Encountering interchange

One of the most hotly-debated credit-card processing fees, especially in recent months, is interchange—also known as “swipe” fees. Interchange fees are a percentage of each transaction amount imposed by the card brands (Visa and MasterCard; Discover Network and American Express follow a different pricing model) that the issuing banks collect from retailers every time a customer uses a credit or debit card. Currently, interchange fees can range anywhere between 1.5 to 2.5 percent for each card-based purchase.

According to the National Retail Federation (NRF), in 2008, U.S. retailers and consumers paid an estimated $48 billion for interchange—three times the $16 billion charged when the NRF began tracking the fee in 2001. These fees and others sometimes put small businesses in the difficult situation of choosing between profit and customer convenience.

In July, the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the financial reform bill, was signed into law. This legislation contains a number of provisions. Most important to retailers is the impact of debit interchange reform and the issue of “swipe” fees.

How does the debit interchange reform affect you?
The new law directs the Federal Reserve Board to ensure that debit-swipe fees are “reasonable and proportional” to the cost of processing transactions. The Federal Reserve has nine months to write new regulations, which will most likely take effect July 2011. These changes only affect debit cards issued by the nation’s largest banks. Some industry experts believe debit interchange reform may be the first step in regulating credit card interchange as well.

The reform does not directly impact credit card rates, except that business owners can immediately establish a minimum dollar value for accepting credit cards. The minimum may not exceed $10 and applies to credit cards only, not PIN or signature (non-PIN) debit or prepaid cards. If you plan to post a minimum purchase sign, it must state, for example, “Credit card sales require a $5 minimum purchase.”  Additionally, you will not be penalized by the card brands for offering in-kind incentives and discounts to customers who use debit cards, checks and cash, but you will, according to state laws, be required to disclose those discounts to customers.

Benefits can depend on card processing agreement. Retail advocates have long been lobbying for interchange-fee legislation to help lower the costs associated with accepting credit and debit cards. But many business owners will not actually reap the potential benefits from the legislation unless they are on an “interchange-plus” pricing model. This is a transparent, simplified model that passes the interchange fees directly through to the merchant while also divulging the separate fee the processor charges for its processing services. 

However, most businesses across the country, especially smaller ones, are on tiered pricing or discount-rate models that group together interchange fees and the processor’s fees, which will make it hard for processors to separate the fees and pass down the reduced interchange rates and savings to businesses.

Since many independent garden retailers may be priced this way, the two most important questions you should ask your card processor are “What is my pricing structure for accepting credit and debit cards?” and “How can I be sure I will benefit from the new debit-interchange bill and see some cost reductions as a result?” Don’t accept anything less than a detailed answer that outlines exactly how your processor plans to ensure you receive the appropriate cost savings.

Look for hidden fees
Besides the standard fees, processors often charge hidden or “junk” fees, such as membership fees, access fees and compliance fees. Some also use the card brands’ seasonal interchange increases in April and October to their advantage by not disclosing the breakdown of costs, raising their prices while assigning the blame for the increase to the card brands.

Now, more than ever, independent retailers like you are looking for ways to cut costs to help boost your bottom line. By learning the facts about payments processing and knowing the right questions to ask, not only can you eliminate hidden fees and reduce your out-of-pocket expenses on every transaction, but you can also maximize the benefits of the recent debit-interchange bill.  These savings can then be put to toward more important things—like your business.


Sanford Brown is Chief Sales Officer at Heartland Payment Systems® (NYSE: HPY), which is the fifth-largest payments processor in the United States. To learn more, visit www.HeartlandPaymentSystems.com and www.MerchantBillOfRights.org.