What Exactly are Interchange Fees, and Why Should I Care?

Posted by Joe Musitano on Mar 27, 2015 11:54:55 AM

bigstock-Fees-words-on-credit-cards-as--79108597Interchange is a fee that is assessed by the card networks, including Visa, MasterCard, Amex, Discover and the PIN Debit networks. Interchange is the largest component of a merchant’s processing costs - Interchange fees account for as much as 90% or more of the overall cost of accepting a credit card payment! They are also the most misunderstood aspect of card acceptance since it is a very complex topic.

Many merchants and cardholders continue to believe that Interest Charges cover the cost of issuing a credit card, but only a portion of cardholders carry a balance that is assessed interest charges. For example, most commercial cards, including purchasing cards, are paid in full each month. Interchange fees are the primary way that these “charge” cards earn revenue to cover the cost of carrying the card balance until the account is paid.

These fees are collected from the merchant through their processor and are passed to the card-issuing financial institution (issuer) by the card networks. For example, if ABC Bank issues a MasterCard credit card, the interchange from any transactions processed using that card will be collected from the merchant by their merchant processor and then passed to MasterCard, who will collect the fee from the merchant processor and paid to ABC Bank. Clear as mud, right?  That is only the beginning of the complexity.

Interchange Fees and Reward Cards

Many card programs provide rewards to cardholders, and Interchange is also the primary income that is used by card issuers to support rewards programs. For the merchant, however, these rewards programs drive up the cost of card acceptance since they usually carry a higher interchange fee.

There are many interchange rates and programs assessed by the card networks, and many factors that determine what interchange program will apply to a transaction. The cost can vary based on the industry classification of the merchant, the data that is provided in the transaction, the size of the transaction, how the transaction is processed, and other factors.

In part 2 of our blog series on Interchange management next month, we will look at the factors that determine what interchange rate you, as a merchant, pay for card transactions, and which of these factors you have control over.  Until then, if you have questions over the rates you pay or simply want to learn how Solupay can help your business, contact us for more information.

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Topics: Payment Gateway Solutions, Convenience Fees