Interchange fees are generally the wholesale fees imposed by credit card issuers and banks on credit and debit card transactions. These fees are a mandatory part of every transaction. When choosing a credit card processing provider, it is important to choose a company that offers “interchange plus” pricing. This pricing structure adds a small markup over the base wholesale rates, which is fair and transparent vs. the deceptive “tiered” rate structures that many unscrupulous credit card processing providers charge their merchants. By choosing an “interchange plus” processor, you will have true transparency in your rate structure and will always know what you are paying just a small amount over the wholesale rates, which can save you thousands of dollars per year vs. the old model of “tiered” rate structures where the rate you are charged over the base interchange rates can vary widely and dramatically.
In the area of credit card processing, there is a term known as interchange. This refers to money that is transferred from one bank to another for a transaction. Fees make up a large portion of the costs for processing a credit card and are established by the credit card brands to provide an open processing system. The fees are collected by the various cards and are subsequently paid to the bank that issued that card. On average, the rate for a credit card payment is 1.8 percent, while it is only 0.3 percent for debit cards.
What is It?
Any time a credit or debit card transaction is processed, funds are then transferred from the issuer bank (cardholder’s bank) to the bank acquiring the money (merchant’s bank). Traditionally, this process occurs with a merchant account, which has grown more and more popular over the last few years due to all the advancements in technology. The credit card brand, such as Visa or MasterCard, allow the process to ensue. They collect fees from the acquiring bank and receive a small percentage from the funds being spent. This amount of money is also known as a network fee, and it is a minuscule amount, usually averaging at around 0.05 percent.
Why is it Important?
Interchange helps to increase the macro payment system, which makes it so important. Fees that the banks that issue cards receive help to financially encourage the institutions to issue more cards to other consumers. Additionally, it covers the risk of doing so and works to benefit many a merchant in accepting both credit and debit cards.
It also expands the market by allowing additional merchants from various industries to accept payments via credit and debit card transactions. It balances the fees associated with transactions involving cards; if the fees are too high, merchants won’t accept cards, but if it’s too low, banks won’t issue cards.
How are the Fees Determined in a Transaction?
There are certain types of situations that can generate these fees. They include the following:
1) Transactions that are manually entered and e-commerce ones have higher costs because of the lack of swiping, which makes for a greater risk of a fraudulent transaction.
2) The costs associated with rewards cards are higher so as to fund those rewards for the cardholder.
3) The fees on debit cards are lower than on credit cards due to a lower credit risk.
4) Certain merchants, specifically those with small ticket sizes, can qualify for lower rates and lower transaction fees for credit card processing.
5) Commercial cards have higher fees to fund things such as spending control, rewards and detailed reporting.
How Often do Rates Change?
Overall, interchange rates can be changed or updated by the card associations on a regular basis. This is generally to generate more cards being issued and accepted. In order to get more cardholders, the associations change their rates and fees, usually in April and October. However, the changes can take place at other times of the year as well.
Please follow these links to view the wholesale interchange rates charged by Visa and Mastercard:
Visa Interchange Reimbursement Fees
Mastercard Interchange Rates
When choosing a credit card processor, the fairest rate structures are “interchange plus” pricing, which adds a fixed markup over the wholesale interchange rates.
