Interchange

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Interchange (aka "interchange rates" or "interchange discount rates") is shorthand terminology for the more technically correct term "interchange plus dues & assessments", and refers to the cost of credit card transactions.

Interchange is essentially the cost that merchant account providers are charged by VISA, MasterCard & the issuing banks to provide credit card processing services.

There are may "players" that come into the process of processing credit card transactions, and the interchange rates are passed along through each of them all the way down to the business who is accepting a consumer using a credit card to buy something.

Interchange rates are set by the credit card associations (Visa, MasterCard, Discover, AMEX) and will vary slightly based on what each entity decides they want to charge.

Different types of credit card transactions will have different interchange fees associated with them, and it mainly has to do with the associated risk.

When evaluating merchant account provider pricing models, think about interchange as the cost a merchant account provider has to pay to VISA/MC and issuing banks to provide you with credit card processing services. The merchant account provider will then mark-up the interchange fees to the end user, and make a profit on the margin (difference).

Every merchant account provider has the same base interchange fees to pay to VISA/MC and issuing banks - but they do not all charge the same markup.

How is the interchange fee calculated?

There are 2 main cost components that makeup interchange rates, and neither merchants, nor merchant account providers, can get around this.

The 2 main cost components that makeup interchange rates:

1. Interchange Rate (Discount Rate + Transaction Fee)
2. Dues and Assessments (Visa/MC)

Interchange Fee = Discount Rate + Transaction Fee + Dues & Assessments

Remember from the intro, when we say "interchange" we are really talking about "interchange plus dues and assessments".

When evaluating which merchant account provider you will choose for your business it is important to understand that they all have to pay the same interchange fees. No matter what, they all have to pay that.

So, why do their rates differ? Margin.

Pro Tip: When evaluating a merchant account provider, remember that they are all paying the same interchange fees. Their prices will differ based on their margin, aka how much they mark-up that cost.

What factors dictate the interchange rate?

The interchange rates are adjusted biannually - every April & October.

Remember that interchange rates will vary with different credit card transactions (generally aligned with the degree of associated risk) and these difference are governed by 3 main factors.

There 3 main factors that dictate interchange rates:

1. Transaction Method (keyed-in or swiped)
2. Card Type (debit card, basic credit card, points & perks credit card, business credit card, etc.)
3. Type of Business (size and industry)

Interchange rates change to control consumer fraud and to account for perks, rewards, etc.

Transaction Method

"Keyed-in" (and "card not present") credit card transactions have a higher probability of fraud than swiped (and "card present") transactions, so the interchange fee reflects that.

Card Type

Different card types have different levels of risk associated with them.

• Debit Cards: Debit cards work by immediately taking money out of a consumers bank account when they make the purchase, very low risk.
• Basic Credit Cards: Basic credit cards work by allowing consumers to buy things with money they may or may not have at the time of purchase, which is higher risk than a debit card. This higher risk is mitigated by higher interchange fees.
• Points, Perks & Rewards Cards: These credit cards are more expensive because every time you purchase something you accumulate money that you can use to get flights, get cash, or participate in other benefits like roadside assistance, concierge, airport lounges, etc. These things cost money, so the interchange fees reflect that.

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