Processing Costs for Online Payments are About to Go Up. Here's What to Do About It. The upcoming interchange rate increases are the most significant in a decade and business owners should understand their options for managing costs.

By Jonathan Razi

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As business owners look forward to more normalcy this spring and summer, not all aspects of "business as usual" are cause for optimism: The return of increases in credit and debit card processing costs, often called interchange or swipe fees, will create additional strain for businesses striving to manage their expenses.

The upcoming rate hikes from the card brands — the most significant in a decade — were previously scheduled to take effect last year, but the proposed changes were put on pause and will now be implemented in April 2021.

Many businesses, particularly those who accept business-to-business (B2B) transactions or online payments, will find that these increases significantly affect their profitability and wonder what alternatives are available. Fortunately, there are options beyond simply accepting another increase, and businesses have more choices than ever before in deciding which model for digital payments makes most sense for them.

Interchange increases: what's on the horizon

Each year, the card brands or card networks, including Visa, Mastercard, and Discover, schedule updates to their standard interchange categories.

Cost determinations often take the form of complex matrices matching card products to merchant categories, but the rate schedule shared by the card brand gives some insights into what businesses should expect regardless of their industry.

Although there are reductions for specific categories such as travel, restaurants, and healthcare, many businesses will see a steep hike in their overall pricing. These increases will be most significant for B2B and card-not-present transactions, which in some cases are seeing upticks of 25 to 40 basis points (0.25% to 0.40%), with the raw interchange costs now exceeding 3% of the transaction—to say nothing of dues, assessments, and other fees added on top by the payment processor.

The net result of these changes to some merchants will be increases in their processing costs of over 15%, which can add up to thousands of dollars per year even for small businesses.

Business owners may not see the full impact of these changes until they receive their monthly merchant statement and realize that their fees have increased dramatically, but many will respond with the same question: what options are available to reduce these costs?

Related: Considering Credit Card Surcharging? Here's What You Need to ...

Four approaches to cost management

For businesses that want to reduce costs without changing any of their client-facing procedures, interchange optimization can be an intriguing option. Many companies, especially in B2B verticals, are able to reduce their costs by sending additional data with the transaction. The savings realized by providing Level 2 and Level 3 data, however, are continuing to diminish over time and providing this data can be challenging to implement. And, while an initial cost optimization project can reduce the overhead associated with payment processing, there are diminishing returns on further optimization after that point—once implemented, there are limited possibilities for further savings.

Other businesses, especially those with costs driven by their card-not-present payments volume, may encourage payers to move to ACH. The governing body for the ACH networks recently increased the same-day ACH limit to $100,000, ensuring that 97% of B2B payments can now be sent same-day via ACH. While ACH is an appealing option, many accounts payable teams prefer card payments and are unwilling to switch to ACH as long as the card payment option is available. This is especially true for large transactions and recurring payments, and businesses in many verticals will often struggle to motivate their customers to adopt ACH.

As a last resort to manage costs, some businesses have stopped accepting card payments entirely. Though this may be tenable in certain verticals or for specific business profiles, it clearly runs counter to the trend: payers expect to be able to use their cards, and card acceptance is increasingly ubiquitous in the payments market overall.

Fortunately, for the many businesses that recognize that interchange optimization and ACH promotion are not comprehensive solutions for the rising cost of payments, yet are committed to continuing to accept credit cards, there's a new option: credit card surcharging.

Related: Why Are Bay Area Restaurateurs Afraid to Charge Credit-Card Fees?

Surcharging as a win-win option

Surcharging, which has been rapidly increasing in popularity, allows businesses to pass on the cost of credit card acceptance when their customers choose credit cards for convenience or rewards. Customers continue to have no-fee options, like paying with a debit card.

With surcharging, businesses are guaranteed that, even while the cost of card acceptance continues to go up to fund the rewards and cashback cardholders enjoy, cardholders are the ones who pay for those benefits. And, especially in this economic environment, merchants want to make it easy for customers to pay them—so offering more, rather than fewer, payment options is a priority.

Surcharging is a balanced, win-win approach, because it allows customers to pay with the option they prefer, even a credit card, all without increasing costs to the merchant.

Businesses that surcharge typically do so by choosing a solution provider that addresses both the complex compliance considerations (including handling state law) and all operational requirements. Using a solution provider ensures that the business not only saves on their payment processing, but does so without any increased liability or complexity.

While every business owner has to weigh various factors in deciding how to handle payments acceptance, the upcoming increases to interchange have given these questions a new urgency—and have given businesses even more reason to choose a solution that expands options while eliminating costs.

Related: Why Retailers are Using Square to Seamlessly Sell In-store and ...

Jonathan Razi

CEO & Founder at CardX

Jonathan Razi is CEO and founder of CardX, a compliance technology company that allows businesses to accept credit card payments at 0% cost. A noted expert, Jonathan authored the CardX brief for the U.S. Supreme Court and is personally involved with advocating for the surcharging model nationwide.

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