Information on Merchant Accounts,
Ecommerce and Credit Card Processing

July 14th, 2022 by J B

What is interchange?

Filed in: Merchant Accounts | Add comment

If you have a merchant account then you have likely heard the term interchange, but many don’t quite understand what it is, how it works, and why it matters. We are going to generally cover the basics of interchange so everyone has a basic understanding of what it is and how it works. First, let’s start off simple.

Simple Explanation:

Interchange defines what card issuing banks charge payment processors for moving funds. It is set across the payments industry so all payment providers have the same interchange costs. It is also the prevailing cost to payment providers when looking at transactional expenses. Rates and fees merchants pay may not explicitly state the interchange cost however it is baked into the fees charged to merchants when processing payments.

Let’s dig in some more:

Interchange is best represented as a matrix and is made up of more than 800 different card types and card type combinations. Each combination may have its own rate generally speaking between 0.05% + $0.21 to 3.25% + $0.10 per transaction.

Card types refer to not only the band the card is associated with, like Visa or MasterCard, but also include it is credit or debit, or what program the card is associated with. MasterCard World Elite and MasterCard Business World Elite are two different card types and their transactions may be processed at different interchange costs.

Charge types refer to the different factors involved when running a particular transaction. There are many factors that can come into play, the most basic being, if a transaction was keyed in or processed via EMV, or if address verification was attempted. That said it could include the type of business processing the card as well as how old the authorization was before it settled. You can imagine where this could get very complicated. For example, you could take the same card twice and the interchange cost on that transaction could be different each time just due to differences in how you had to accept that card. Or two different businesses could accept the same card the same way and end up with different interchange rates. Couple that with all of the different card types and you end up with a mess of combinations.

There are some interchange combinations that do not appear at first glance to fit into the rate range mentioned above. For example, GSA Large Ticket has an interchange rate of 1.20% + $39.00 that said it’s a very specific type of government transaction, and while a $39 transaction fee seems crazy you have to note that it only applies to sales over $5,900 which is equivalent to 0.66% on top of the 1.20%.

Costs Trickle Down:

What many merchants seem to miss is that the interchange costs trickle down. It doesn’t matter what pricing structure a merchant has, the interchange fees are covered by the merchant. Sure you may have a flat percentage fee for EMV transactions, but rest assured interchange was already calculated in. Also if a large enough group of merchants is doing things that cause the effective interchange cost to increase enough the payment provider will just adjust the pricing accordingly. At the end of the day, it’s in everyone’s best interest to process payments effectively as reasonably possible.

If you can accept payments in person EMV and NFC-based transactions are going to get you started down the most cost-effective road. Make sure you are settling your transactions at the end of each day, as authorization that has aged over 24 hours may result in a higher interchange cost.

If you are eCommerce or a business that keys all of its sales you will want to make sure you are using address verification and CVV.

In addition, make sure your processor is doing what it can to help you lower your interchange costs. Some processing systems, like our own, look at the transaction data to see if it can provide additional information at the time of settlement to shift transactions into a lower-cost interchange category. For some merchants, this can generate significant savings.

Interchange Padding

While the interchange tables are the same for all processors the cost to the merchant isn’t always the same. Some payment providers use a technique that many refer to as interchange padding. This questionable practice is used to make the fees charged by the processor appear smaller. Basically, the processor makes it look like they are passing interchange costs directly to the merchant, but in reality, they are inflating those costs on the merchant’s statement. To the merchant, it looks like they are paying true interchange when they are not. This is most commonly seen on interchange plus, or cost plus, fee structures. While it is somewhat rare to run into this these days it still happens.

In order to see if there is interchange padding on your account, you have to look up each card and charge type you were billed for and compare it against the current interchange table.

If you find discrepancies its worth a call to your processor to ask about it. It could be you are not looking at the correct card and charge type. This is common as the merchant statements generally use vague descriptions of the charge type which can make things difficult to look up. If you find the processor is padding interchange I would recommend shopping around.

Keep in mind this is generally not something your sales agent would have control of and may not even realize is going on. If you have an agent you have been working with it’s a good idea to point these practices out to them. At the end of the day, most agents don’t want to be associated with such practices, and bringing it to their attention will help them in the long run. Plus if you have a good agent you have been working with they likely will be able to assist you in shopping around.

Visa and MasterCard’s Interchange Tables

The interchange tables are published publicly for everyone to see. Here are the most recent Visa and MasterCard tables I was able to find with a quick web search.

https://www.mastercard.us/content/dam/public/mastercardcom/na/us/en/documents/merchant-rates-2022-2023-apr22-2022.pdf

https://usa.visa.com/content/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees.pdf

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