Credit Card Processing: Explaining Interchange

If your business accepts credit cards, then there’s no doubt the term “Interchange fees” is one you’re familiar with or one that you’ve seen on your merchant statements. Surprisingly, even with how much of an impact interchange has on the final cost a business pays, very little business owners understand what the fees are or how they work. 

Interchange can be a complicated topic, but we’ll do our best to briefly answer some of the main questions regarding them.

What are interchange rates and fees?

Interchange rates are the fees charged by card issuers to businesses every time a credit or debit card is used for payment. These fees make up the largest portion of the total processing fees businesses pay. They are set by credit card networks such as Visa, Mastercard, and Discover and are not negotiable. Essentially, interchange fees are one of the main ways credit card companies make money.

How much do interchange fees cost?

Credit card Issuers typically charge businesses between 1% and 3% of each transaction in interchange fees, but these rates can go as low as 0.05% for some debit transactions. In addition to these fees, businesses also have to pay assessment fees, which are set by the card networks and go towards things like fraud prevention and developing new banking technologies etc..

What determines the cost of the interchange fee?

The cost of the interchange fees are determined by a number of factors, including the type of card being used (rewards, points, corporate), how the card is being accepted (Card present or not present), the industry in which the business operates in (Grocery, retail, hospitality) and the card issuer (Visa, Mastercard, Discover, Amex). In general, interchange fees are highest for rewards cards and corporate cards and lowest for debit cards. 

Are there any steps merchants can take to reduce their interchange fees?

Absolutely! This is generally called “Interchange Optimization”, which is the process of adjusting how you’re accepting transactions to help qualify for the lowest interchange rates. As mentioned in the previous paragraph, the interchange fees you are charged is dependant on various factors, so lets take a look at what would need to change in order to achieve lower costs. 

Limit Keyed-in Transactions

Keyed-in transactions, like mail and telephone order transactions, are considered high risk, so they have some of the highest interchange rates. This means that it is a good idea to avoid or limit these types of transactions. 

Settle your transactions

Merchants are encouraged to settle their transactions every day. Not settling all your transactions at the end of everyday, could result in your transactions being classified incorrectly with higher interchange costs. 

Implement Fraud Protection Tools

If your business processes online payments, for extra protection they can use tools and protocols like 3-D Secure and Network Tokenization, which are both offered by the card brands to enhance security and help prevent fraud. 3-D Secure does this by authenticating users before conducting transactions, and Network Tokenization replaces sensitive cardholder data being used during the payment process, such credit cards numbers, so it cannot be read by anyone else. 

Include transaction-specific data

Regardless of the industry you’re in, entering as much information as possible about the card holder is beneficial, however, if you’re in an industry that accepts lots of Corporate or Government cards, having Level 2/3 data acceptance is a must for reducing your interchange costs.

Level I: Level I transaction data refers to the data that gets transmitted with a standard business-to-Consumer (B2C) transaction. This data includes: 

  • The purchase amount
  • Date of the transaction
  • Card expiry date
  • CVV2 code.

Level II: Level II applies to corporate and government credit cards. The data required for these transactions includes everything from Level I, plus additional fields such as:

  • Order number
  • Tax amount
  • Card holder name
  • Address
  • ZIP code

Level III: Similar to Level 2, Level 3 data generally applies to corporate and government credit card transactions but is typically intended for large dollar amounts. Level III includes all the data collected in Levels I and II, plus more detailed information. Level III can include upwards of 100 data fields but generally encompasses about 20.  These fields include:

  • Product ID or SKU
  • Product description
  • Price per unit
  • Quantity
  • Shipping or shipping amount
  • VAT information

Generally speaking, the higher the data level, the lower the fraud risk. So businesses processing at the higher Levels will have access to lower interchange rates. 

If I’m not on an Interchange Plus structure, am I still paying interchange fees?

Yes, regardless of the structure you’re on (Interchange Plus, Tiered or Flat Rate etc..) the interchange fees always get paid. If you’re not on an Interchange plus program, your processor is simply bundling the interchange fees into simple to understand categories, which often results in the business paying more for credit card processing. 

Conclusion

While interchange rates and fees can be a complicated topic, it is important for businesses to understand the different factors that go into these charges. By understanding how interchange rates and fees are calculated, businesses can make more informed decisions about their payment processing solutions. Have you ever been confused by interchange rates and fees? Need more clarity? Give us a call! We’re always happy to help.

 

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