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Small Merchants Attempt to Hold Down Interchange Fees

Posted by: John Tozzi on October 09, 2009

Some small business owners shared their suggestions for minimizing credit card interchange fees, after yesterday’s hearing on a bill to restrict some fees and increase transparency. (Interchange fees are what merchants pay to the bank when customers pay with swipe cards, on average about 1.75% of each transaction.)

A reader named Suzanne Riga writes about giving discounts for cash:

We discount 3% for cash sales to try to recover the cost on credit cards. The problem we’ve run into now is more customers use debit cards than cash. Debit cards are considered a “cash transaction” so we really get hit hardon those charges. We are debating now whether to consider not giving a discount on a debit card. That would antagonize the customers though, so we’re caught in a catch 22.

Monte Smith says his restaurant recently started passing the cost of interchange along to customers:

Credit card payments are 48% of our payments. So you add all the fees it gets to be expensive. It seems that these card companies twice a year raise their rates and if a restaurnt raises it menu they get another raise based on their percentages….We just started calulating the cost of these fees [to] be included in menu pricing..

And J. Goldberg set a $20 minimum on taking credit cards, even though he says it breaks the rules of his agreement:

Recently in my small business I did an average cost per ticket anaylsis of my credit card transactions instead of trying to figure out the 40 page bill. What i found out is that it costs me $2.12 average for each transaction. I did 1100 transaction in July and it cost, with all of the fees open and hidden, $2332. Even though it is against the rules we have instituted a $20 minimum on the acceptance of credit or dedit cards.

Meanwhile, a spokesman from Visa got in touch with me yesterday to send over the network’s statement. Here are some excerpts:

Merchants receive tremendous benefits from electronic payments including guaranteed payment, increased sales, faster checkout times, as well as greater convenience and security - all at a fair price. For these benefits, Visa’s interchange rate for banks averages 1.62 percent for each transaction and has remained steady for a decade. Unfortunately H.R. 2382 is nothing more than a renewed effort by lobbyists representing some national retailers and trade associations to shift the normal cost of business onto consumers, while retailers continue to reap the benefits electronic payments offer and pad their profits.

Importantly, retailers already have numerous options to manage their acceptance costs. They can shop around and get a better deal on their merchant acquirer, negotiate a lower fee with their acquiring bank, steer consumers towards other forms of payments and offer discounts for cash, check or PIN debit.

Now, that may raise some eyebrows among merchants. Has anyone tried to negotiate lower fees with their bank? Share your story with us in comments below.

Here are some changes that the Credit Card Interchange Fees Act of 2009 would make:

  • Ban the practice of charging higher fees to the merchant when customers pay with “rewards” cards
  • Prevent credit card networks from imposing certain restrictions on merchants, like how they can display their prices or steering customers to use cash instead.
  • Increase transparency for merchants and direct the FTC to police merchant agreements for unfair, deceptive, or anti-competitive practices

The big concern here is whether the market is working to set interchange fees in a way that reflects the value that credit cards provide to merchants and consumers. A great nugget from this US News piece suggests the opposite might be happening. Quoting payments expert Aneace Haddad:

“Interchange fees are set by Visa, MasterCard, and other card schemes as a feature of each card product that the scheme offers to banks,” explains Aneace Haddad, an entrepreneur who works in electronic payments and blogs on the subject. “When a bank is deciding between a Visa or MasterCard logo on their cards, and between one company’s platinum card and the other’s, it is very tempting to choose the one that provides the highest interchange fees. This competition is what has driven interchange fees higher over the years.”

In other words, competition from bank card issuers drives the prices up, rather than competition from merchants and consumers driving the prices down. Sound like a functioning market?

Please keep the comments coming on this one. It’s a bit of an obscure topic, but one that matters to almost anyone doing business, particularly any consumer-facing business or anyone selling online. So your on-the-ground stories are invaluable to reporting on this.

Reader Comments

Twice Bitten

October 10, 2009 09:32 AM

Visa's statement that its average interchange fee is 1.62% is a half-truth as they are combining credit, signature debit and their Interlink PIN debit rates in this average. Visa and MC credit product rate averages are likely in the 2.00 - 2.20% range.

Brian J. Donovan

October 10, 2009 03:20 PM

The average interchange fee in the U.S. is seven times the interchange fee set by Visa and MasterCard in countries throughout the rest of the world. The following article discusses this issue and how comprehensive, standardized, simplified, and transparent credit card reform legislation may fund a Natural Disaster Trust Fund.


October 10, 2009 10:50 PM

I was able to negotiate a significantly lower rate on my interchange fees. It was painfully time consuming, and I was dealing with a customer service agent who was fairly green, but due to their own mistakes and lack of knowledge of the process, I was able to get several different fees waived, as well as lower rates for all three tiers of transaction types. Make sure you pay attention to knowing what types of cards you are swiping most of the time; debit? PIN debit? credit? rewards cards? all of these will have different rates. If you are swiping a PIN debit card will it be cheaper for you to run it without the PIN number? or with? Every contract is different, each provider will have their negotiated rate that they can work with or not... if you are a small business owner like me, you have to be informed because nobody else is going to do this work for you. on a final note, we sell both brick and mortar and online, you should be negotiating different rates for each of those accounts depending on the volume of transactions.


October 10, 2009 11:09 PM

FYI, stop whining,
nyc yellow cab drivers have to pay
five percent on every credit card
charged by a passenger.and there is
no minimum.

Rocky Patel

October 10, 2009 11:23 PM

Its a Big game of Fraud, The merchants are lured initially with low rates, which goes up quickly plus the credit card company does not clearly disclose all the Fees, the merchants are shocked with additional fees, its impossible to understand their interchange fee statement, finally they force merchants to a set period in contract and they enjoy changing contract and raising the rates without any government oversight.


October 11, 2009 06:57 AM

Interchange fees are killer, on average the fee is not 1.75%, it is close to 2.5%.

Interchange fee is different for each industry for Visa and Mastercards, for example, hotel/motels owners pay a different rate than say Gas Station, or grocery stores. American Express, Discover, Diners, Wright Express, etc. each have one standard merchant fee.

Here are the breakdowns:

(1) Visa - average is about 2.10% across different industries;
(2) Mastercard - about 2.80% across different industries;
(3) American Express - 3.5%;
(4) Discover - 3%;
(5) Diner, Barclay, etc - 5% or so.

Oh yeah, these fees are NON-NEGIOTIABLE as these are base fees for the credit card underwriters (Visa, MC, AMX, Discover, etc).

Then there is the issuer bank, like Citi, Bank of America, Wachovia, Chase, etc. These issuer banks also have their fee stacked on top of the underwriter fees, depending on the card type (reward, cashback, etc), is about 1% to 100% - it is unknown!

Then there is middleman, who takes additional fees for processing card cards.

So the formula is: NON-NEGIOTIABLE card issuer fees + Issue bank hidden fee + Middleman processing fee + chargebacks (that is, risk of stolen cards, customer disputing their purchases, etc).

Middleman processing fee depend on merchant volume and relationship between the merchant and the middleman, generally for a low volume merchant they are about 2% and high volume merchants they are anywhere between 0.1% to 1.5%. Corporations like Walmart, Macys, Homedepot, etc. which have larger volumes, do not have a middleman as they go direct with the underwriters.

As you can tell, it is very difficult to have an exact percentage without assessing the type of card (Visa, MC, Amex, etc) and issue bank. Oh wait, how many bank there are in US, countless? Yes. How many of these countless banks issue credit cards, countless? Yes. And, is there a directory out there which CLEARLY states each of the issuer banks credit card fee that a merchant is charged in every industry? The answer is NO.

In simple words, if a customer walks into XYZ vendor in California and presents Visa card issued by an small bank in New Mexico, there is no way for XYZ vendor to exactly tell what kind of merchant fee it will be paying till the vendor receives the invoice from Visa.

Prior to receiving the invoice, they will know what what is Visa's cut, and what is middleman's cut.

Anyway, if you take the rates and formula that I have given above to calculate an average merchant fee %: 2.45% (VISA/MC average), including AMEX, Discover, etc. this average rate increases to about 2.75% + bank issuer fee of about 1% + middleman fee of say 1% + 0.1% for chargebacks, etc. Total is 4.85%.


Example, say you buy $1800 flat screen tv, you play a tax on it of $160. Total is $1960. The merchant card card fee in this transaction is $95. In otherwords, the true cost of the flat screen tv is $1705.

Another example, say you spend per month the following: about $400 on groceries, $250 on gasoline, $200 eating out, movies, etc. about $100 on books, cloths, etc. Total expense is, say about $1000 per month, for one year is $12,000. Say you do this on credit cards, the merchant fee for this per year is $582. That you could have saved.

Mike Hawthorne

October 11, 2009 08:32 AM

We own a small environmental consulting business that, in part, develops and sells technical software. Due to the high price of this software, the percentage-based transaction cost of accepting credit cards for payment cuts too deeply in to our profit margin. Therefore, if a purchaser wishes to pay with a credit card, we calculate the cost of the credit card transaction and add it to the total cost, thereby passing it directly and transparently on to the purchaser. This has led to very few credit card transactions. It seems to me that if the credit card companies placed a cap on the percentage-based fees so that it is based on a percentage not to exceed a certain amount, they could increase the utilization of their cards for high-cost transactions.


October 11, 2009 09:56 AM

A credit company staff called me to pay for a transaction fee regarding payment I will do for my account. It costs 15 dollars according to her. Seems like extortion from me. They're doing business and processing is part of running it. Why put the load to the poor when it is inherent to process records to move on with business. We do payment, processing is theirs. Let business be fair.

Fred Gosbee

October 11, 2009 10:03 AM

I have been hit twice with "one-time" fees from Visa, passed through the processor. One was for a change in processing for Porto Rico accounts, the other for another "cahnge in the system". I am in Maine and, to my knowledge, have never seen a credit card from Porto Rico. These charges were $70, which for my small business is a big hit. I am in the last year of a three year contract and can't get out of this until next June.

There are almost 3 million retail stores in the US, about 87% accept credit cards. That means Visa has tagged its merchants for almost $200 million in unexpected fees each of the last two years.

The Lexington Coffee Shop

October 11, 2009 10:28 AM

The statement from VISA is bogus. When referring to the average interchange rate, ask VISA about daily upload fees, cross boarder fees, monthly maintenance fees (even when you own your own equipment) annual "compliance fees", security fees, foreign handling fees, cross boarder fees, the list goes on. For your own research, ask for a sample contract, the one usually given to a small retail business, and show it to one of your lawyers. My lawyer said it was the most unilateral contract that he had ever seen. Regardless of the number of banks offering credit card services to merchants. Ask how many actual processors of credit card transactions (clearing houses which all banks use) are in business in this country, my research indicates two.
I am looking at my statement for the month of September: Total Sales--(we take Visa and Mastercard Only) $9,533.93. Total Fees--$592.85. Number of transactions--786. Total cost of using Visa or Mastercard per transaction--75 cents. In our state, the sales tax is 5%.
In the United States of Banking, the tax is 6%. (In addition to the state sales tax.) These fees are part of the overhead of every business which accepts credit cards. They are reluctantly passed on to every consumer, regardless of how they pay--because language in the contract forbids merchants for charging more for a credit/debit transaction.
The fair solution is for customers who choose to use their credit/debit card to pay the additional costs associated with their use. That will save the rest of us, who use cash, about 6%--not the 1.75% claimed by the industry.


October 11, 2009 10:35 AM

Running a small on-line company I evaluated several companies and first I have to say that trying to figure out all the charges and add-ons is painful. The overall charges for us last month with everything from gateway fees to AMEX addon charges amounted to 4.8% although the original quoted price from the processor was about 2.19%. The rate will vary as low as about 3% on high volume and if we don't process reward cards, or have foreign sales. I personally feel this whole credit card business is completely out of hand and overtaxes small business. (You get much better rates if you have larger volumes.)

I think there should be an exception to debit cards with lower fees and the ability to discount for debit cards.

Alex. S.

October 11, 2009 04:32 PM

In fact, online merchants are doing even worse - there is no guarantee payment; if a fraudulent sale occurs who do you think loses? It's not the bank - the merchant is the 'insurance policy' to both the bank and the customer. Online merchants with risks often the same or even lower than off-line pay TWICE the rate - 3% with all the fees ends up 5-7% of the costs. The fees are out-of-this world. There is no competition in the market. The market is cornered by 3 companies. No matter where you go you get the same rates sometimes packaged differently.

I doubt it costs more to process a credit card in the US than in Australia or Norway. Credit card business is a big organized crime.

Catherine Wood Hill

October 11, 2009 07:33 PM

I run an online boutique, and our transactions are 100% credit card. Our average cost is nearly 3% per order, and on an average order of $400.00, the credit card processors and banks are making a fortune on me. Unfortunately, it seems like our costs keep going up and options for switching never seem like they are worth the hassle. I would really like to hear from someone who has switched and seen a noticeable difference in their fees.


October 11, 2009 07:56 PM

There are so many variations in type of credit cards that a merchant does not even know what he will be charged. Regardless, negotiating with merchant providers is not as easy as it is portrayed. You can end up with restrictions that the merchant provider will hold your funds for a month or longer, because they classify you as a high risk. Changing the provider will cause that for example, but belonging to a certain industry too - Jewelers, Travel Agents, Mobile Vendors like Flea Market Vendors etc. are all over the sudden bad merchants. The maybe got a lower rate but have t wait for their money, and guess who makes more money by having that practice.

There is a reform needed and in my opinion this is not going far enough. It is just a first good step and the banks and merchant providers should not be the one calling the shots of what the rules are. They should be the one following them and not making them.


October 11, 2009 10:05 PM

There are so many variations in type of credit cards that a merchant does not even know what he will be charged. Regardless, negotiating with merchant providers is not as easy as it is portrayed. You can end up with restrictions that the merchant provider will hold your funds for a month or longer, because they classify you as a high risk. Changing the provider will cause that for example, but belonging to a certain industry too - Jewelers, Travel Agents, Mobile Vendors like Flea Market Vendors etc. are all over the sudden bad merchants. The maybe got a lower rate but have t wait for their money, and guess who makes more money by having that practice.

There is a reform needed and in my opinion this is not going far enough. It is just a first good step and the banks and merchant providers should not be the one calling the shots of what the rules are. They should be the one following them and not making them.


October 12, 2009 02:39 PM

The government should encourage use of credit cards, if only for the dent they make in the underground economy. Sales made by credit card are much less likely to be omitted from the merchant's tax return. Let's face it, most mom-and-pop stores don't report all their cash sales to the IRS.


October 12, 2009 04:08 PM

Unfortunately, Visa isn’t telling the whole truth when it says that “Visa’s interchange rate for banks averages 1.62 percent for each transaction and has remained steady for a decade.”

They are using a simple average instead of a weighted average to deceive us. Say for example they issue one card at 1.00 percent and another at 3.00 percent. Well, then they can say the average is 2.00 percent. But what they should be calculating is the weighted average: if they issue one card at 1.00 percent but 99 cards at 3.00 percent, the weighted average is 2.98 percent.

And this is exactly what we have seen as the card companies are cancelling “plain vanilla” accounts and offering high rewards cards and even business cards to ordinary persons, all of which have higher interchange rates!

Also, why is it that the Federal Reserve Board says that paper checks must clear at par, but the card companies are making money off of hidden fees on debit card?!?! Visa and MC sold debit cards as “electronic checks” when they were first introduced.

Perhaps the most disturbing part of this is that the card companies are making money OFF OF TAXPAYERS through food stamps and gift cards distributed after hurricanes. These items used to clear at face value but as soon as you slap a Visa or MC logo on them, the card companies and banks are collecting an easy 2 percent right off the top!


October 15, 2009 02:06 PM

Similar legislation to H.R. 2382 has been passed in the EU as well as Australia. We've found that rather than passing these savings on to consumers, prices stay the same and merchants enjoy higher profits.

While this would do great things for merchants, it will ruin an entire industry (MLS, ISO, and Acquiring Banks). The ability for Merchant Services providers to price merchants however they like allows for competition in the Acquiring industry. If regulated, competition in that industry will be squashed.

For example, my company reaps the benefits of those companies over-charging their merchants. We provide reasonable rates to our merchants; undercutting the competition by more than 20%. Note: If you deal with consumers in a face to face environment and are paying more than 3% all in, you are being ripped off. Shop around for better pricing.

Would merchants feel differently if they were in the same boat as the Aquirers? What if the government stated that businesses that sold candy bars could not mark up more than 5%? Doesn't this squash the idea of a free market economy?

This bill, if passed, would offer a possible 1.5 - 2.5% increase in revenue to merchants, at a cost of losing an entire industry.

Jeff Zellmer

October 27, 2009 03:13 PM

Financial Mitigation Services helps businesses lower the cost of accepting credit cards without changing vendors. The FMS cost reduction process is achieved by working with your current processing partner to eliminate unnecessary fees, billing errors and overcharges. FMS has saved businesses across the country millions of dollars by identifying and eliminating unnecessary credit card processing fees for our clients.

Stuart Isbister

November 4, 2009 05:39 AM

The real issue that gets glossed over is that a % is charged in the first place. Why should it cost me twice as much to process a card from a customer buying a £100 gift to one buying a £50 one? Does it cost the industry twice as much? - I don't think so.
This money business is really too important to be left in the hands of private banks. The profits they make from this leeching scam are too hidden and there is no real competition.
Radical overhaul or stringent global regulation is needed.
Having said all of that - it IS possible to negotiate fees. I've just negotiated a 0.3% reduction after threatening to move my business elsewhere - but you do need to ask.

Jeff Zellmer

November 18, 2009 01:07 PM

Many companies wrongly assume that they have little bargaining power when it comes to credit card processing rates they are forced to pay. Most companies incorrectly assume that the more volume that they do in credit card processing, the lower the rates they will be forced. Although this is a factor, it is a very minimal factor in the total scope of credit card processing costs a business must pay if they accept credit cards. In addition to transaction costs, gateway fees, communication costs and various other costs, the bulk of credit card processing costs is in Interchange costs per transaction.

Based on the fact that Visa and Mastercard both have literally thousands of different Interchange rate combinations for every single transaction, it is extremely difficult for the average business owner to truly know if what they are paying to process credit cards is correct or the lowest rate possible.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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