How the Interchange Fee and Rates Are Calculated
How the Interchange Fee Affects Merchants
Merchants must know what the interchange fee is, who it’s paid to and how it affects the business’s bottom line.
What is Interchange?
Interchange is a structured fee paid by the merchant’s bank to the cardholder’s bank. This fee is determined on a per-transaction basis and deducted from the transaction amount prior to the bank transfer.
The interchange fee is designed to ensure that banks and merchants share responsibility for the risk of accepting credit card payments.
Card Networks Set the Fees
Interchange rates are determined by the card networks, and may be changed twice yearly in April and October. Further information can be obtained from MasterCard and Visa.
There are no incentives for card networks to increase interchange fee structures. Card networks do not profit from interchange fees. If the fee is set too high, merchants would refuse to accept that particular card network. Fee structures that are set too low would affect banks’ ability to offer particular cards.
Therefore, card networks have established a flexible fee structure that is comprised of both a percentage amount and a flat fee.
Interchange Categories Affect the Rates
Interchange fees are determined by a rating scale based on several factors. Some determining variables are within the merchant’s control, others are not.
- The type of processing (card present vs. card not present).
- The transaction data that is supplied to the card network.
- The merchant category code.
- Who the card belongs to (a business, individual, or corporation)
- The card brand.
- The type of card (fees rank from highest to lowest: premium credit cards, standard credit cards, signature debit cards, PIN debit cards)
Optimization Can Reduce Rates
By optimizing transactions, merchants can help to reduce the interchange rates that they are charged. Optimization can be achieved by:
- Using Address Verification Service
- Posting the transaction within three calendar days
- Shipping merchandise within seven calendar days
- Including transaction details with the settlement batch
While this will not eliminate all fees, it can reduce the expenses due to credit card processing.
Merchants often consider interchange fees to be another means of reducing their profits, and therefore an aggravation. In comparison, however, interchange rates cost considerably less than chargebacks and do not have the same potential consequences.
If you are struggling to optimize credit card transaction fees, contact us today. We’ll help your business save money and reduce the impact of chargebacks.