By Georgia Robinson May 7, 2025
For many merchants in California, accepting credit and debit card payments is a necessity. Customers expect quick, seamless, and digital transactions — whether they are shopping in San Francisco, dining in Los Angeles, or browsing a boutique in Santa Barbara. But with this convenience comes a less visible cost: interchange fees.
Often buried in monthly statements and overshadowed by other business expenses, interchange fees can silently cut into profits. To make informed financial decisions, merchants need to understand what these fees are, how they are calculated, and how they affect the bottom line. This article simplifies interchange fees for California business owners and offers practical insight into managing them more effectively.
What Are Interchange Fees?
Interchange fees are the charges that a merchant pays every time a customer makes a purchase using a credit or debit card. These fees are collected by the customer’s issuing bank — the bank that provided the card — and are typically set by major card networks like Visa and Mastercard.
Even though merchants do not directly interact with these banks during transactions, they still foot the bill through their payment processor, who facilitates the entire transaction.
How Interchange Fits into a Card Transaction
When a customer swipes, taps, or inserts a card, several things happen behind the scenes. The payment processor sends the transaction to the card network, which forwards it to the issuing bank. If the bank approves the transaction, the funds are transferred — but not before subtracting the interchange fee.
The processor then deposits the remaining amount into the merchant’s account. The interchange fee, which is usually a percentage of the sale plus a fixed amount, is taken out before the merchant receives the payment.
Who Sets Interchange Fees?
The card networks — primarily Visa, Mastercard, Discover, and American Express — determine interchange fee structures. These structures are not static. They are reviewed and updated multiple times a year, and they vary depending on the type of card used, the nature of the transaction, and the industry in which the merchant operates.
Why Interchange Fees Matter for California Businesses
California is home to a wide variety of businesses — from small cafes in Monterey to large retailers in Sacramento. Many of these businesses operate on thin profit margins, especially in competitive urban centers or tourism-driven towns.
Understanding interchange fees is especially important because these costs can quietly erode profitability over time.
High Transaction Volumes Equal High Fees
Even if the interchange fee on a single transaction seems small, those charges add up quickly. For example, a 2 percent fee on $50,000 in monthly card sales equals $1,000 in interchange fees alone. For busy California businesses with high volume, this becomes a major expense.
Local Legislation and Transparency
California has strong consumer protection laws and a growing emphasis on pricing transparency. Merchants should know exactly how much they are paying in processing fees, especially as more consumers push back against hidden surcharges or vague pricing models.
Factors That Influence Interchange Fees
There is no universal interchange fee. What a merchant pays depends on a range of variables. Knowing these factors can help California business owners better understand their statements and identify potential ways to reduce costs.
Here are the main elements that impact interchange rates.
Card Type
Premium cards like rewards or business credit cards often carry higher interchange fees. These cards come with perks for the consumer, but the cost of those benefits is often passed to the merchant.
In contrast, basic debit cards or non-reward credit cards tend to have lower fees.
Transaction Method
How the transaction is processed also matters. In-person payments, where the card is physically present, usually have lower fees than card-not-present transactions like phone orders or e-commerce. This is because the risk of fraud is lower with physical transactions.
Industry and Merchant Category Code (MCC)
Every business is assigned a Merchant Category Code based on the industry it operates in. Certain categories — such as nonprofits, utilities, or government agencies — may receive lower rates. Others, like hospitality or e-commerce, may pay more due to higher risk profiles.
Transaction Size and Frequency
Smaller transactions can result in disproportionately higher interchange fees due to fixed per-transaction charges. For instance, if you process many $5 sales with a $0.20 flat fee per transaction, that adds up to a 4 percent cost before the percentage-based fee is even considered.
Interchange Fees vs Processor Fees
It’s important to distinguish between interchange fees and processor fees. The interchange fee goes to the card-issuing bank. The processor fee is what you pay your payment processor for facilitating the transaction.
Together, these form your effective rate — the total cost of accepting card payments. While interchange fees are non-negotiable, processor fees are not.
Understanding the Full Cost
A merchant statement might quote an “all-in-one” rate, such as 2.9 percent plus $0.30 per transaction. This includes both the interchange fee and the processor’s markup. Understanding what portion of this goes to interchange helps you evaluate whether your processor is charging a fair rate.
Interchange Plus vs Flat Rate Pricing
With interchange plus pricing, you see the actual interchange fee for each transaction, plus a transparent processor markup. With flat rate pricing, everything is bundled into one rate. Interchange plus is generally more cost-effective for businesses with consistent or high-volume transactions, while flat rate offers simplicity.
Hidden Costs Related to Interchange Fees
While interchange fees themselves are regulated by card networks, there are indirect or related costs that can catch merchants by surprise. California business owners should be aware of these to avoid unnecessary expenses.
Here are a few examples.
Downgraded Transactions
If a transaction does not meet the criteria for the lowest interchange rate — perhaps due to missing data or delayed settlement — it may be downgraded to a higher-cost category. These downgraded transactions show up as “non-qualified” and can increase your costs without obvious cause.
PCI Non-Compliance Fees
To protect cardholder data, merchants are required to comply with PCI DSS (Payment Card Industry Data Security Standard). If you don’t complete the required compliance steps, your processor may add a monthly fee — even though it has nothing to do with interchange rates.
Batch Processing Fees
Some processors charge a daily fee for settling your credit card transactions. While typically small, these fees can become significant over time, especially if you run multiple registers or have high-volume days.
Tips to Manage and Minimize Interchange Fees
While you cannot eliminate interchange fees, there are ways to manage and reduce their impact. Taking control starts with awareness and continues with making strategic choices that improve your payment efficiency.
Below are practical steps California merchants can take to lower processing costs.
Encourage Debit Card Usage
Debit cards typically have lower interchange fees than credit cards. While you can’t force customers to use one or the other, you can display accepted debit card logos or offer promotions tied to debit card use.
Use the Right POS System
A modern POS system helps capture all necessary data and reduces the risk of transaction downgrades. This includes using EMV chip readers and properly configuring tip and tax settings.
Settle Transactions Promptly
Delaying the settlement of transactions can lead to downgrades. Make sure your team closes out batches daily, especially in industries like food service and hospitality where tips are adjusted after payment.
Review Statements Regularly
Go over your monthly processing statements with a critical eye. Compare your effective rate with industry averages and flag any sudden increases or unusual charges. Don’t hesitate to ask your processor for a breakdown of fees.
Negotiate with Your Processor
While you can’t change the interchange fees set by Visa or Mastercard, you can negotiate the markup charged by your processor. If your sales are consistent and your chargeback history is low, you are in a strong position to ask for better rates.
California-Specific Considerations
California’s size, diverse economy, and consumer expectations create unique dynamics for payment processing. Merchants in the state should also be aware of certain trends and policies that can influence how they approach interchange fees.
Here are a few to keep in mind.
High Volume of Tourism Transactions
Tourism-heavy regions like Napa Valley, San Diego, or Lake Tahoe often see higher rates of premium card usage. These cards typically carry higher interchange fees. Merchants in these areas should be especially diligent in reviewing processing costs.
Service Charges and Tip Adjustments
In cities like San Francisco and Los Angeles, many restaurants and cafes have adopted service charges instead of traditional tipping. How these are coded in your POS system affects how the transaction is categorized — and potentially the interchange rate.
Legal Environment
California merchants must also be careful with surcharge rules. While federal laws allow merchants to pass credit card fees onto customers, California previously had restrictions on surcharges. Though challenged and partially lifted, it’s important to check current legal guidelines before adding service fees to offset interchange.
Conclusion
Interchange fees are an unavoidable part of accepting credit and debit card payments, but that doesn’t mean you have to pay more than necessary. For California merchants, where operational costs are already high, understanding and managing these fees is crucial to long-term profitability.
By decoding how interchange works, monitoring monthly statements, choosing the right pricing model, and working with a transparent processor, you can ensure that your payment systems support your growth — not eat away at it.