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Interchange Fee Facts for Merchant Consideration

by | May 14, 2015

The interchange fee –a fee within the overall cost of a single credit card transaction, is confusing to most merchants (rightly so).  But understanding the concept is doable and important, as it is undoubtedly the bulk of the cost in that transaction. Its management then, is essential to all payment card processing merchants.  Unfortunately, there is a lot of incorrect information defining the fee, and the complex relationships between the factors that influence it.  Let’s sort through it – in basic order.

Visa and MasterCard credit cards (called “bankcards”) are not issued by the company’s themselves, but by banks (and credit unions, organizations, retailers) all across the country whom they contract with to market and manage the credit cards.  American Express and Discover issue their own cards.

The interchange fee/rate is one component of the cost of a credit card transaction.  It is determined by the interchange category the credit card transaction falls into. The interchange category and the interchange rate are set by the individual card brands (all of them).

These established interchange categories number literally in the hundreds (approximately 700 total).  Below are some of the complex variables considered by all the brands relative to the single transaction, that determine the transactions processing interchange category (whew, peter piper…)– keep in mind this is not an exhaustive list!)

  1. Card type – credit or debit? basic? rewards? higher rewards? government procurement?
  2. Method or how processed and “environment” – was the card swiped? Keyed?  NFC (Near Field Communications)?  Was it through an e-commerce site? mobile phone?
  3. Data collected on the transaction? Zip code? CVV code? Level 3?
  4. Size or amount of the transaction?
  5. Type of business processing the card?

*Noteworthy significance  when the credit card transaction is complete, the payment processor pays this interchange fee to the card issuing bank – NOT your bank, and NOT your processor.  That convoluted, substantial interchange fee goes to a bank that you have no business tie or relationship with – or of course – American Express/Discover.

Many merchants we meet with seem to think their bank is receiving the interchange fees from their company’s credit card transactions.  It’s not surprising really – even Forbes contributors promote the common misnomer – see Colao’s 2013 – Interchange is for Suckers.  First paragraph – big mistake – “the lions share goes to your bank”.  Worse – see interchange in the creditcard.com glossary – UGH!

This misnomer however, creates a “value added” myth to the relationship between the merchant, their bank, and payment processing services.  The banks making money from your credit card transactions are all over the country, and yes, they make a lot of it, but again, it’s not your business bank, and it’s not for processing, it’s for issuance.  And while banks specialize in issuing cards – they rarely maintain expertise on staff knowledgeable enough about processing them to incorporate interchange control. Interchange fees are currently a fact of life in business for merchants who accept electronic payments (and it would be foolish not to).

Interchange fee management is more than just possible despite this complexity – so choosing an experienced payment provider would be wise.  Remember XBS assists merchants in the reduction of interchange fees through intelligent payment processing.  Eliminate waste, and process profitably.