Interchange fees are a significant part of doing retail business. Entrepreneurs should expect to pay fees associated with accepting credit and debit cards regardless of the products they sell. Many small business owners have full knowledge that interchange fees are necessary evils. Some, however, do not understand the options they have when paying for the service.
What are interchange fees?
Interchanges are fees credit card companies charge businesses to accept their cards. Some may view the fees as preposterous at first glance. Why would credit card companies charge businesses to use their product? Shouldn’t they be happy that small businesses want to use their services?
Credit card companies bring an element of convenience to business owners. There is potential for more revenue when entrepreneurs extend their acceptable payment forms to credit and debit cards. Thus, the fees associated with using electronic payment are minimal in comparison to the benefits of such services.
How are interchange fees determined?
There are a number of factors that determine how interchange fees are tallied. The type of card used is a significant determinant of how much the merchant will pay for the transaction.
MasterCard and Visa cards usually charge under $0.50 per transaction. The fee gets more expensive when merchants forgo swiping for keying in credit card numbers and cardholder information.
Debit cards also typically come with lower fees. Cards issued from a small bank or credit union with fewer than $10 million in assets, however, tend to come with the highest fees.
The most obvious explanation for such a spike in charges is because of the risks associated with processing transactions using debit cards issued from smaller banks and credit unions. There is always the possibility of a financial institution failing to follow through with its obligations. Such a risk is heightened when transactions come from a bank or credit union with limited resources. Debit cards issued from smaller banks and credit unions tend to fall under the exempt status.
How much does the merchant pay?
The amount the merchant pays for transactions as a whole largely depends on the provider they choose to process credit and debit purchases. Many merchants offer set rate processing, which is a flat-fee paid per transaction regardless of the card or industry type. Some companies have extended beyond such a system to offer subscription services to small businesses.
A subscription service works similar to monthly movie passes. Business owners pay a set fee every month that gives them access to significantly discounted interchange fee rates. In some instances, providers offer merchants the opportunity to not pay a fee for every transaction. In these instances, business owners may only be charged for smaller transactions. How do business owners access providers?
Most entrepreneurs sign up for a provider’s services in a package deal. The merchant typically buys equipment through the provider that is used to process sales at the retail store. The provider then takes its fee automatically from every purchase so the merchant is not left to tally what is owed at the end of the day.
Some providers even give merchants the opportunity to lease equipment. Such a feature is especially beneficial to small business owners who may not have thousands to spend on the equipment during the beginning stages of starting the company. A good leasing program gives new entrepreneurs the opportunity to invest in their companies while earning money at the same time. More traditional models of starting a company require a substantial amount in seed money before the first day of business.
What interchange fees service is right for your company?
The interchange fees service you select for your business should depend on a number of things. First, you should look at your budget to determine what you can afford. Second, you should consider whether or not you want to purchase a subscription to pay interchange fees or if the set rate processing model is best for your business.
Interchange fees are necessary in the world of retail. The type of service and provider you choose is optional.