interchange
How Interchange Works
There are currently 300+ different types of credit, debit, business and reward cards used by consumers everyday. All of these cards carry a rate. These rates are set by the credit card companies and are commonly known as “Interchange.” These rates vary between 0.05% up to 3.5% depending on the type of card. Debit cards typically have the lowest rates while Business and Reward cards tend to have higher rates.
Business owners are charged these Interchange rates for each credit card transaction and are higher for online transactions. The credit card companies also tend to increase Interchange rates every year.
Interchange rates are determined based on various factors, including the type of card used (credit or debit), the merchant’s industry, the method of transaction (card-present or card-not-present), and the specific details of the transaction (such as the transaction amount and whether it was authorized electronically or through a signature).
The purpose of interchange fees is to cover the costs associated with processing card transactions, managing the payment network infrastructure, and providing additional services like fraud protection and rewards programs. The fees also contribute to the revenue of the card networks.
The interchange fees are typically divided between different parties involved in a card transaction. The merchant’s acquiring bank, which processes the payment on behalf of the merchant, receives a portion of the interchange fee. The rest is usually paid to the cardholder’s issuing bank, which issued the credit or debit card used in the transaction. The issuing bank bears the risk of providing credit to the cardholder and may also offer various cardholder benefits.
Interchange rates can vary significantly depending on the factors mentioned earlier. They are usually classified into different categories or tiers, with different rates applied to different types of transactions. For example, transactions with a higher risk of fraud, such as card-not-present transactions made online, typically have higher interchange rates compared to in-person transactions where the card is physically present.
It’s important to note that interchange rates are set by the card networks, and merchants have limited control over these fees. However, merchants can negotiate with their acquiring banks or payment processors to potentially secure lower rates based on factors such as transaction volume, average ticket size, and industry type.
Understanding interchange rates is crucial for merchants, as they directly impact the cost of accepting card payments and can significantly affect a business’s profitability, especially for businesses with high transaction volumes.
Core Benefits
Interchange plus pricing provides transparency
by separating the interchange fee and the processor’s markup. The interchange fee is the direct cost set by the card networks, while the processor’s markup represents the fee charged by the payment processor or acquiring bank for their services. With interchange plus pricing, merchants can clearly see the interchange fee and the processor’s markup separately, making it easier to understand the cost structure and evaluate the competitiveness of the pricing.
Since the interchange fee and markup are separate, merchants can easily identify the specific costs associated with each transaction. This visibility enables merchants to analyze their transaction patterns, identify areas of potential cost savings, and make informed decisions about their payment processing.
Interchange plus pricing is considered fairer and more flexible compared to other pricing models. It ensures that merchants pay the actual interchange fee set by the card networks, without any hidden markups or inflated rates. The processor’s markup is usually a fixed percentage or a per-transaction fee, making it easier for merchants to understand and compare pricing across different processors.
As interchange fees are set by the card networks, processors have less control over them. With interchange plus pricing, the processor’s markup is typically more competitive, as it’s a separate component that can be negotiated. This separation of costs allows merchants to focus on negotiating favorable rates for the processor’s markup, potentially resulting in lower overall costs.
Since the interchange fee is a direct cost, merchants have a vested interest in reducing their interchange fees by implementing best practices such as proper transaction data entry, using chip-enabled terminals, and reducing chargebacks. By adopting efficient payment practices, merchants can lower their overall processing costs and maximize their profitability.