Are Credit Card Processors Inflating Your Interchange Fees?

(This article was originally written for the Forbes Business Council. Click here to read the article on Forbes.com)

For example, I encountered a real scenario where the interchange rate was 0.76%. However, the processor was charging an additional 0.65% on top of Visa’s 0.76% interchange rate. Meanwhile, the merchant thought Visa was charging them 1.41%.

How It Works

Processors don’t usually mark up the base interchange rate (the rate charged for basic non-rewards, non-commercial card transactions) since this rate is listed on the merchant’s agreement, and they may notice that rate bump.

They only mark up the transactions that downgrade. For those who may not be as familiar with credit card processing jargon, a downgrade is when a transaction does not settle at the lowest tier/rate; for example, a transaction that could settle at 1.90% would downgrade to 2.95% if not enough data was entered at the time of the sale. This usually takes place when the merchant has the wrong equipment, payment gateway, setup, etc.

This means the processor’s profits go up when transactions downgrade. In short, the processor is incentivized for a merchant to get things wrong. Yet, most merchants turn to their processors for help.

A smart processor may help the merchant fix some of the downgrades while leaving the majority of the transactions to downgrade. The worse a transaction clears, the more profit for the processor, the very people teaching merchants how to process. This means that if the processor sets the merchant up wrong, the transactions will downgrade, costing the merchant more money and making the credit card processor more money.

In 2016, a class-action lawsuit was filed against Vantiv Integrated Payments over “claims the company charged customers unauthorized and marked-up fees.”

What Companies Can Do

If you are interested in hiring a specialized auditing firm for credit card processing fees, look for a firm that guarantees its work, doesn’t require a contract and does not take a percentage of the savings. (Disclosure: My company helps with this, as do others.)

Keeping a close eye on your statements in May and November is crucial due to the adjustments in interchange fees by Visa and Mastercard every April and October. Despite these adjustments being minimal—usually less than 0.01%—processors often use them as an excuse to hike their own fees, attributing the increases to the processing networks.

When you notice an increase, don’t accept vague explanations from your processor. Demand detailed breakdowns of how these changes impacted your fees. It’s essential to scrutinize each fee listed on your statement. For example, you can Google terms like “risk fees” to verify their legitimacy and ensure they aren’t fabricated by your processor.

If they are legitimate fees, you should be able to find the fees on the processing network’s websites, not a blog or a processor website. But even that can be tricky, as “risk fee” is a real fee, but it is very, very small—as in, less than one cent in most cases. However, processors can make up a fee with the same name and charge a very large amount. That is their fee, but it is not the same fee that is shown on the processing network’s page.

By staying vigilant and informed, you can protect your business from unnecessary charges and avoid overpaying due to unjustified fee hikes.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Subscribe to insights  –  Read more Insights  –  Submit an article idea