the fees and notify their merchants of the change. The updates will be released in two phases – once in July of 2020 and once in October of 2020. This is meant to give processors more time to adjust.
Overall, the rates are increasing some sectors and decreasing in others. eCommerce and all other card-not-present transactions will see a spike in their interchange rates. For a $100 transaction on a normal VISA card, the fee will increase from $1.90 to $1.99, a 4.7% increase. With a premium, high-benefit card, the fee will go from $2.50 to $2.60, a flat 4% increase.
Meanwhile, they’ve announced certain decreases, too. For all charges related to health care, education, and real estate, the interchange fees will drop. VISA’s goal is to be accepted by as many merchants as possible, so some of the changes are inevitably made to court new users.
How Will the VISA Interchange Rates Affect Your Small Business?
The short answer at this point is that it’s hard to say. VISA hasn’t yet released the details to the public. But it does seem clear that online transactions will see a significant hike in their final fees. And while there does seem to be some exceptions for certain niche industries, interchange rates will likely go up for traditional retailers.
The notion that they’re actually decreasing their rates is likely disingenuous. The industry is certainly not known for being overly transparent. And they’re even less known for offering merchants any discounts. It’s likely that they’re trying to bring new users into their ecosystem while raising rates for more standard businesses that are unlikely to stop accepting VISA over such a small rate change.
And while the changes are indeed small, pennies and the dollar can make a big difference for shops that process a lot of transactions. Just check out our evaluation on Square’s processing changes from 2019.
Try to keep an eye out on your processing statements in August and November to see if there are any glaring differences. And ask your processor about it, too. The change is out of their control, so they’re likely to offer some transparency.
How Can Small Businesses Lower Their Processing Rates?
When it comes to this, there isn’t really too much that can be done, other than refusing to accept VISA cards at your business. Unfortunately, VISA is making these changes because they know that the vast majority of businesses won’t do that. The card is too commonly used by consumers; denying the card is likely to frustrate shoppers and lose merchants business. Barring any regulation, something most retailers agree the payment industry desperately needs, there isn’t much that can be done.
But remember, you can always find ways to lower your processing costs by being selective about how you accept cards (mentioned above) as well as the processing company that you use. Some processors offer fixed rates that end up charging businesses far more than the interchange rate. These flat-rate pricing structures are almost always more costly for businesses and best to be avoided. Look for processors that offer transparency through interchange-plus pricing.
Take a look at your processing statement to see EXACTLY what you’re being charged for. If there are mysterious items on the list, ask your processor for an explanation. And if you notice a big uptick this summer from the VISA changes, maybe it’s time for a more dramatic change.
Also, for eCommerce stores, make sure you use address verification service (AVS). This security feature matches the shipping address provided by the online shopper with the billing address that the issuing bank has on file. This protects against fraud, lowering the overall risk of the transaction, and thereby keeping interchange rates slightly lower.
At KORONA, our point of sale software integrates with all major credit card processors, allowing our customers to shop around for the cheapest solution they can find. You’ll never be locked into a long-term contract or unfriendly deal. To learn more about how it works and our processing partners, sign up for a free trial below!
Among other things, Michael writes about trends and tips in retail for KORONA POS. His focus is on bringing small business owners a more holistic approach to growth. In his spare time, you'll find him hiking somewhere in the southwest. Connect with him on LinkedIn.