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Interchange Rate Hikes Are Straining Small Businesses—Here’s How You Can Combat Merchant Fee Increases

After keep rates relatively stable throughout 2020 and 2021 in light of the impact of the COVID-19 pandemic on businesses, Visa, MasterCard, American Express, and Discover hiked interchange rates in 2022. 


In April last year, the four major card issuers updated their interchange rates, meaning merchant fee increases for millions of small business owners already grappling with inflation and rising Federal Reserve interest rate hikes. Most notably, swipe fees went up about 25% costing U.S. merchants a total of nearly $138 billion in additional fees. Visa and MasterCard also raised rates on card-not-present transactions, which includes online purchases. 


What Are Interchange Fees?

Visa, MasterCard, American Express, Discover, and other card issuers charge an interchange fee on every transaction made with their card. The fee is meant to cover the card issuer’s operation costs and compensate for the risk of fraud. 


These interchange fee rates are updated regularly but not always at the same time or by the same amount. Every issuer updates interchange rates according to their own schedule, but it usually happens twice a year, often in April and October. 


After the latest merchant fee increases sparked widespread complaints, the card issuers argued that the rate hikes were meant to address the increasing cost of fraud prevention and other services. However, the Federal Reserve found that the average cost to card issuers is just 3.6 cents, as of 2019. Meanwhile, merchants typically pay $2 to $3 on a $100 purchase, so the rates bear little relationship to the actual cost of processing a transaction. 


To make matters more frustrating, technology is helping drive those costs even lower. While the cost to card issuers has dropped 54% since 2009, interchange rates have soared in that same time period. 


What You Can Do to Combat Merchant Fee Increases

For merchants, these fees can be a headache. They’re non-negotiable so when rates increase, you really don’t have much choice but to just eat the costs—and those transaction costs can end up being one of the largest expenses your business deals with. In today’s market, customers expect to be able to pay with cards so simply refusing to accept card transactions is not a realistic option for merchants. 


While you can’t negotiate a lower interchange rate, you can optimize other aspects of your payment processing to keep transaction costs as low as possible. You can also join other merchants in the fight to pass legislation that would curb card issuers’ ability to unilaterally raise rates without limit. 


Put Pressure on Lawmakers to Pass the Credit Card Competition Act

After major card issuers announced the merchant rate increase last year, thousands of merchants decided to pressure congress to pass legislation that would help level the playing field. The Credit Card Competition Act would essentially require banks to give merchants a choice of at least two processing networks for each card. 


So instead of banks issuing a Visa card that is exclusively processed on the Visa network, they would have to issue, say, a Visa/Discover card or even a Visa/MasterCard/American Express card to its customers. Then, when that customer uses the multi-network card to make a purchase, the merchant can choose which network to process the transaction on. 


The goal of the bill is to stimulate competition between the card issuers that would drive fees down since merchants would now be able to pick the network offering the lowest interchange rate for each transaction.


At the same time, it would give merchants a little more control over their transaction costs. Instead of just eating the costs of these non-negotiable interchange rates, the choice of network would give merchants more power to fight merchant fee increases. 


Congress began a new session in January, so you can call or write to your representatives asking them to support the bill now. 


In the meantime, try the other strategies below to keep merchant fees as low as possible. 


Choose a Payment Processor That Uses an Interchange-Plus Fee Structure

As if rising interchange rates weren’t bad enough, some third-party payment processors, like Square or Stripe, use a less transparent fee structure to charge merchants for their services. For example, some charge a single flat transaction fee that’s usually set just above the highest interchange rate. 


So if Visa charges 1.4%, MasterCard charges 1.5%, and American Express charges 3.5%, the third-party payment processor might set its transaction fee at 3.5% plus $0.15 across the board. As a merchant, that means you’re effectively paying the highest possible interchange rate all of the time, regardless of the card used.


When you go with a payment processor like National Processing, however, the transaction fees are set using a transparent interchange-plus pricing structure. That means you’re charged the base interchange rate for the card used plus a flat rate that goes to the payment processing service. 


Instead of paying the highest possible rate across the board, merchants pay a variable rate based on the actual interchange fee for each transaction. When the base interchange rate can vary as much as two percentage points, that variable rate can add up to significant savings for merchants. 


Use a Cash Discount Program

There are no interchange fees for cash. So one way to compensate for rising interchange rates is to incentivize your customers to pay with cash instead of card. While surcharges are illegal in some states, offering a cash discount is allowed in all 50 states.


Basically, instead of implementing a policy of charging customers an extra fee for using a card, you would build the transaction fee into your advertised price and then offer a discount to cash-paying customers. If you’ve ever seen a gas station that displays separate prices for cash-paying customers and card-paying customers, you’ve seen a cash discount program.


This strategy helps merchants minimize transaction costs because they can incentivize cash transactions while customers who do opt to pay with card anyway pay the higher price that covers the extra processing fees. 

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Christian Woodward

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Customer focused

If we can't beat your current rates, we'll give you $500!*

We happily accept merchants processing any amount. Price guarantee for merchants processing $10,000 or more per month. Free terminals and other promotions depend on processing volume, credit and qualifications.

Customer focused

If we can't beat your current rates, we'll give you $500!*

We happily accept merchants processing any amount. Price guarantee for merchants processing $10,000 or more per month. Free terminals and other promotions depend on processing volume, credit and qualifications.