What is Interchange?
February 5th, 2019

To view current interchange rates, visit the following pages: Visa, MasterCard, Discover, American Express.

Credit card processing fees are complicated and often overwhelming for business owners. Markup fees, card association fees, and interchange fees are all part of the per transaction fees you pay to process credit cards for your business.

Tempting though it may be to ignore these fees and accept them simply as a cost of doing business, it benefits you to gain a least a cursory understanding of each. That way you’re able to choose a credit card processor with the best rates for your company…and your profits.

In this article, we’re going to take a close look at interchange fees. If you want the most basic definition of interchange, this is it: interchange is the cost of completing a credit card transaction.

If you want a more detailed explanation, we’ll explore below why interchange is important, how interchange rates are determined, and what it all means for you as a business owner.

What is interchange?

Interchange is a nominal fee that a business owner’s bank (the acquiring bank) pays to a cardholder’s bank (the issuing bank) to convert a credit card charge into a cash deposit. It compensates the issuer for the value and benefits that businesses receive when they accept electronic payments.

Specifically, the fee covers the issuing bank’s costs associated with billing, losses due to fraud and bad credit, the float time in between the transaction and when the payment is posted to the cardholder’s account, etc. The Issuing bank provides these services so you don’t have to.

Why is interchange important?

Business owners should have a basic understanding of interchange, because it is the major portion of the “merchant discount” you pay to your financial institution for the ability to accept and process card payments. Yes, it is frustrating to see a portion of your sales going towards merchant and interchange fees, but the value you receive far outweighs the cost.

So what’s in it for you? Here are a few of the benefits you, as a business owner, receive because of interchange:

    • Guaranteed payment: Once you have received authentication, you are guaranteed payment by the issuing bank. And, as an added bonus, those payments come sooner. No more waiting 3-4 business days for a check to clear, which is great for your cash-flow.
    • Inclusion into a Card Association: When you pay the interchange rate, you are gaining access to broadly adopted card networks, like Discover, Visa and Mastercard.
    • Increased sales from consumer convenience: Credit cards have become one of the most common methods of payment, and many consumers carry cards as their preferred and only payment method.
    • Fraud protection: The issuing bank accepts the risk for fraud so you don’t have to.

Interchange is also important because it balances and grows a payment system for the benefit of all participants. Interchange fees encourage banks to market and issue cards to more consumers, which ultimately benefits businesses that accept cards, because more consumers are making credit card purchases.

How are interchange rates determined?

Credit card associations, such as VISA and Mastercard, set their individual interchange rates and make revisions on a semiannual basis, typically in April and October.

As mentioned above, interchange rates drive participation from issuing banks and businesses, but it is a delicate balance. If interchange rates are too high, businesses may forego accepting cards. On the other hand, if the rate is too low, banks have little motivation to cover the risks of issuing cards to new customers.

The pricing structure for interchange fees is complex, with flexible rates based on a number of factors including your business industry, transaction volume, average transaction size, card type and how the card is accepted. Let’s dive deeper into a few of these:

    • Business industry: Interchange rates vary based on your business type. Supermarkets, restaurants, hotels and charities will each have different interchange rates set by the card companies. Typically, supermarkets will have a lower rate than restaurants and retail stores.
    • Card type: Credit cards will generally have higher rates than debit cards due to the how the card is processed and the increased risk for fraud and non-payment by a cardholder. Reward cards also charge a higher interchange in order to offset the costs of providing perks to cardholders.
    • Transaction Type: Transactions that are conducted in person by swiping or dipping will always have a lower rate than card-not-present transactions or manually entered transactions (such as by phone or on the internet). Again, this is due to increased risk. You will also typically pay a higher interchange for debit cards that are run as credit and authorized by signature instead of by PIN.

Finally, it is important to note that interchange rates are not negotiable. You will not be able to work with your processor or bank to receive lower interchange rates, because they are fixed rates set by the card companies.

What does it mean for you, the business owner?

At this point, you may be asking: If I cannot negotiate a lower interchange rate then why is it  important that I understand it? This is a valid question. Let me explain.

Though you cannot negotiate a lower interchange rate, understanding how interchange rates are structured will help you save valuable dollars by adopting best practices for card acceptance.

  • If possible, always swipe magnetic strip cards and dip EMV chip cards instead of entering the card information manually.
  • If you have to manually enter the information, make sure you verify the cardholder’s address using an Address Verification service.
  • When selecting a card processing terminal, opt for a model that features a PIN pad so your customers can authorize via PIN instead of forcing a signature.

Understanding how interchange works also enables you to make the best decision when selecting a processor as it allows you to compare the markups charged by acquiring banks and payment processors.

If you’re curious to learn more about interchange and what effect it has on your business, contact a Sonder Payments representative by emailing info@sonderpayments.com or by calling (314) 722-6424.