Interchange fee rate hikes can eat your revenue for lunch, but vertical SaaS providers can take control of how credit card processing fees impact both them and their clients.
Every April and October, card networks adjust their interchange fee rates. Typically, this isn't big news, but reports that Visa and MasterCard are planning significant increases have catapulted this regular adjustment into the spotlight, even inviting Congressional scrutiny. While MasterCard has since denied the reports, any change to the MasterCard or Visa interchange fees would be impactful, as they are two of the largest card networks.
Whether you want to know more about payment processors or to help your customers with their merchant credit card processing fees, PayEngine has the tools and experience you need. We enable vertical SaaS companies to control how interchange card fees impact their bottom lines. Read on to learn how PayEngine can help you bring credit card processing fees to heel.
Why Do Card Interchange Fees Rise?
Credit card interchange fees are a significant revenue source for card issuers. While the card networks set card interchange fees, that money goes to the issuing financial institutions (FIs). Interchange charges cover lending risk, rewards programs — which is why rewards cards have higher card processing fees — and fund infrastructure and technology.
Card companies have claimed that fraud prevention and technology costs are rising. However, Block — the parent company of payment processor Square — has filed suit against MasterCard, Visa and associated FIs, alleging they have inflated their credit interchange fees. For a company such as Square, the difference between those interchange fees and the rate they charge customers is their profit margin, so you can see why they are so concerned.
Where Your Money Goes
Card processing fees include three main parts: the interchange fee, the assessment or network fee, and the payment processor fee. The following briefly summarizes how these impact card transaction fees. If you want to know more, check our FAQ at the end of the post, or — if you already understand card processing fees — skip ahead for more on how PayEngine can help you bring them to heel.
As of September 2023, the current Visa interchange rates for North America ranged from as low as 0.05% for debit and prepaid cards to as high as 3% for business credit cards. This difference in card interchange fees comes from a mix of influences, including tighter regulation on debit card fees and the lower associated risk.
On the other hand, the card networks make most of their money from the much lower assessment fees. For comparison, Visa's network assessment fee was around 0.16% in September 2023. Assessment fees for debit card transactions are typically only around 0.01% lower than for credit card transactions.
After the card networks and issuing FIs take their cuts, payment processors tack on a final markup to credit card fees for businesses. Payment processors handle everything from transaction authorization to communications between issuing banks, acquiring banks and card networks. Processor fees pay for these services and are the processors' primary revenue source.
For vertical SaaS companies, stepping in at that processor level is a great way to increase revenue. With PayEngine as a partner, our clients can leverage best-in-the-industry experience and technology without the heavy lift of becoming a processor.
The Best Ways to Lower Credit Card Fees for Businesses
The easiest way your customers can lower credit card transaction fees for merchants is by decreasing risk. That can include steps as simple as avoiding manual entry or as advanced as tokenization and processor optionality.
Avoid Manual Entry and Reduce Chargeback Risk
One of the easiest ways for businesses to lower card processing fees is to improve transaction handling. While some of these suggestions may seem small, encouraging your customers to tighten up their operations can significantly and immediately impact credit card processing rates. Not all of these will directly impact interchange fees, but they can lower overall costs associated with processing cards.
- Too many chargebacks can raise fees and even cause a card network to drop the business. Clear return policies and strong customer service can reduce chargeback risk.
- Manual entry raises risk factors for chargebacks and fraud, such as human error and identity verification, and should be avoided whenever possible.
- Higher incidents of fraud can cause a processor to raise rates or drop a business. Card verification methods such as entering at least the five-digit zipcode for address verification help to protect against fraudulent transactions.
Use the Latest Technology
Some of the lowest card interchange fees are already offered for card-present transactions. Up-to-date POS terminals and software can further lower interchange fees. Technology such as EMV chip card readers protect against fraud, and updated POS terminals and software capture more data.
Modern technology also permits dynamic routing to ensure the lowest processing fees. This processor optionality is particularly helpful for cross-border transactions.
With PayEngine, you can ensure your customers have ready access to the latest technology. From the most up-to-date POS technology and branded terminals to seamless access to processor optionality and dynamic routing, everything is taken care of for you.
Provide More Transaction Data
The card networks offer lower interchange charges when they have additional information about the customer, business and purchase. A transaction involving Level 1 (L1) data gives the bare minimum: the business name, transaction amount and date. That makes it relatively easy for scammers to game the system.
Card networks offer lower interchange card fees for Level 2 (L2) and Level 3 (L3) data. L2 data includes finer details such as tax information and a merchant code. L3 Data adds in even more, including item descriptions and quantities. Of course, the more data, the more critical Payment Card Industry Data Security Standard (PCI DSS) compliance becomes, and PayEngine can take all of it off your plate.
Employ Network Tokenization
Network Tokenization replaces sensitive consumer data with a secure token when dealing with e-commerce transactions. This lowers risk in two ways: First, your client deals with a token rather than sensitive user data, reducing exposure if their data is ever compromised.
Second, the actual data transmitted is useless if intercepted. Some card networks offer lower interchange merchant fees when network tokenization is employed, and PayEngine makes network tokenization easy.
Negotiate with Card Processors and Explore Processor Optionality
A payment processor's credit card transaction fees are the only ones a business can negotiate directly. Unlike card interchange fees, processor fees do not depend purely on industry or risk exposure. You can negotiate fees based on volume, fees other processors are offering, or by bundling services.
This is where you can gain the most if you provide payment services to your customers with PayEngine's custom-label services. Consider a company such as Square. The only rate their customers see is the sum of all the fees up to that point, including the fees Square adds on. If you take on that role, the difference is yours to use as everything from a revenue source to a customer incentive.
Many previously covered security and risk measures also provide a better negotiating position. PayEngine offers something even better: processor optionality. With our dynamic routing capabilities, each transaction can be directed through the optimal channels to ensure the lowest possible fees. You can then pass those savings on to your customers as a value add or simply realize the added revenue yourself.
Taking Control of Card Processing Fees with a Custom-Label Solution
Understanding and successfully navigating card processing fees is a business unto itself. As a vertical SaaS company, you already have a business to run. Dedicating the time and resources to staying current with the latest technology and regulations — let alone becoming a payment processor — are distractions you don't need.
However, you can still have the deeper integration that comes with supplying seamless payment options to your clients without becoming a payment processor. If you want to know how to access the best technology and optionality with a custom-label payments model tailored to your specific needs, request a demo today.
Frequently Asked Questions
What Are Interchange Fees?
While the card networks set credit card interchange rates, the fees are paid directly to the issuing financial institution that takes on the associated debt. Card interchange rates include a flat charge for each transaction, such as $0.20, and a percentage of the transaction.
Fees vary by card network but can also go up based on factors such as whether the card supports a rewards program, whether it is a card-present transaction, how the transaction is processed, and even the business's merchant category code (MCC). Credit card interchange fees are typically higher than networks charge for debit card transactions. This is due to regulatory caps and a lack of credit-related risk.
What Are Assessment and Network Fees?
The credit card network also sets the assessment or network fee and may appear as part of a Visa or MasterCard processing fee. This can lead to confusion with interchange fees, which is confounded when issuers combine the two fees in a billing statement. Unlike interchange credit card fees, assessment fees go to just the network and are significantly smaller. Network fees are also assessed monthly based on total transaction volume.
What Are Payment Processor Fees?
Payment processors handle everything from transaction authorization to communications between issuing banks, acquiring banks and card networks. They also deal with transaction data security and regulatory compliance, such as the PCI DSS. These companies include such familiar names as PayPal, Stripe, and ApplePay.
Payment processors add a markup to interchange and assessment fees to generate revenue. These fees are typically the only portion of credit card fees for businesses that can be negotiated. The resulting credit card merchant charges may be presented separately or as a single fee on a billing statement. Some processors also charge an additional monthly fee.