Interchange Optimization: How to Save On Interchange Fees

If your business allows transactions via credit cards or other electronic payment methods, you pay fees to a merchant processing provider. Merchant processing providers, also known as payment processing providers, play a vital role in facilitating transactions all across the world.

As you may already know, there are a number of fees associated with utilizing a merchant processing provider. And one of the main fees you’ll pay as a merchant is interchange fees. By better understanding what interchanges are and how to optimize them, you can find valuable cost savings for your business.

In this article, we will explore exactly what interchange fees are, how they are calculated, and what interchange optimization entails.

What Are Interchange Fees?

An interchange in the payment processing world is a group of categories and qualifications that credit card companies use to define the rates and fees of different types of transactions.

There are numerous different types of interchanges and the fees you’ll pay depend on which interchange categories you qualify for. These interchange fees are typically the largest fees you’ll pay to a merchant processing provider in order to accept credit cards and other forms of payment.

To clarify, merchant processing providers don’t set the interchange fees — this is the responsibility of the card associations. A merchant processing provider initially pays these fees to the card-issuing banks but then these costs ultimately get passed on to you (the merchant) by the processor.

How Interchange Fees Are Calculated

Many complex variables govern how interchange fees are calculated. For the average customer, it’s difficult to understand the details of these calculations.

To simplify matters, credit card companies typically compute a flat interchange rate based on a number of variables for each business and then tack on a percentage of the business’s total sales.

Though interchange fee calculation is complex, there are key variables that determine interchange fees including but not limited to:

  • The size of your business
  • The type of business you operate
  • Size and volume of transactions
  • The types of cards you accept
  • The types of payment gateways you use
  • Your standard industrial classification (SIC) code

What Is Interchange Optimization?

Interchange optimization is the process of qualifying your business for the interchanges that will minimize your spending on merchant processing costs. This primarily involves selecting the proper SIC code for your business type and processing level 3 data through your payment gateway.

Due to the complex nature and vast array of interchanges, it’s very common for businesses to function within categories that have higher rates than they need to pay. Furthermore, interchange optimization is where businesses can find the most savings in this cost category.

Though interchange optimization is extremely valuable for businesses, it’s nearly impossible for businesses to properly optimize their interchanges by themselves. In most cases, you’ll have to work with a team of merchant processing experts to truly find savings in this category.

How Interchanges Are Optimized

When you work with a team of experts such as P3 Cost Analysts, they’ll help you qualify for incentivized or reduced interchange rates based on your type of business.

SIC Codes

Your business has a SIC code which is one of the factors that determines which interchanges you qualify for. A team of experts understands these codes and is able to help qualify your business for the best rates possible.

For example: If you own and operate a gym, you have a specific SIC code for that type of business. But if you also teach classes in that studio, you qualify for a special educational interchange category that can optimize interchange costs. Most owners would not know this is possible because these details are rarely communicated by your merchant processing provider.

Payment Gateways

Another way interchange fees are optimized is by prescribing better payment gateways. These gateways are devices you use to accept payment and each unique device uses certain types of data. This data is defined as level 1, level 2, and level 3, with level 3 being the most detailed kind of data.

Any time you process higher-level data, you get reduced interchange fees. With the appropriate gateway, you could potentially process level 3 data instead of only level 1 and 2 data.

The P3 Merchant Processing Auditing Process

As mentioned above, conducting your own merchant processing audit to optimize your interchange fees would be quite complex. Luckily, P3 Cost Analysts can leverage its team of merchant processing experts to find your business the savings you deserve.

Step 1: Engagement

After we explain our shared savings agreement, we’ll ask you for invoices, contract information, and other details about your merchant processing provider. In many cases, we can get this information directly from your provider which can save you time and energy.

Step 2: Audit

To start the auditing phase, we perform a detailed analysis of which interchange categories you are currently functioning under and look for more cost-friendly interchanges you can qualify for. We also take an in-depth look at all of your other merchant processing fees to find additional savings.

With our decades of experience in the industry, we can compare your expenses with our nationwide vendor pricing benchmarks to ensure you are getting best-in-class pricing.

Step 3: Share Findings

After around 4–6 weeks from our engagement meeting, we will compile all of our findings throughout the audit and share our recommendations with you.

Step 4: Negotiation

Once you take a look at our findings and approve our recommendations, we will start working with your merchant processing vendor to arrange our recommended agreements and secure the best pricing possible.

Step 5: Implementation

After our negotiations with your merchant processing provider are finalized, we can implement the new program and ultimately share in the cost savings with your business.

Step 6: Ongoing Monitoring

Our work doesn’t stop after the implementation of our recommendations. We will continually monitor your invoices each month to make sure your savings are secure and also to ensure your vendor sticks to their pricing and agreements.

Interchange Optimization Case Study

The team at P3 Cost Analysts worked with a large food manufacturer in South Carolina that was interested in reducing their merchant processing costs. During our initial audit of their interchanges, we found that they were inefficiently clearing Level 1,2, and 3 data. This means there was much opportunity to find savings for this client.

After a deep analysis, we identified the necessary changes in process and worked with the merchant processor to implement these changes. In total, we were able to find this client around $60,000 in savings per month on merchant processing costs.

Other Ways to Reduce Merchant Processing Costs

In addition to optimizing your interchanges, the experts at P3 Cost Analysts are able to find savings on merchant processing costs in a variety of ways. These methods include:

  • Negotiating merchant processing fees: Though general processing fees only make up around 20% of your possible savings, we can negotiate better rates than customers due to our industry expertise and database of pricing benchmarks.
  • Eliminating fake fees: It’s not uncommon for merchant processing providers to tack on fees that shouldn’t be there. With our knowledge, we can spot these and get these costs reimbursed to you.
  • Reducing chargeback fees: Chargeback fees can quickly become a problem if you have a lot of disputed transactions. Fortunately, we are experts at working with merchant processing providers to reduce your costs on chargeback fees.
  • Prescribing alternative payment methods: Depending on your volume of recurring transactions, it may make sense to use ACH solutions versus processing credit cards to reduce costs. Additionally, in rare cases, we can help you implement an aggregator such as Square or PayPal when it makes sense to do so.
  • Spotting and correcting padded interchange fees: In some cases, merchant processing providers will pad their interchange fees, which means more fees for you in addition to your real interchange costs. With our expertise and access to published interchange categories, we can find these discrepancies and get them corrected.

Save on Merchant Processing Costs Today

As we’ve seen, there are many savings to be found in merchant processing costs. The main area where savings are found is on interchange fees. Since interchange fees are difficult to understand for the average customer, it’s best to consult third-party experts to truly find savings.

By working with a cost reduction consulting agency such as P3 Cost Analysts, a full merchant processing audit can be performed — and a major part of this audit is dedicated to optimizing your interchange fees.

If your business has a high volume of credit card or other electronic payment transactions, it makes sense to find savings by conducting a full merchant processing audit. If you’re interested in having us take a look at your merchant processing invoices and contracts to achieve better rates, schedule your free expense audit today.

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