I was recently reviewing our list of credit card processing terms for our training programs, and it dawned on me. This is a very complicated and complex industry for someone to understand.

I’ve been in it so long, that I take it for granted sometimes, but training new staff and talking with business owners reminds me of how confusing it can be. One of the terms that comes up often is interchange. What is it and why should you care?

From the MasterCard website:

Interchange is a small fee paid by a merchant’s bank (acquirer) to a cardholder’s bank (issuer) to compensate the issuer for the value and benefits that merchants receive when they accept electronic payments. This fee applies each time a business takes a credit or debit card payment.

I find it interesting they describe it as a “small fee”.

Interchange rates are set by payment card issuing companies, part of the determining rate is based on the risk of transaction. When a consumer uses a check card (non-pin debit card) the risk for fraud is lower. So the rate is lower as well.

 

Sample Interchange Overview

 

When a consumer pays online or over the phone (MOTO) the risk and rate is higher.

When a consumer uses a rewards card, the rate is also higher, and the business pays more to accept it. Why the higher rate? The consumer gets something for free when they use a rewards card.

Part of the interchange is used to cover these programs like cash back, airline miles, rewards, etc.

Interchange rates are set by financial companies and revised periodically. Rates will vary depending on the network used and are often a percentage of the transaction amount, a flat fee, or a combination of both.

Industry type also determines the rate that is charged, so the rate for a supermarket purchase is often lower than airline transactions.

Summary
  • Interchange rates are a per-swipe fee charged by banks to merchants who accept credit or debit cards.
  • Dues & Assessments are charged by the card brands like Visa, Mastercard, Discover, and American Express.
  • The interchange rate is normally higher for credit card transactions compared to those made with debit cards.
  • Interchange is justified as a buffer against the credit risk of consumers who borrow to make these purchases that financial companies become exposed to.
  • Interchange fees can be negotiated by bigger companies.
What Can You Do?

Now that you have a basic understanding, how does this information help your business? There may be some adjustments that you can make with your pricing. If you know the interchange is higher when people pay online or card not present, you can build in the additional cost to your pricing.

If you are accepting payments from other businesses (B2B) or the government, the rates will be higher. However, there is an additional verification process known as level 2 & 3 data that can lower your interchange.

I wrote a post about it here talk with your processor (or me) to see if this would help you business.

Like everything, interchange rates will continue to rise in the future. The Credit Card Competition Act of 2023 is currently in congress and aims to help lower interchange fees by creating a third network. Something to keep an eye on.

If you have not reviewed your rates recently, consider having us analyze a statement for you. Give us a call or email scott@scottgibbens.com