Accepting card payments is a regular part of day-to-day operations for the majority of businesses. It’s convenient for both enterprises and customers, making transactions quick and easy. However, this convenience does come with costs attached.
The infrastructure for taking card payments – whether it’s through a card machine,an e-commerce site, or online payment links – incurs various fees, with one important component being the interchange fee.
Understanding interchange fees is important because they contribute to your overall expenses. Whether you’re just starting out or considering how to run a business more effectively, knowing how these fees work can help you keep costs in check and maintain a healthy bottom line.
This guide aims to give you a clear understanding of what interchange feesare and why they matter. We’ll provide a straightforward overview – interchange fees explained in simple terms – covering the basics, how these fees are calculated, and how they fit into your payment processing costs.
Plus, you’ll also get some practical tips to help you manage these costs better and keep your business on track.
For most businesses, the benefits of accepting card payments easily outweigh the costs. It’s all about making things easier for your customers by offering them more ways to pay, and potentially boosting your sales as a result.
What are interchange fees?
The interchange fee is the amount paid by the merchant’s bank (known as the acquiring bank) to the customer’s bank (known as the issuing bank) to cover the cost of processing a card transaction, along with associated expenses like the cost of system maintenance, debit and credit card fraudprevention measures, and credit card rewards schemes.
Let’s imagine you run a small retail premises, and a customer pays using your card reader. Here’s a step-by-step overview of how debit and credit card interchange fees fit into that process:
Your customer uses their card to make a purchase. The card information is sent to your payment processor for approval.
The payment processor checks with the card network (for example, Mastercard), and the customer’s card-issuing bank to ensure there are enough funds. You receive an approval or denial.
If approved, you complete the sale and hand over the items to your customer.
At the end of the day, transactions are processed, and the money – minus the interchange fees – is sent from the card-issuing bank to your business’s merchant account.
Any other fees, such as processing fees, are deducted before the money is moved from your merchant account to your regular business account.
How much are interchange fees?
While interchange fees benefit the bank that issued the customer’s card, they’re set by card networks such as Visa and Mastercard. These networks review and update their rates twice a year – typically in April and October – so the fees can change.
However, UK interchange fees are capped by the Payment Systems Regulator at 0.2% for consumer debit cards and 0.3% for consumer credit cards, which helps keep them under control.
Despite the cap, interchange fees can still depend on factors like:
Type of card
The kind of card used plays a big role in determining the interchange fee. Rewards cards and business cards usually come with higher fees compared to standard debit or credit cards.
Transaction type
The way a card is used can also affect fees. If a customer taps their card in person at a point-of-sale terminal, the fees are generally lower. However, card not present transactions – such as taking card payments over the phone – typically have higher fees due to the greater risk of fraud.
Nature of business
The type of business you operate can influence the fees you’re charged. If your business is considered higher risk, perhaps because you operate in a sector more susceptible to fraud, you’re likely to need a high-risk merchant account which often involves higher fees.
Geographic location
Transactions that involve international cards or cross-border payments often come with higher interchange fees to cover the more complex processing infrastructure being utilised.
How do businesses pay interchange fees?
As a small business owner, you don’t directly pay interchange fees with each transaction. Instead, your merchant services provider bundles these fees, along with other costs, into an overall payment processing fee known as the Merchant Service Charge (MSC).
This charge is part of your agreement with them, making the choice of the right merchant services provider key for your small business. By selecting a provider with clear and predictable pricing, you can ensure that your payment processing costs are transparent and well managed.
Payment processors use a few different pricing models to structure their charges:
Flat rate – You pay the same percentage on every transaction, no matter what kind of card your customer uses or how the payment is processed.
Tiered pricing – Fees are grouped into different pricing tiers based on factors like card type or transaction method.
Interchange-plus – You pay the actual interchange fee plus a fixed markup from the provider. This option is typically reserved for larger businesses.
SumUp offers easy-to-understand pricing models tailored to different payment methods. This means you always know what to expect, with clear, predictable costs that fit the way you do business.
How do fees impact small businesses?
The impact of fees associated with accepting card payments, including interchange fees, should be kept in mind when you’re considering these aspects of running your business.
Cash flow management
Card transaction fees will, to a certain extent, eat into your cash flow. It’s important to plan ahead when calculating how much it will cost to start a business, and factor these fees into your small business expenses when you’re writing your business plan.
Once your business is up and running, good bookkeeping is essential for staying on top of your cash flow. By closely monitoring your income and expenses, you’ll be better prepared to anticipate how card fees will affect your bottom line.
Factoring these fees into your cash flow forecast ensures that your cash flow remains predictable, even during busier times.
Pricing strategies
When setting prices for your products or services, the cost of accepting card payments is something you’ll want to consider. Let’s say you run a food and drink stall at a weekend market – those card fees will take a bite out of your profit margins.
While you can’t add a formal surcharge for card payments, you can incorporate these costs into your overall pricing strategies.By factoring in these fees, you can work out how to price a product so that you cover your expenses but still attract customers and keep your business profitable.
Customer retention and loyalty
Since fees affect your pricing, they can also impact customer retention and loyalty. Let’s say you run a small restaurant. If you need to raise menu prices due to card payment fees, customers might notice and compare your prices to other eateries. Balancing your pricing with these expenses is key to keeping customers happy and staying competitive.
Learning how to do a competitor analysis can help you understand how similar restaurants are pricing their dishes, allowing you to adjust your strategies to maintain customer loyalty while covering your costs.
Growth and expansion
As your business grows, card payment fees will become a bigger part of your expenses. If you’re running a successful online boutique, for example, being aware of how these costs affect your profit margins will be important when planning how to scale your business, whether you’re exploring new business opportunities like opening a brick-and-mortar store, or focusing on business growth strategies like expanding your product lines.
Cut your transaction fees
Looking to grow your business and cut down on costs? With the SumUp One flexible monthly plan, you’ll get discounted transaction fees, half-price card readers, and 7am next-day payouts – even on weekends. Plus, you’ll have access to our pro invoicing software to keep everything running smoothly.
FAQs
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