The Merchant's Guide to Lower Interchange Fees:
4 Strategies to Save Now
Interchange fees make up approximately 82% of card processing costs for enterprise merchants — yet most companies are overpaying without knowing it. This guide shows you exactly what you can control, and four strategies to start reducing costs today.
Everything you need to start reducing interchange costs today.
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01Understanding Interchange Fees — what they are, who sets them, and why they're your biggest processing cost ↓
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02Navigating Macro & Micro Factors — what you can and can't control in your interchange rate ↓
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S1Strategy #1: Utilizing Address Verification System (AVS) ↓
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S2Strategy #2: Adhering to Authorization and Settlement Timelines ↓
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S3Strategy #3: Leveraging Level II and III Data ↓
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S4Strategy #4: Implementing Least Cost Debit Routing (LCR) ↓
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✓Key Takeaways & Next Steps ↓
Understanding Interchange Fees
Interchange fees represent the largest expense for merchants accepting card payments. For businesses processing $100 million or more in annual card sales, these fees typically make up approximately 82% of total payment processing costs. The remaining 18% consists of network and acquiring fees, making interchange a critical factor in overall payment expenses.
At its core, interchange is the wholesale fee paid by merchants to the bank that issued the customer's card when a credit or signature debit transaction occurs. While these rates are set by Visa, Mastercard, and Discover, the revenue ultimately goes to the card-issuing bank.
What Do Interchange Fees Pay For?
Interchange fees serve several critical functions within the payments ecosystem. A significant portion funds the rewards programs cardholders enjoy — points, miles, and cashback — costs that are entirely subsidized by interchange revenue. They also cover the "cost of money": when cardholders use credit cards and pay off balances monthly, they receive an interest-free loan made possible by interchange. Beyond rewards, interchange helps banks manage fraud prevention, chargeback handling, and payment infrastructure.
A study found that 30–40% of interchange revenue collected by banks contributes directly to their bottom line — making these fees a significant profit driver for issuers.
Navigating Macro and Micro Factors
If you were to download Visa, Discover, and Mastercard's interchange tables and add up all the unique rates, you'd find there are over 1,000 different interchange rates. This complexity leaves many merchants asking why — and the answer lies in a mix of macro and micro factors.
Macro Considerations: Competition Amongst Card Networks
Visa and Mastercard dominate the U.S. payments industry, but their real competition is for bank partnerships — not consumers. Because banks rarely switch networks, card brands offer incentives like higher interchange rates to attract issuers. This competition drives interchange rates higher rather than lower, ultimately impacting merchants who bear the cost.
Micro Considerations: What You Can Control
Your Merchant Category Code (MCC), method of entry, card type, and transaction risk level all influence your interchange rate. Many of these are outside your control — but several are not, and those are exactly what the four strategies below address.
| Factor | Controllable? | Impact |
|---|---|---|
| Merchant Category Code (MCC) | No — verify accuracy only | Determines base rate category |
| Method of entry | No | Swipe/dip/tap = lower; keyed = higher |
| Transaction size | Limited | Affects fee calculation |
| AVS usage | Yes | Can lower rates on CNP transactions |
| Settlement timing | Yes | Prevents costly downgrades |
| Level II/III data | Yes | Significant savings on commercial cards |
| Debit routing | Yes | Least cost routing saves substantially |
The Address Verification System (AVS) is a fraud prevention tool used for card-not-present (CNP) and manually keyed Visa and Discover transactions. AVS compares the billing information provided by the customer at checkout with the billing details registered with the card issuer.
We typically recommend submitting only the ZIP code, as including the numeric portion of the address does not reduce interchange fees and can sometimes cause mismatches, leading to unnecessary false declines.
| Scenario | AVS Requirement |
|---|---|
| Zip code is minimum | Submit billing ZIP code only. Sufficient for validation, avoids false declines from street number mismatches. |
| CNP / Keyed / E-commerce | AVS must only be an attempt. A mismatch will not result in a downgrade — you pay the same rate regardless. |
| Card-Present Keyed Transactions | AVS must match at least the ZIP code to qualify for optimal interchange rate. |
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Every transaction has a preset time limit for processing. If these limits are exceeded, the transaction will downgrade — leading to higher interchange fees. To avoid unnecessary costs, process transactions within the optimal timeframe.
Settle Transactions Within 24 Hours of Authorization
For retail environments, settling within 24 hours of the authorization date/time is optimal. Most retailers have automated systems that auto-close at end of day. In e-commerce, additional business rules are needed to maintain authorizations and keep them as fresh as possible.
Authorization Holds for Card-Not-Present Transactions
For CNP transactions, merchants can typically hold an authorization for up to seven days before settlement. E-commerce merchants usually authorize at purchase but settle upon shipment. If a delay extends beyond the allowable window — due to an out-of-stock item or shipping postponement — void the original authorization and obtain a new one before settlement.
In the United States, commercial cards — business cards, corporate cards, and purchasing cards — are used by businesses of all sizes. If a significant portion of your transactions involve commercial cards, you can reduce interchange costs by sending Level 2 and Level 3 data in your settlement files.
Why Does Enhanced Data Lower Interchange Fees?
Card networks incentivize merchants to send enhanced transaction data because it provides corporations with greater insights into employee spending. Enhanced data helps businesses track sales tax paid and identify SKU-level purchase details.
| Data Level | What's Required | Potential Savings |
|---|---|---|
| Level 1 | Basic transaction data (standard) | Baseline — no additional savings |
| Level 2 | Merchant postal code, customer code, sales tax indicator + amount | Moderate savings vs. Level 1 |
| Level 3 | All Level 2 data + minimum one line-item SKU per transaction | 5–165 basis points vs. Level 1 |
Least Cost Debit Routing (LCR) applies specifically to debit card transactions. If you examine a debit card, you'll see a Visa or Mastercard logo on the front and one or more EFT (Electronic Funds Transfer) network logos on the back — networks like Pulse, NYCE, STAR, Interlink, Maestro, and Accel.
Under the Durbin Amendment (implemented October 2011), issuing banks must enable at least two unaffiliated payment networks on each debit card. This allows merchants to strategically route transactions to balance cost savings with authorization performance.
How Least Cost Debit Routing Works
When processing a debit transaction, merchants can determine the cheapest routing path. The routing decision involves choosing between Signature or PIN debit rails, and selecting the lowest-cost network dynamically when multiple options are available.
- Acquirer/Processor Directed Routing — The acquirer automatically routes to the most cost-effective network
- Merchant-Directed LCR — The merchant directly controls which networks are used
- Cost-Based LCR — The system calculates all eligible interchange levels and routes to the lowest-cost option dynamically
- Card-Present PINless Debit Routing — Some debit cards allow routing through a PIN-based network without the cardholder entering a PIN
- Card-Not-Present PINless Debit Routing — A growing option for online merchants, enabling debit transactions to route through PIN-based networks without a PIN
Four strategies. Meaningful savings. Starting now.
While interchange optimization may seem complex, the potential savings make it a valuable investment. Businesses that proactively manage interchange fees can achieve significant cost reductions, enhance operational efficiency, and maintain competitive pricing.
Address Verification System (AVS)
Implement on CNP and manually keyed transactions to reduce fraud risk and qualify for lower interchange rates.
Authorization & Settlement Timelines
Process and settle within optimal timeframes to prevent costly downgrades to higher-cost interchange categories.
Level II and III Data
Provide enhanced transaction data for commercial card payments. Savings of up to $165K per $10M in commercial volume.
Least Cost Debit Routing
Route debit transactions through lower-cost PIN/PINless networks rather than defaulting to Visa or Mastercard signature rails.