What are Swipe Fees, Why are They Rising, and How Can Your Small Business Manage Them

July 11, 2023

Credit card swipe fees are a fact of life, especially if you plan to run an online business. However, these costs of running credit card transactions can represent a heavy burden — especially as inflation has caused them to balloon in recent years.

Statistics indicate that these expenses jumped 25% last year, with retailers paying an aggregate of $138 billion in swipe fees during 2022. That marks a new annual record and represents a doubling of the total over the past decade.

What does that mean for small businesses? More importantly, how can you combat this growing cost? This article will address those questions. You'll learn the basics of swipe fees and discover some potential techniques to lower your exposure.

What are swipe fees?

Swipe fees represent one of the ways credit card companies make money. The term applies to the amount of cash you, as a merchant, owe the card issuer for each transaction. Each time a customer uses their credit card to purchase something from your small business, you have to pay a swipe fee.

Swipe fees, also known as interchange fees, represents the main amount that vendors pay. Fundamentally, these expenses represent the cost you endure in exchange for the ability to accept credit cards as payment.

Statistics indicate that [swipe fees] jumped 25% last year, with retailers paying an aggregate of $138 billion in swipe fees during 2022. That marks a new annual record and represents a doubling of the total over the past decade.

This expense is paid by you as the vendor, not by the customers. In other words, it doesn’t work as a pass-on cost, like sales tax. However, like taxes, it exists as a percentage of the transaction value. You pay in proportion to the amount you charge your customer.

Swipe fees typically range between 1.5%-3.5% of a transaction value. As you might guess from the broad gap there, many factors go into determining your precise expense. The credit card network, the type of transaction, the size of your company and even your industry can influence the percent you'll need to pay.

The high cost of swipe fees

Note that swipe fees exist as a percentage of transaction total. The higher the amount of a sale, the higher the swipe fee will be. That means that as prices in general rise, the size of swipe fees expand in lockstep. The rate may stay the same, but the dollar amount increases with the size of the transaction.

Enter inflation. In the last couple years, the U.S. has experienced its highest inflation rate in four decades. This peaked in June of 2022, with consumer prices rising more than 9% compared to the previous year. This dynamic means that prices are going up across the board — sending transaction amounts are higher. This, in turn, has pushed up the amounts required for swipe fees.

Retailers have pushed back on these increases. The National Retail Federation has repeatedly complained about the structure of the credit card industry, dominated as it is by two major players: Visa and Mastercard.

The NRF has accused the companies of price fixing their swipe fees. Meanwhile, the organization has also called for legislation to limit the amounts retailers would have to pay.

This pressure has come because swipe fees can have a significant impact on your bottom line. Especially as a startup or small business, the larger dollar amounts associated with these expenses in recent years has become a significant burden.

Meanwhile, any attempts to pass costs onto customers just adds to their hardship in a period already marked by high inflation. Even from a strictly business standpoint, making your offerings more expensive can become counterproductive. Especially as a startup or small business, looking to accelerate growth and build your customer base, the imposition of higher costs can act as a significant speed bump to your expansion.

As NFIB Federal Government Relations Director Jeff Brabant put it in an op-ed:

"Small businesses and customers are reeling from inflation, with price increases the inevitable result of worker shortages and supply chain snarls. Amid these terrible challenges, massive credit card companies have shockingly decided to raise the fees they charge small businesses and customers. It’s adding insult to inflation injury at the worst possible time, costing money that Main Street needs to survive."

Tips for managing swipe fees

Yes, swipe fees have been rising in recent years. This has put significant pressure on small businesses, even as the overall economy enters a shaky period. But there are steps you can take to mitigate the situation.

Here are some tips to improve your management of swipe fees:

Pass Costs onto Clients

We noted earlier that, unlike sales tax, swipe fees don't act as an add-on paid by your customers. However, there are ways to pass the cost onto your buyers. This way, the higher expenses don't eat into your bottom line.

The easiest way to do this is through a surcharge for credit-card payments, or a discount for those using a less-expensive form of payment. Be careful here, though. The credit companies have rules regarding these practices. At the same time, many states have outlawed the practice, or have significant regulations in place. As a result, it's important to research the situation before taking any action.

Another option is to simply raise prices to take the swipe fees into account. This makes a lot of sense if most of your sales come through credit card transactions. However, there are dangers here as well. Increased pricing can make you less competitive.

Allow Other Payment Methods

The easiest way to avoid swipe fees is to use another payment method. With a brick-and-mortar business, you can encourage cash purchases. However, this becomes more complicated with online commerce.

However, there are alternatives. These include money transfers directly from a customer's bank or even the decision to accept cryptocurrency.

Before implementing any of these options, it's important to understand the details. These other forms of payment come with their own pros and cons, including costs involved. Look into the possibilities and weigh the right mix for your business.

Find the Best Pricing Model for You

Credit card companies offer multiple pricing models. Look into these possibilities. One might offer a lower-cost option for your business. Here are some of the alternatives available:

  • Flat Rate Pricing Model: The swipe fee here is a fixed percentage of a transaction, no matter the type or amount. It can also include an additional transaction fee.

  • Tiered Pricing Model: In this structure, different types of transactions come with different swipe fee rates. That means some purchases will have a lower cost.

  • Interchange Plus Pricing Model: Think of this as a cost-plus structure. You pay the interchange rate required of the credit card network, along with a set transaction fee.

Work with Credit Card Networks

Large organizations have some negotiating leverage. Amazon recently took on credit card fees, eventually forcing a settlement of the dispute. Unfortunately, you're not Amazon. Still, a conversation with your credit card networks can provide some relief.

Meanwhile, there are also steps you can take to make yourself a safer risk for the credit card companies. Certain security upgrades and other changes to your processing operation, for example, can lead to lower fees.

There are also steps you can take to make yourself a safer risk for the credit card companies. Certain security upgrades and other changes to your processing operation, for example, can lead to lower fees.

Research the details as they apply to your organization and talk with representatives from the credit card firms. You might find some areas where relatively easy upgrades can lead to lower expenses, as well as an improved operation.

What to do about swipe fees

Swipe, or interchange, fees have been rising in recent years. The bad news is that these growing costs can adversely affect both your business and your customers. However, there is good news as well. There are ways to combat these fees.

Use the information provided here to create a strategy about swipe fees. Determine if there are things you can do and take the steps necessary to reduce the costs for your business.