Everything You Need to Know About Interchange

As a business owner, accepting credit cards is crucial to your organization’s success. And if you accept credit cards, interchange is a relevant topic to understand. It affects your merchant account fees and in turn your margins.

Yet many business owners don’t know the meaning behind this credit card processing term. It’s a common belief that merchant account providers set your credit card processing fees at random, explaining the difference in quotes you might receive from different merchant banks.

In reality, our processing fees are based on interchange rates set by the credit card brands. Yes, we collect a small markup for moving your customers’ card payment funds through to your merchant account, and this markup varies from provider to provider, but the bulk of the percentage you pay per each card transaction covers interchange.

What is Interchange?

Interchange can be summed up as the wholesale cost of accepting credit cards. Visa, MasterCard, Discover, and American Express determine and collect interchange rates for different types of card payments. They are updated and published quarterly.

You can find an example of Visa interchange rates here.

As you can see, interchange rates vary considerably depending on the type of transaction. They also vary by card brand.

For example, accepting a Visa debit card in store (a “card-present” transaction) is less costly than accepting an American Express credit card on your website (a “card-not-present” transaction). This is because there’s a far smaller risk of fraud and chargebacks when you accept a payment card in person.

Furthermore, accepting a MasterCard credit card online would differ from the same kind of payment made with a Discover card, and so on and so forth.

A higher rate might go toward funding cardholder perks, such as fraud reimbursement and reward programs, which are unique to each credit card network. American Express offers perks that are appealing to its cardholders, which explains why American Express charges a generally steeper interchange rate than others.

Interchange rates compensate for the benefits that other parties derive from credit cards as well. There are many benefits for cardholders, such as the convenience of using a line of credit and fraud protection. Businesses benefit from guaranteed funds, customer satisfaction, and more.

Interchange rates are an unavoidable cost of doing business if you accept credit cards; they help fuel electronic commerce.

Interchange Plus Pricing

Interchange plus, or “cost plus”, pricing is a transparent pricing plan offered by merchant account providers. It means that you, the merchant, pay exactly what the card brands charge (the “interchange”), plus a consistent markup your payment processor charges (the “plus”). Card-present transactions, therefore, would be less expensive to process than credit card payments you take over the phone or online. Your rates would would fluctuate depending on the brand of credit card your customer uses.

Some merchants prefer flat-rate pricing for accounting and reliability purposes. It gives them one rate for all payments they accept, so they know exactly what to expect each statement period. That rate might give the merchant account provider a larger profit margin for some transactions (e.g. card-present Visa debit transactions), which would in turn absorb the cost of the more expensive transactions (e.g. card-not-present American Express transactions). The flat rate would be a middle ground between the least and most expensive processing fees.

It’s up to you to determine the best pricing plan for your business, but we’re here to help in a free consultation if you’d like to weigh the pros and cons of each.

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