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What Is Interchange and Why Am I Paying for It?

Posted by on May 6, 2016 9:28:34 AM

What Is Interchange and Why Am I Paying for It?

Many credit card processing fees show up on your merchant statement, so it may take some time to learn about each one and its significance. You are charged various amounts depending on the company you have a merchant account with, but the types of fees listed (though not the amounts charged) are generally the same. One that almost always makes an appearance is interchange.

Interchange Defined

Interchange refers to a schedule of fees that card issuing banks—the banks named on the face of credit and debit cards you accept—get paid for transactions that are processed on the cards they issue to consumers. It’s not unusual for interchange to account for 80 percent of the total cost that merchants pay for credit card processing.

There are three components of merchant services: the merchant acquirer, the processing platform, and the funding bank. Businesses have merchant accounts with merchant acquirers in order to accept consumers’ credit cards and debit cards. The processing platform and the funding bank work with the merchant acquirer to ensure that every card transaction is completed.

Issuing banks—like Citibank, Bank of America and Chase—provide consumers with the cards they use, and are therefore also involved in the transaction. Because a card issuing bank takes the greatest risk in any one credit card transaction—the risk that the consumer will actually pay back the amount purchased—they are entitled to the largest percentage of fees charged to merchants for any such transaction. The percentage of fees paid to issuing banks is called interchange. Merchant acquirers are charged interchange fees and, in turn, commonly pass those fees onto merchants in one form or another.

There are several hundred different interchange clearing categories, ranging from .05 percent for debit cards to 2.95 percent for some corporate cards. Four factors determine what interchange rate will be applied to each transaction:

  • Type of Card Used: For example, debit cards have the lowest interchange rates, while rewards cards and commercial cards tend to have the highest rates.
  • Size of the Transaction: Very large transactions can qualify for significantly lower interchange rates.
  • Industry of Merchant Accepting the Card: Some industries deemed “emerging markets” like utilities or real estate rental properties and certain business-to-business merchants can qualify for lower interchange rates.
  • How Card Data was Captured and What Data was Captured by the Merchant: Transactions in which cards are swiped (or, in the case of EMV-chip-enabled cards, inserted) at the point of sale tend to have significantly lower interchange rates than those in which card data is entered online or telephoned in. In addition, requiring data such as the card “CVV code”, the cardholder’s zip code, and other data can drive down interchange costs.

Every six months, in April and October, Visa and MasterCard announce interchange rate updates, with a good handful of changes occurring each time. What interchange rates were two years ago isn’t necessarily what they are today. But finding the latest interchange rates is easy, as Visa and MasterCard make their interchange rates available to the public. 

Why Interchange Fees Are on Credit Card Processing Statements

Because merchant acquirers make it possible for business owners to complete credit and debit card transactions, they charge their clients fees for their services.

One of those fees is interchange. Merchant acquirers require their clients to pay the interchange fees to cover the cost to the acquirers that issuing banks charge them.

Part of owning a business is finding a merchant acquirer, because it enables you to accept various methods of payments from your customers, and help your business grow to reach its full potential. Learning about the different fees can be confusing. Be sure to choose an acquirer that will take the time to fully explain the purpose of each fee, so you know what you’re paying for.

Find out how to lower your credit card processing fees with MPX!

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