Maximizing Your Bottom Line: Interchange Optimization Tactics That Work

In just one year, US businesses paid $137.8 billion in card processing fees. With interchange being at fault for approximately 80% of the average fee, it’s no wonder many of our clients come to us asking about interchange optimization strategies, especially with North America averaging some of the highest interchange fees in the world.

We felt it was unfair to keep all that knowledge locked up, so here are five interchange optimization strategies we’ve used to help our clients lower their fees, often by millions.

What is interchange optimization?

 Interchange optimization is the process of reducing your interchange fees by optimizing your payment processes. Interchange optimization is ideal for merchants and PayFacs who are looking to reduce fees, decrease downgrades, and improve their bottom line.

The first place to start when considering interchange optimization is figuring out how much interchange is costing you. With the average interchange fee at 2% of each transaction, you can find out what interchange costs you by taking your average annual revenue via card payments and dividing that number by 50. 

For example, if your business takes in $30,000,000 per annum via card payments, interchange may be costing you approximately $600,000. Recognizing the magnitude of these costs is essential in implementing strategies to reduce them. By carefully analyzing your payment data and processes, you can identify areas for improvement and take targeted actions to lower your fees.

Now, let’s delve into a few strategies we’ve found successful and instrumental in saving our clients money.

Review and audit interchange costs

Do you know exactly how much you’re paying in interchange fees? Not a rough estimate, but the exact amount you’re paying every month.

If not, when was the last time you reviewed your interchange fee structures? Unfortunately, it’s common let a thorough audit of your fees fall to the bottom of your list of priorities – we’ve seen many merchants make the same mistake.

This is usually because either they assume nothing can be done to reduce the fees or because interchange optimization is generally viewed as a tedious process. This last barrier is particularly true for enterprise organizations with millions, if not billions, of transactions made every year, passing through multiple systems, vendors, and processors.

But the truth is a detailed assessment can result in opportunities to settle transactions at the lowest possible interchange category, which is a benefit that can evolve into millions of dollars worth of savings. And isn’t that worth the work?

If you don’t know what you’re currently paying, now might be a good time to crack open those accounts and take a deeper look.

Once you’ve completed an internal audit, you might like to have a look at the hidden network fees eating away at your bottom line. For example, did you know Mastercard charges $1000 when a chargeback response document is sent with over 20 pages?

Knowing is half the battle.

Negotiate with card networks and issuers

One method that has brought lots of businesses great success in lowering fees is negotiating with the card networks and issuers. Find out everything you can about how much other businesses of your size and type are paying and leverage that information to reduce your overall costs. Analytics tools (like the ones we offer) can help you by opening up unseen market intelligence and hidden agreements, empowering you with the knowledge you need to negotiate effectively.

Use level 2 and 3 data

If you process B2B or B2G payments, you’re eligible to send level 2 and level 3 data to the card issuers, which can reduce the total cost of your interchange fee.

While standard transaction data includes the basics (amount paid, card number, date), L2 data goes a level further and provides additional information such as customer codes and sales tax amounts. L3 data goes even further by providing information such as product quantity and item descriptions.

The more data you can send across the more favorable the interchange fee.

This is because this additional data makes the payment more secure and less likely to be the result of fraud. But level 2/3 data doesn’t only benefit you by reducing your interchange liability, collecting this data also improves your internal fraud prevention processes and arms you with powerful insights into your sales trends and customer behaviors.

A key component of qualifying for level 2 and 3 data processing is leveraging proven payment processing infrastructure, you can do this by working closely with payment partners. Only compatible systems can capture and transmit the relevant information effectively.

Other qualification factors include your company type (L2/3 data is used primarily by B2B and B2G businesses), your information capturing processes, and whether or not you are compliant with network rules. For example, with this last element, Mastercard and Visa may have different formatting rules for the submission of this data, so be sure to check you’re submitting the correct information to the correct network.

Monitor and Manage Downgrades

Downgrades are damaging and occur when information is incorrectly submitted. Each credit card transaction is initially assigned a target category which determines its processing fees. If all transaction details are accurate and meet the specific requirements of that category, the transaction qualifies and you’ll pay the lower fees associated with it.

However, if any information is missing or incorrect (for example, postcodes or tax percentages), the transaction may be downgraded to a different category with higher processing fees. This means you’ll end up paying more for the same transaction.

You may experience a downgrade if:

  • Customer/card information: The customer information you send is incorrect when checked against the card. E.g. you send the wrong customer address.
  • Settlement times: You do not settle payments in a timely manner.
  • Transaction information: The amount submitted is not the amount charged.
  • Chargebacks: You experience a high number of chargebacks.

We recommend that you consistenly monitor your downgrades to make an effort in reducing the number of punishable offenses by ensuring accurate data submission. Track the data you send moving forward and keep a close eye on what you’re charged to ensure you spot discrepancies early.

Here are some quick tips to take away for minimizing downgrades:

  • Ensure all data entered is accurate, both on your end and on the customer’s end.
  • Provide customer codes with each transaction.
  • Settle transactions daily.
  • Double check the information you’re submitting is correctly separated out. For example, ensure you’re sending the tax total and percentage as a separate number from the payment total. The same applies for tips.
  • Where possible, use chip and pin machines to reduce the risk of fraud.
  • Don’t force transactions.

Double Check Your Merchant Category Codes

Each merchant is assigned a category code–a number payment networks use to identify your business type and distinguish the kinds of products or services you sell. Using a non-optimal merchant category code could be costing you thousands. Optimize your MCC by:

  • Finding out which category code has been assigned to your business.
  • Performing some research to uncover what the best category code would be for your unique circumstance.

Work With Payment Consultants

Every business is unique, which is why we always recommend working closely with a payment consultant. Our team of consultants can help you get a clear understanding of your unique circumstances and find the specific opportunities for optimization that work best for your business.

For example, they could analyze your current card acceptance split. If most of what you pay in interchange fees is sent to one specific card type but only a few of your customers use that card, a payment consultant could work with you to decide if you should limit acceptance for that card. A decision like this is very specific to not only the business, but the products being sold and the unique customer profiles.

We’ve personally helped businesses like Chicago Parking Meters save $2 million a year in transaction fees, so it’s worth considering if a payment consultant can help you achieve similar results.

A few final quick tips

  • Settle transactions daily.
  • Improve your security and fraud prevention processes.
  • Collect and send as much accurate data as you possibly can.
  • Talk to other businesses to find out what they’re paying.
  • Get up close and personal with the card network guidelines.
  • Ensure transactions are categorized correctly.
  • Monitor your progress and adjust based on results.
  • Keep an eye on upcoming regulatory changes.

How Optimized Payments Can Help

At Optimized Payments, we consider it our personal mission to help businesses achieve payments efficiency. That’s why we’re offering a free payment health check for eligible businesses.

Just click the link below and submit your information and we’ll be in touch. Our team of specialists will analyze a portion of your payments data and check for payment strategy optimization opportunities. We’ll then help you find hidden fees, blind spots, and quick wins. All for free.

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