Working Capital

Your Guide to Credit Card Interchange Fees and Alternative Payment Acceptances

January 02, 2022
The C2FO Team
hand swiping credit card

Hidden processing fees in credit card transactions strike hard at many companies’ bottom lines. C2FO explores these “swipe fees” and compares the options of virtual cards, purchasing cards and dynamic discounting that enables early payment.

The COVID-19 pandemic has upended the business landscape in so many different ways, and one of the most notable changes is the rapid move toward cashless payments via the use of credit cards. All over the world, individual consumers and businesses are taking out plastic cards (rather than old-fashioned cash or their checkbooks) for buying goods and services. But all these transactions come at a cost. Whenever someone swipes a credit or debit card, physically or virtually on the internet, the credit card company tacks on an interchange rate that the merchant or supplier must pay. Also called swipe fees, all these little bills can accrue to big budget busters for many large and small businesses.

To keep you informed and maybe help you decrease your credit card transaction bills, we lay out the current landscape on these fees, the massively profitable credit card world and alternatives to the plastic card in your wallet.

What are interchange fees and why are they issued? 

When a consumer or a business buys goods or services from a merchant or supplier and uses a credit or debit card, the credit card company issues an interchange fee (or rate) on that individual transaction and bills the merchant selling the good or service. These fees are higher for credit card usage versus debit cards and constitute a fraction of the total purchasing cost. 

On the whys behind these costs, financial services companies enact these swipe fees to generate revenue for themselves and as a “buffer” or hedge on taking the short-term credit risk when a consumer borrows money from the financial company in order to buy something, according to Investopedia. The fees also cover other items such as credit fraud and handling costs.


man shopping online with credit card

How interchange fees are calculated

The calculations arriving at an interchange fee can have many variables, but financial companies base them on financial risk numbers and the costs of handling and moving money, among other factors. Credit card networks such as Visa, Mastercard, American Express and Discover set these fees sometimes annually or twice a year. Visa and Mastercard usually issue interchange fee numbers in the spring and fall.  

It gets a bit complicated for the merchants who have to pay these fees because the amount they must pay differs based on particular factors about the transaction. The following are the different variables that will impact the fee amount: 

  • Type of card: Different credit cards from the same financial company may have different interchange fees. As said before, debit cards have lower fees versus credit cards because there is decreased exposure to risk. Rewards cards can have relatively higher interchange fees compared to others. 

  • Type of business and size: Different businesses, such as grocery stores versus boutique gift shops, also pay different interchange fees. Also, the size of the company can determine interchange fee costs. For example, large businesses may have the pull to negotiate lower interchange fees with financial services companies versus mom-and-pop stores.

  • Type of transaction: Another variable that determines interchange fees is how the transaction was made. Was it made at a cash register or mail order or a website? When the card is taken out and physically swiped or scanned, interchange fees tend to be at a lower rate compared to scenarios where a card is CNP, or card-not-present.

The big business of swipe fees 

As you can imagine, all these transactions add up to eye-popping numbers and big revenue generators. According to data from the Nilson Report, Mastercard and Visa alone pocketed $67.6 billion in interchange fees during 2019, up from $32.7 billion in 2012. The fee revenue was slightly less in 2020 ($57.3 billion), due to closed businesses during the pandemic. By contrast, 2009 saw $25.6 billion in interchange fees, according to a CNBC article.

“The overall processing fees paid by U.S. merchants to accept all card payments jumped to $116.4 billion in 2019, up 88% since 2009,” reads the same article. 

In 2019, Visa came out as the big winner with the majority of credit card transactions at more than 60%.


small business main street 

How businesses are coping with high fees

For many businesses, whether they are corner bodegas or large grocery chains, these interchange fees become big expense items, and that has them crying foul.

“These prices are so ridiculous. The amount we pay in swipe fees is so high that we have to do something about it, somebody has to do something about it,” said Hub Convenience Stores CEO Jared Scheeler in the CNBC article.  

In the past year, Visa and Mastercard’s efforts to increase interchange fees have been met with derision from businesses and political scrutiny, according to Bloomberg. 

Others are finding ways to cut their costs and pass along these expenses to the consumer, either in the form of increased prices for goods and services or surcharges, according to an August article in The Wall Street Journal. On these credit card surcharges, the article reported that 5% of the 8 million card-accepting US businesses now charge a fee for credit card purchases — up from 2% five years ago, citing data from payments consultancy The Strawhecker Group. Another interesting data point: CardX LLC, a payments processing tech company, told the WSJ that “more than 6,400 merchants—most of them online businesses—use its surcharge-calculating software, up from 4,030 a year ago and 2,380 in 2019.”

In a recent C2FO survey of 1,000 company leaders and financial decision-makers who operate in the B2B space, 64% cited credit cards as a significant form of payment acceptance. This means most businesses must figure out a way to cover the cost of the necessary interchange fees. More than half of those surveyed said they charge a fee to customers paying with a credit card all or most of the time. But even more common, 71% say they factor in the cost of interchange into their margin or cost of goods (COGS). 

More than half of those surveyed said they charge a fee to customers paying with a credit card all or most of the time. But even more common, 71% say they factor in the cost of interchange into their margin or cost of goods (COGS).

The owners at Karen’s Dairy Grove, a small ice cream shop near Cleveland, Ohio, told reporters at the WSJ that they pass along a 25-cent credit card surcharge to customers when the transaction is less than $5. 

“My business is made on the pennies. If I do everything right, I have a small margin,” the owner told the WSJ. “On a $5 ice cream, 25 cents is a big chunk of the margin.”

Others are encouraging customers to use cash, a debit card or check by offering discounts. 

Alternative payment forms

Businesses have been considering options like virtual and purchasing cards and dynamic discounting as they weigh factors such as interchange fees, security issues and fraud that can occur with physical cards. Here are some of the most common alternatives. 

virtual card on mobile phone

What are virtual cards?

A new but fast-growing form of payment in the financial transaction ecosystem is the virtual card or v-card, a computer-generated credit card number that does not require the issuance of a plastic card. 

In 2019, Juniper Research, a digital research company, estimated that virtual cards would grow by 90% to a $1 trillion business by 2022. If anything, the explosive growth in digital commerce during the COVID-19 pandemic may have accelerated that predicted growth for virtual card products, which are offered today by large brand names such as JP Morgan and Stripe.

How do virtual cards work?

Before getting a virtual card, first you must have a traditional account, such as your regular credit card or debit account. The virtual card works as a proxy for your credit/debit card account by masking vital, sensitive information on your account and digitally generating a card number, expiration and security code in its place.

A virtual card cannot be processed by anyone other than the merchant you have designated, and then only for an authorized amount. A virtual card can be used repeatedly like a regular plastic card, or just once as a single-use account for a specific supplier. Buyers that implement a virtual card setup for their suppliers can control the expiration dates of the cards, who is allowed to use the cards and the amount of cash available for the payment. Another positive attribute is that buyers often get a rebate on purchases, basically giving the buyer a discount.

The virtual card service, usually a free add-on from the financial company, can send you as many virtual card numbers as you wish without impacting the standing of your account or credit score.

For suppliers that use virtual cards, the perceived benefits are tighter security, ease of use and more efficient working capital management. Other positives: They serve as an alternative to invoice factoring, can reduce the number of card disputes and chargebacks, and cut down on processing costs.

Another thing in favor of virtual cards: They can reduce the interchange rate because there is less credit risk exposure.

“Large-ticket interchange rates vary by size, but as an example, a $100,000 payment transaction would produce supplier interchange fees of less than 1%, substantially lower than the standard rate of 2.65%,” reads a JP Morgan report on virtual cards. Of course, the average B2B invoice is approximately $4,000, and lower invoice amounts typically see much higher interchange rates than payments in excess of $100,000.

stack of credit cards

What are purchasing cards?

Purchasing cards (also called “p-cards”) are another type of card that merchants can use, and they have some attributes/positives that make them stand apart from a regular credit card. They basically function like a regular credit card and use the credit card infrastructure, but the merchant using the p-card must pay off the balance each month, according to the NAPCP, an association devoted to the interests of the commercial card and payment industry, an estimated 7 out of 10 US companies currently use p-cards.

How do p-cards work?

They are usually used for business-to-business payments and can exist as physical cards or digitally as a virtual account. Cards can be issued to individual staff members of a company in order to buy goods and services. Typically, multiple employees have access to a p-card. At many businesses, only executives use p-cards, or a p-card is limited to a particular department.

These cards can be a speedy alternative to the slow, traditional procurement process of requests and approvals, particularly with smaller transactions. They streamline the purchasing process by doing away with invoices and paper purchase orders. They can give companies greater control over spending and cut down on the need for employee reimbursements. 

How does traditional dynamic discounting compare? 

Dynamic discounting is another payment solution that allows buyers to set early payment terms for their suppliers to access capital when a business needs it and enhances buyer and supplier relationships. The process unfolds with the supplier extending a buyer-determined discount on an approved invoice for the proffered goods or services to be paid early. Instead of static discounting terms like 2/10 net 30, where the discount amount is fixed and inflexible, the discount amount would be on a sliding scale and would change depending on the timing of when the supplier receives its payment. 

As an example of how dynamic discounting works, let’s paint the following scenario: A supplier, with a customer who is offering dynamic discounting, sends in an invoice for $10,000. Let’s say the buyer wants a 12% APR for early payment. If the invoice is paid 60 days early, it costs the supplier a 2% discount. At 30 days early, that discount amount is reduced to 1%. Here the buyer is paying $9,700-$9,800 on the $10,000 invoice. 

Better dynamic discounting with C2FO

C2FO brings more to dynamic discounting and our customers through an innovative, easy-to-use, low-cost and secure platform. Besides the fostering of early payment, C2FO customers specify which invoices they would like to accelerate and at what discount through patented Name Your Rate® technology, meaning they control the cost of capital for their business. They are able to access the working capital they need to grow, when they need it, and at the price they name instantly, without the hassle of paperwork, debt or long-term commitments. Enabling this kind of model puts suppliers in the driver’s seat while also giving buyers the opportunity to improve their financial results. To learn more about how C2FO compares, read our complete guide to dynamic discounting.

Let’s get smart about payments 

In an average year, business-to-business payments in the United States are estimated to be in the range of $20 trillion. These transactions include checks, commercial credit cards, ACH and wire transfers. Along with these widely known avenues, there are now alternatives in the increasingly crowded business-to-business payment sector such as virtual and purchasing cards and dynamic discounting that we have covered above. They can help you knock down pain points and whittle away inefficiencies in your purchasing process, provide increased oversight and control, ensure greater security from misuse and fraud, and even save on those onerous interchange fees.

Beyond these options, there are other emerging alternatives such as real-time payments, which instantaneously move money from one account to another at all hours of the day and night, and more exotic fare like payments systems built on the blockchain.

Just research what’s right for you, your business and your suppliers because it literally pays off to see what’s happening in the larger payment ecosystem.

Want to take control of your cash flow?

Early payment through C2FO can help.

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