In 2019, businesses in the United States generated $24.31 billion in interchange fees from prepaid and debit card transactions, according to the Federal Reserve. While that mind-boggling figure is quite impressive, it breaks down to about 24 cents per transaction. The lesson there? Small change can have a huge impact.
So how do interchange fees affect your business? In this guide, you’ll learn more about what these fees are and why they exist. Plus, you’ll discover how you can turn these fees into actual revenue with the help of embedded finance.
What Are Interchange Fees?
When a customer uses a credit, debit, or gift card to pay for goods or services, it costs money to process that transaction. The fees associated with card payments are called Interchange fees, or “swipe fees.”
For example, let's say a customer buys $200 worth of gear from Patagonia. When that customer pays with a card, Patagonia cannot count the full $200 as revenue, because they must pay the interchange fee.
These fees are generally 1% to 2% of each purchase. So while $196 may go into Patagonia’s bank account, $4 will be taken out to pay the interchange fee. While small, these interchange fees do add up – especially as online sales continue to reach unprecedented new heights.
Why Do Businesses Have to Pay Interchange Fees, and Where Does the Money Go?
Businesses like Patagonia have to pay interchange fees to cover handling costs, fraud prevention, and the overall risks associated with issuing credit.
So where do these interchange fees go? The short answer is that they get dispersed to a variety of companies. Small portions go to the credit card network (think Visa or Mastercard), while some go to the company that actually makes the payment processor being used in the transaction. However, the largest portion of the interchange fees goes to the bank that issued the card, like Bank of America or Chase.
The card-issuing banks get the largest portion of the fees because they are the ones assuming most of the risk.
Can a Business Avoid Paying Interchange Fees?
Unfortunately, for a long time there wasn’t much a business could do to avoid paying interchange fees.
They could stop taking card payments for purchases. However, considering there are an estimated 5.37 billion debit cards in the United States, and more than 191 million Americans have credit cards, refusing card payments would cost a business more than the actual interchange fees.
If a company was really determined, they could try to find ways to reduce their interchange fees, but that comes at an opportunity cost because tracking down and negotiating rates is difficult and time-consuming. And not guaranteed.
To add to the complexity, interchange fees vary depending on a variety of factors like the type of card being used (debit or credit) or whether it’s a premium card with extravagant rewards.
Rates can also vary based on:
- The type of industry the merchant operates in
- The way the card is accepted (such as the point of sale system used)
- The size and type of transaction
Luckily, as technology has evolved, it has provided companies with new opportunities to reexamine their relationship with interchange fees.
With the growth of the fintech industry and embedded finance, there is now a way for businesses to turn interchange fees into a new source of revenue, called Interchange Revenue.
Turning Interchange Fees Into Interchange Revenue
Every business would be ecstatic if there was a way to turn interchange fees into a brand-new stream of revenue. Luckily, with the advent of embedded finance, that’s exactly what companies can now do.
By integrating embedded finance as a service, businesses can remove the need for traditional banks altogether, and directly offer customers a full host of financial services, including embedded bank accounts, payment processing, and the ability to issue rewards cards.
Being able to issue cards is at the heart of how companies can turn interchange fees into interchange revenue.
If you recall, the largest portion of the interchange fee goes back to the bank that issued the card. So what happens if Patagonia adopts embedded finance, and can now issue their own cards without the need for a bank?
They now receive those interchange fees as a form of new revenue.
That’s right. By adopting embedded finance, businesses in any industry can issue their own cards and turn interchange fees into interchange revenue.
While a small portion of the fees still gets paid out to the customer’s bank and the credit card company, a large portion goes directly to Patagonia and their embedded finance provider.
Obviously, this is a huge step forward for large-scale enterprises to create millions of dollars in new revenue, regardless of the industry they are in.
What Is Embedded Finance?
As one of the most recent developments to come out of the fintech movement, embedded finance (also known as banking-as-a-service), allows any business to offer financial services directly to their customers with a simple API (application programming interface).
Offering these services creates a more convenient, streamlined, and enjoyable experience for both the company and the customer. In fact, brands that offer their customers these financial tools have seen an increase in customer lifetime value and retention.
In addition, by giving companies the ability to create new streams of revenue through the interchange, embedded finance is empowering brands to increase profits and earnings in ways that didn’t exist just a few short years ago.
Interchange Revenue Can Add Up
There’s no doubt that any large enterprise company will see an impact on their P&L once they go from paying interchange fees to collecting interchange revenue. Sure, a 1-2% fee doesn’t seem like a lot, but once you multiply that by millions of swipes and transactions, the numbers quickly add up.
According to estimates, companies that issue cards could expect to see up to $300 profit per customer, per year. That means if a company like Patagonia has just 100,000 customers using their branded card, they could make up to $30 million in brand-new revenue every year.
As the fintech industry and the banking-as-a-service sector continue to grow, interchange revenue will become one of the most lucrative and important aspects of your company’s strategy, so make sure to do your research when looking for a partner.
At Alviere, we believe embedded finance is the next phase of business innovation. If you’d like to learn more about interchange revenue, or how our plug-and-play embedded finance platform can transform your business, click here to contact us.