Updated: Feb 16, 2020
According to Bloomberg (see article), Visa is planning on increasing interchange rates for merchants starting in April and finishing the rollout in October.
Interchange rates are part of the costs for accepting branded cards (Visa, MasterCard, AMEX, and Discover) that are paid by merchants for card acceptance. Every time a merchant – store owner or online ecommerce store accepts a credit card payment, they pay a credit card processing fee.
Interchange rates make up roughly 75% of credit card processing fees. The other 25% in costs are composed of bank acquiring fees called pass thru, and other fees imposed by payment processors for marketing efforts and servicing the accounts.
There will be some winners and losers with the new price hike. Grocery stores and real estate will benefit from the changes.
The biggest losers will be merchants that conduct business online or over the phone, also known as card-not-present transactions. Ecommerce is the fastest growing segment in retail. It would make sense to say that online payments would be the fastest growing segment in the payment industry. It is this cohort that will be impacted mostly.
Retail brick-n-mortar merchants that use recurring payments for memberships or other regular monthly service fees will be affected as well. Recurring payments allow merchants to save card info on cloud based servers for future use without having to physically swipe the card. Gyms, insurance agencies, accountants, lawyers, med spa, wine clubs, men health clinics, and associations are types of businesses that may use recurring payments.
For card-not-present transactions, the increase will be roughly 4.7% for traditional credit cards and 4% for signature rewards cards. A traditional card purchase for a $100 will increase from $1.90 to a $1.99 and from $2.50 to $2.60 for the same dollar amount with a signature card. This rate increase is nearly double the national inflation rate which is currently at 2.3% (2019).
HOW TO OFFSET INTERCHANGE FEES
If you’re a merchant that accepts card not present transactions you might be thinking “how can I offset these charges?”
First, you can pass along the rate hike to your customers by increasing your prices partially or fully. A price increase might make you less competitive versus the rest of the field of players in your industry. However, this is an option that must be considered. A price increase strategy might include waiting for your competitors to flinch. If they flinch first, you may benefit from an increase in business. You also might want to slowly roll out price increases for certain premium products and services first. Generally your premium goods and services aren’t as price sensitive to price increases.
Another way to circumvent or offset costs would be to use additional payment options such as echeck payments. Echeck payments are a form of online payments that could prove to be extremely beneficial for you. Echecks are not bound by the same interchange rates as credit cards. The costs associated with accepting echeck payments generally come in the form of a flat fee or a small percentage. You can expect to save at least 2x’s (200%) or more by accepting echecks.
Lastly, another way to offset or eliminate interchange rates entirely would be to use something called surcharging. Surcharging is the exercise of adding on a small percentage fee to a transaction that covers the merchant’s costs associated to accepting credit cards only. Surcharging may look similar to increasing your prices but it is not at all the same. In the event you raise your prices, all your customers - including cash paying customers will be affected. Surcharging on the other hand is designed to add the extra fee to credit card purchases only. The surcharge fee cannot exceed 4%
Visa rolled out new updates to surcharging sometime prior to October 2019 outlining the program. As of 2020, only 6 states prohibit the use of surcharging:
To help merchants offset the rising costs of payment processing, Easy ePayments offers several payment options. First, we have an All-In-One payment platform that accepts both echeck and credit card payments. Echecks cost a measly flat fee of .50 cents versus the average online credit card rate of 3% +. Plus it has a surcharging feature that can easily be applied to credit cards. If you are a professional services company such as an accountant, insurance agency, or lawyer, you’ll want to use this platform.
Secondly, we offer payment gateways that seamlessly integrate into 150+ ecommerce platforms giving you the option to surcharge.
Want to learn more? Contact us.