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If you accept credit card payments then you can’t really avoid the fees that come with payment processing. However, through interchange optimization, you can cut some of those fees down and save your business a good amount of cash. Interchange optimization can be useful for any kind of business but it’s most effective for business-to-business companies because they’re more prone to transaction downgrades.
What is Interchange Optimization?
So, what exactly is interchange optimization? You can think of it as a strategy that strives to lower the cost of credit card payments, resulting in the lowest possible rates. This allows merchants to manage their fees in a smart way, specifically, by reducing interchange fees.
In credit card processing, an interchange is the portion of the transaction fee your bank pays to the card-issuing bank. 90% of your credit card processing costs are from interchange fees. Because of this, interchange optimization is vital and can result in real savings for your business every month.
A transaction is downgraded when it doesn’t reach its target. To be more specific, every transaction has a target category that will be routed. Each of these categories has its own rate and fee, which processors use to calculate transaction costs. If something does go wrong, the transaction downgrades to a more expensive category, leading to bigger costs.
Who Benefits from Interchange Optimization?
Businesses of all types benefit from interchange optimization, but those which are more likely to experience downgrades can lower target interchange significantly. Businesses that sell to other businesses, those that sell to government agencies, and those that process card-not-present transactions are especially susceptible to downgrades that you can rectify to lower costs.
Does Interchange Optimization Help you Save Money?
Yes. By optimizing interchange fees via routing transactions you’ll reduce costs and save money. This can only happen if your interchange fees are already high. Another thing to keep in mind is that when you do a lot of international business, you should always review and route transactions efficiently in order to save.
Moreover, don’t forget that you can only save money through interchange optimization if the pricing model you’re on allows money to be sent to you, and not to your processor. You also need to be able to see transaction-level interchange details on your statements.
How Can you Lower Processing Fees with Interchange Fees?
In reality, interchange fees play a factor in lowering credit card processing fees, but there are others factors to take into account as well.
Credit card payment networks such as Visa and MasterCard set non-negotiable interchange fees. But non-negotiable doesn’t necessarily mean static. Visa and MasterCard change the interchange fees value twice a year, in April and in October. This affects the bank or the payment processor’s decision of how big of a processing fee to charge.
- Visa and MasterCard consider:
- type of card
- the risk level of the business
- method of accepting payment
This is where interchange optimization can assist your business by helping you lower fees as much as possible.
The Importance of Level II and Level III Interchange Optimization
When we’re talking about optimizing interchange we want the best and ultimately the lowest rate for purchases. You can achieve that through in-depth transaction details that can only be captured with Level II and Level III optimization. This level of processing detail lowers your risk, and thereby optimizes your interchange fees.
Each data level represents a different kind of information when processing payments. Level I data contains only a customer’s basic billing information. Level II and III, on the other hand, give more information and usually include details such as PO number, customer codes, invoice number, shipping info, and more. These extra details will further help your business avoid fraud and when used efficiently, save you cash.
Downside of Interchange Optimization
The whole process of optimizing your interchange doesn’t have a downside but you won’t see improvement if you don’t use it to its full potential. Throughout this article, we talked about who benefits from interchange optimization, how it can save you money, and the importance of Level II and Level III optimization. Putting all this information to good use will lower your payment processing fees which means you’ve successfully optimized your interchange.
Other Considerations
If interchange optimization is not what you’re looking for, there are other ways to lower your interchange fees. Consider these three things:
- Negotiating with processors — This is an option bigger corporations can pull off. As the name suggests, it involves negotiating with payment processors to get lower card processing fees. If you’re a bigger corporation, you can get lower fees by discussing your transaction volume with processors.
- Increasing security — A merchant can reduce their interchange fees by increasing security measures before the capture of the payment and afterward. When a payment is processed without a PIN code or another authentication, the transaction will incur a higher interchange rate.
- Settling card transactions daily — You will get the lowest interchange rates if you settle your batch daily. For most cards and transactions in the United States, the clearing call has to take place within one day of the authorization to qualify for lower interchange rates. Waiting longer will result in higher rates.
Final Thoughts
Interchange optimization for credit card processing can definitely help you save cash by lowering fees as much as possible, but only if done right. Businesses to business companies, and business to government companies will benefit the most from this process. In some cases, by optimizing interchange you can lower processing fees as well as interchange fees. One way to lower these fees is by Level II and Level III processing, which requires more information from the cardholder and therefore reduces risk to the merchant and processor. Finally, in case you don’t care for this specific way of optimizing your interchange, consider the other alternatives we have provided.
