How to Counterbalance Credit Card Processing Fees With Innovative Early Payment Programs

Cashless payments are on the rise but extra swipes and clicks cost your bottom line. Learn how credit interchange fees work and explore alternative options.

Technology has upended the business landscape in many ways. One of the most notable changes is the shift toward credit and debit card payments. Now more than ever, customers are counting on their suppliers to accept cashless payment methods.

But for businesses such as yours, these transactions come at a relatively high cost. Whenever someone swipes a credit or debit card, physically or virtually, you are charged processing fees. Interchange fees, also known as swipe fees, are the largest among them, accounting for 70% to 90%. These fees can add up quickly, increasing your operating costs and affecting your finances overall.

Fortunately, you can counterbalance these high fees with innovative fintech solutions, such as early payment programs.

To help you make the best financial choices for your business, we’ll first explain what credit card interchange fees are and how they’re calculated.

The cost of cashless payments

Credit card processing fees have more than doubled over the last decade. According to data from the Nilson Report, credit, debit and prepaid cards were used to make $9.4 trillion in purchases in 2021, and US merchants paid $105.23 billion in processing fees, an increase of 25.1% from the prior year. Nilson Report data also revealed that credit cards accounted for 76.3% of total processing fees paid by US merchants in 2021, up from 75.9% in 2020. Calls for lower interchange rates have been ringing out around the world for several years, as business owners of all sizes have become increasingly aware of the high costs associated with card processing.

In a C2FO survey of 1,000 company leaders and financial decision-makers who operate in the business-to-business (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 necessary cost of 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 the cost of interchange fees into their margin or cost of goods sold (COGS).

What are credit card interchange fees?

When a customer buys goods or services from your business and uses a credit or debit card to pay, the credit card company charges you an interchange fee on that transaction. These fees are deducted from the total amount of the purchase, meaning you receive less than what your customer paid if they use their card to make the payment. Interchange rates are nonnegotiable and can vary by network, type of card and other factors.

Credit card companies have extensive systems to securely and safely collect money and send it to merchants like you. They charge these fees to generate revenue and cover the costs associated with accepting, processing and authorizing card transactions — such as the costs of fraud protection, for example. 

How interchange fees are calculated

Calculating interchange rates and fees can be complicated because there are many variables involved. Fees are typically based on current interest rates, the costs of moving money and the risk involved in processing credit/debit payments. These charges may appear as a single, bundled amount on the statement from your processor, but there can be as many as 300 individual interchange fees within the “single” interchange fee you pay each month.

Though the interchange fee is “paid” to the issuing bank, the rate is set by the card networks. Payment networks such as Visa, Mastercard, American Express and Discover determine their own rates and set them on an annual or biannual basis. Based on these rates, interchange fees are typically calculated as a percentage of the total sale amount. For example, the typical interchange rate is 1.7% to 2% for credit cards and 0.5% for debit cards. Average interchange fees for the four most common credit card networks are as follows:

• Mastercard: 1.45% to 2.90%

• Visa: 1.30% to 2.60%

• American Express: 1.80% to 3.25%

• Discover: 1.55% to 2.45%

Apart from these transaction fees, a fixed fee is also added. While there is no standard rate for the fixed fee, this should be clearly outlined in any contract you sign with your merchant service provider.

Below are some different variables that will impact the fees your business is charged:

Type of card: Different cards from the same financial company may have different interchange fees. As noted above, debit cards have lower fees than credit cards. This is due to their lower potential risk. Rewards cards, on the other hand, can have higher interchange fees compared to others.

Type of business and size: Different businesses, such as grocery stores versus boutique gift shops, pay different interchange fees. Also, the size of a business can determine interchange fee costs. For example, large businesses may be able to negotiate lower interchange fees with financial services companies compared to 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, via mail order or on a website? When a card is physically swiped or scanned, interchange fees tend to be lower than in card-not-present (CNP) scenarios.

What about virtual cards?

Another fast-growing form of payment is the virtual or digital card. In fact, Juniper Research, a digital research company, estimated that virtual cards would grow by 280% to a $9.1 trillion business by 2027. Virtual cards use a unique card number that does not reveal the buyer’s primary credit card number, and they do not require the issuance of a plastic card. As a proxy for a credit/debit card account, they mask vital, sensitive information on the buyer’s account and digitally generate a card number, expiration and security code in its place.

A virtual card can be used repeatedly like a regular plastic card, or just once as a single-use account for a specific supplier. The virtual card service, usually a free add-on from the financial company, is able to issue as many virtual card numbers as a buyer needs without impacting the buyer’s account or credit score. 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. 

As a supplier, accepting virtual card payments can offer your business tighter security, provide more efficient access to working capital, decrease disputes and chargebacks, and reduce fraud risk. However, as with traditional credit cards, accepting virtual cards can be expensive due to processing and interchange fees. Additionally, sometimes CNP transactions have higher interchange fees because they’re deemed to be higher risk.

Counterbalancing these high fees with a faster cash conversion cycle

Accepting traditional credit card and virtual card payments can help you increase sales, improve customer satisfaction, and enable quick and efficient payment. Even with the fees, these payment methods might still be a preferable and less expensive way to speed up buyer payments and improve your cash flow than options such as invoice factoring.

However, to mitigate the cost, you could consider taking advantage of an early payment program to speed up your cash conversion cycle.

Early payment programs

Early payment technology with dynamic discounting is a solution that suppliers can leverage to accelerate customer payments and improve cash flow. Platforms such as C2FO’s Early Payment program allow buyers to upload their invoices and set early payment terms for their suppliers. With dynamic discounting, suppliers are able to view invoices and offer a sliding-scale discount to customers that agree to pay early.

First, a buyer uploads invoices to the platform and sets a target for the size of the discount it is seeking in exchange for making an early payment. Using the platform, you, the supplier, can then select which invoices you are willing to discount and by how much for early payment. If the offer is accepted, the buyer then sends the payment directly to your bank account. This can reduce waiting for payments to as little as 24 to 48 hours from when you make an offer.

A key benefit of this payment approach is that you avoid the credit card processing and interchange fees associated with credit card and virtual card payments. You also have more control over the size of early payment discounts.

In summary

In an average year, B2B payments in the US are estimated to be around $20 trillion. These transactions include checks, commercial credit cards, automated clearing house (ACH) and wire transfers.

To turn a profit in this increasingly digital economy, you will most likely have to take credit and debit card payments, with interchange fees as a cost of doing business. However, to counterbalance these fees, it’s worthwhile exploring other innovative payment options — including C2FO’s Early Payment program.

This article originally published January 2022, and was updated March 2023.