The first step to fully understanding your processing rates and fees is to understand where Merchant Services Providers obtain their Buy Rates, and what fees they mark up to create revenues. Welcome to your first lesson on Interchange and Interchange Rates; the foundation of our industry.
The most commonly asked question is: What is Interchange? In the simplest explanation possible: Interchange refers to a matrix of Discount Rates (percentage) and Transaction Fees that are developed by and published by the Card Associations on a biannual basis. While this is the industry-wide accepted explanation, it is our opinion that confusion and misconception actually starts with this very question and does little to contribute to complete Merchant understanding.
To explain Interchange fully and how it relates to the end pricing accessed to the Merchant, we need to explain Interchange from start to finish, from conception to the final Merchant rate. Below, we will discuss the following: What exactly is Interchange and how are these Interchange Rates created? Can I get lower Interchange Rates? Who assesses Interchange fees? How does Interchange affect what I pay?
What exactly is Interchange and how are Interchange Rates determined?
Interchange is a matrix of Rates developed by and published by the Card Associations on a biannual basis. To delve further into the explanation, every Interchange Rate is associated with an Interchange Program, or an Interchange Classification Level. Each Interchange Program lists specific and pre-determined criteria for qualifying for that particular Interchange Program. Additionally, each Interchange Program has a corresponding RATE associated with it. Hence, Interchange Rates. These Interchange Rates are our (and every Merchant Service Providers) Buy Rates. There are over one hundred different Interchange Programs, or Interchange Classifications, meaning there are just as many possible rates.
Visa, MasterCard and Discover determine the Interchange Rates using factors such as type of card presented (debit, credit, business, world, rewards), business industry category code (type of business), the way the transaction is initiated (key entered versus swiped) and security (amount of info collected/submitted).
For example, a Visa Rewards 1 Card when swiped through the merchant terminal is associated with the Interchange Rate of 1.65% and $0.10. However, if this same card is key entered instead of being swiped, the transaction does not qualify for the CPS Retail Rewards 1 Rate. Due to being key entered, the transaction would be associated with the Visa CPS Retail Key Entry Interchange Rate of 1.95% and $0.10. In this example, both the card type presented (rewards) and the way the merchant initiated the transaction (swiped versus keyed) play a role in the Interchange Rate that would be associated with the transaction.
Can I get lower Interchange Rates?
Interchange Rates are actually a matrix of buy rates that are listed on Visa.com and MasterCard.com, and are the same matrix of buy rates for all processing companies. There is no one Merchant Services Provider that gets a better or different set of Interchange Rates than another. Additionally, Interchange Rates are applied by Visa and MC directly as a transaction occurs (these fees are marked up and passed on to the Merchant). The Interchange Rate that is applied to a transaction depends on criteria such as card type submitted (rewards, business, debit) and how the transaction was initiated (key entered, swiped) amongst other criteria.
It is a good idea to be wary of anyone that tells you they have "direct" or "lower" Interchange Rates! Again, all Merchant Services Providers are subject to the same interchange rates. A Merchant Services Provider has no way of controlling which Interchange Rate is assigned to a transaction when it is processed by a merchant. If a Provider advertises a Rate of 1.48% and a merchant processes a transaction that receives an Interchange Rate of 1.65%, the Provider HAS to pay the 1.65% in Interchange. Only charging the merchant 1.48% would generate a loss. Typically, to avoid paying more in Interchange Fees than what they are able to charge the merchant, the Merchant Services Provider present pricing as TIERS, BUCKETS. These are usually represented as Mid Qualified or Non Qualified Rates. Merchant Services Providers need to be sure to cover any "higher" Interchange Rate than the Discount Rate (such as 1.48%) presented to the merchant.
Nearly all pricing structures (with the exception of a flat Interchange Plus Pricing program) have multiple tiers of pricing. Premier offers tiered pricing to our merchants, however, our programs are all supported by Card/Interchange Classification documentation. All pricing offered to our merchants is transparent. We inform you of what you can expect to see in each tier.
With whichever Merchant Services Provider you select, it is important to know the following about your tiered pricing:
- Know which Interchange Rates will be covered by each tier of pricing.
- Upon request, Premier provides a transaction Qualification Matrix to all merchants showing exactly which transactions are processed under each tier/bucket/rate.
- Know what each of your Discount Rates are
- What is your Qualified Rate? Mid Qualified? Non Qualified?
Who assesses the Interchange Fees?
In an electronic card transaction, the card-issuing bank (cardholder bank) deducts the interchange fee from the amount it pays the processor/merchant services provider that handles a credit or debit card transaction for a merchant. The processor/merchant services provider then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee, which is often referred to as a discount rate, qualified/mid/non rate, or pass-thru. When charged as a discount, the interchange fees and provider fees are bundled, meaning the merchant typically doesn't know which portion of the rate charged to them went to the provider and which portion went to the Card Associations for interchange. When a merchant is on pass-thru, they are shown the exact interchange fees as assessed by the association and are also shown the exact provider rate.
Interchange Rates are by far the largest component of the various fees that banks deduct from merchants' credit card sales, representing 70% to 90% of these fees.
How does Interchange affect what I pay?
Interchange Rates are the "buy rates" for all providers of merchant services. Visa ©, MasterCard © and Discover © issue their buy rates every April and October.
How does Interchange Clearing work?
When a transaction is processed, Interchange has to be paid, regardless of whom the Merchant Services Provider is or who the merchant is. No Merchant Services Provider earns any revenue from Interchange. A Merchant Services Provider only earns what they charge over these Interchange Rates. Similar to a buy rate for the mortgage industry. The banks get a rate from the feds and the mortgage guys give a rate to the homeowner.
Assigning a rate to a transaction happens as follows:
- Data is received by Visa/MC/Discover
- Based on Data received, Visa/MC/Discover determine which INTERCHANGE is appropriate
- Each INTERCHANGE has a predetermined rate associated with it, so whichever Interchange is deemed applicable to the transaction, the rate is the corresponding rate to that Interchange.
Also important to understand is that a business owner could process 100 electronic transactions in a month, and each transaction could be assigned a different Interchange. How do we account for these varying prices? There are two base pricing models used by Merchant Services Providers when provided rates for credit card processing to business owners.
The first is called tiered pricing. For example, we may set the business up with three different rates. We would set them up with a structure of 1.75%, 2.25% and 3.25%. Any transaction that was processed by the business owner that was assigned an Interchange cost of less than 1.75% would be charged to the business owner by us at 1.75%. If the Interchange cost was 1.6325%, and the Business owner paid us 1.75%, we make that difference between the Interchange cost and what the Merchant was charged. If the transaction was assigned an Interchange cost of 1.98%, the business owner would pay the tier of pricing that most closely covers the cost but is not less than the cost. The business owner in our tiered pricing example would pay us 2.25% on an Interchange cost of 1.98%.
The second pricing option is called Cost Plus, or Interchange Plus. On this type of pricing model, instead of charging the business owner one of the three tiers of pricing, the business owner is charged the exact Interchange Cost. In addition to the exact Interchange cost, the business owner pays us a predetermined percentage for our services (keep in mind we don't profit in any way from Interchange). We might agree to 0.25% over cost, or 0.20% over cost. What we decide to charge would depend on the business owner's current pricing and their monthly processing volume.
More Qualified Interchange Categories
Premier uses the most secure and robust front-end authorization network available. Our experience has shown that our merchants typically see a reduction in transactions processed under the interchange categories of Visa Electronic Interchange Rate (EIRF) for both debit and credit. We see a progression of a majority of the transactions processed at these categories into more qualified interchange categories, resulting in additional savings. EIRF transactions are related to the data that is transmitted and processed on a transaction. Our front-end authorization networks are more robust and tend to be more consistent in capturing and appropriately processing the data that is transmitted, resulting in a larger percentage of merchant's transactions being processed at better interchange rates.
Interchange Rates don't seem fair, they seem really high
The Interchange fees are very misunderstood. A majority of Interchange fees go to the Issuing Banks (the Cardholder bank). Interchange fees offset the high costs and high risks involved in Issuing credit cards to cardholders. Most revenues on credit card acceptance are generated from the fees assessed to merchants for acceptance and not the fees assessed to the cardholders.
To maximize and increase profitability for all parties involved (the Merchant Bank/Acquiring Bank, Issuing Bank, Card Brands, business owners) there is a delicate balance in pricing. If fees that the cardholders pay are too much, cardholders would use their cards much less. Cardholders typically spend 20% more on electronic purchases than cash purchases, increasing profits for the business owner. If Interchange rates were lowered, fees assessed to cardholders would need to be increased significantly.
Additionally, merchants are paying for the 'advance'. Merchants are funded within 2 - 3 business days on transactions that have yet to be paid by the cardholder. If the cardholder doesn't end up paying the Issuer for the transaction, the merchant does not have to forfeit the payment. They are guaranteed their funds (unless there is a chargeback/dispute). An Issuing Bank (or Merchant Services Provider) could lose the amount they make on 100 accounts in just one unpaid cardholder balance.
If you have the right deal with your Merchant Services Provider, fees should be reasonable for the return you get from accepting credit card transactions.
How do I know if I'm getting a good offer/deal?
If were to only take away one piece of information, the most important lesson that can be learned by any Merchant is that there isn't one flat "going" interchange rate. Some companies will quote rates low rates such as 1.48%, but it's important to know that these rates are never all-encompassing.
If Visa and MC classify the transaction as a consumer debit card, swiped, the corresponding rate for that Interchange classification will apply to the transaction. For example, 1.25%. The Merchant Services Provider then marks up that Interchange Rate in order to be compensated by the Merchant for their services. At Interchange plus 30 basis points, you are charged EXACTLY what Visa/MC assess on the transaction and for services, you are assessed a flat 0.30% (Also, a basis point is .01%. So 30 basis points would be 0.30%).
If a Merchant Services Provider quoted you a rate of 1.59%, then any Interchange Rate that was assessed on a transaction you submitted that was less than 1.59% would be charged to you at 1.59%. However, there are several Interchange Rates that are over 1.59%. For example, if a transaction is key entered instead of swiped, the lowest possible rate that Visa/MC will charge on that transaction is 1.98%. The Merchant Services Provider then assesses a surcharge on top of the 1.59% rate to cover their costs. The surcharges are anywhere from 0.50% to 2%, and are either listed on the rates page or in the terms of the agreement.
What information should I ask my provider for?
It is important to know where we get our costs from, and also know that all Merchant Services Providers have at least these same costs (there are also network access fees, authorization costs, statement costs, etc.). You should ask for a copy of interchange or download your own from Visa.com and MasterCard.com. You should ask for a more detailed document that your Merchant Services provider should be able to give you, an Interchange Qualification Matrix. An Interchange Qualification Matrix details at which tier of pricing each Interchange Rate will clear at for that Provider's tiered pricing.
Based on both Interchange Pricing and the rate structure the Provider will be offering, the Provider determines which Interchange categories will be under each of their tiers of pricing. Tiers typically consist of Qualified Rate, Mid Qualified Rate and Non Qualified Rate. Some providers also offer a separate Debit Qualified Rate. Some processors may offer a Qualified Rate of 1.64%. But what Interchange categories are processed at this Qualified Rate? This rate may only include Retail Credit Transactions, which only represent 20 - 30% of a typical merchant's transactions.
What is your Mid Qualified Rate? Is it 2.76%? Is it 2.99%? Or is it 2.15%? This is very important to know, as you will receive the Mid Qualified rate on several transactions. Not only do you need to know what the rate is on each of your tiers, you need to know which Interchange Categories (which transactions) will be processed at each tier. For example, the cost on a CPS Rewards I card is 1.76%. Some providers may offer a Qualified Rate such as 1.85%. This may seem higher than 1.64%, but if it includes MORE Interchange Categories it will likely end up costing you less overall.
Each Merchant Service Provider's Qualification Matrix may be different.