Interchange Defined
Posted by Sharon Robb on Mon, Feb 16, 2009 @ 09:10 AM
We launched our Processing Profitably newsletter in March and started right in on the subject of interchange - what it is- and how it impacts the merchants processing costs. At the risk of repeating myself - I'm going to revisit the subject here -for you - and not just once, because it can be a real challenge to understand - it's bizarre - and as you may or may not know , the pricing method we recommend is bound tightly to the concept.
Definition
Interchange is the cost associated with processing a Visa or MasterCard, and now, DISCOVER card transaction that defines the percentage of funds from the transaction (sale) that will go to the bank that issued the credit card. Visa and MasterCard (the governing bodies - deserving of a whole blog unto themselves and for lack of a better word) adds a really, really small percentage fee ( .0009 and called assessments) on top of the interchange rate - to complete the true wholesale cost of the transaction. Interchange and assessment rates are non-negotiable.
Where the money goes
Your merchant account provider marks up the wholesale interchange rates and provides you, the merchant with credit card processing services. The majority of the fees go to the issuing bank , teeny slice to VISA/MasterCard, and the balance to the providers delivering the service.
Variables that impact the interchange "rate"
Interchange rates are established by, VISA and MASTERCARD (and again, now DISCOVER). It is a complex set of rules that determines transaction cost based on the type of card that is used by your customer (and there are A LOT of different card types my friend) and the method by which the card was processed, i.e. keyed or swiped? pin entered or signature with that debit card? Even the ticket price of the sale or your industry SIC code can impact the interchange rate - thus processing cost. In fact there are almost 200 different interchange rates that you could be charged, based on this, that or the other regarding your sale/transaction.
Uncle Sam is watching
As you might imagine, this interchange thing is gaining scrutiny at all government levels with a growing level of discomfort due to its complexity and overall "murkiness". Nobody likes murkiness when it comes to their financial well being.
One point to be taken from this complex pricing fiasco is that the merchant (you) has little or no control as to whether your sale will be processed at qualified, mid-qualified or non-qualified rates. We'll examine then, other ways to take control of your processing costs, such as interchange cost plus pricing.