All About Interchange

March 1, 2013

Interchange fees make up a bulk of the credit card processing fees that a business will have to pay. This is why it is fairly important for managers or business owners to do everything possible to understand all about interchange fees. Interchange describes the money that is transmitted to the issuing bank from the acquiring bank. These fees are a part of each transaction that involves a bankcard. These fees are a large part of the amount of money that it takes for a business to feature credit card processing. Interchange fees are created by the various card brands that use open loop processing systems. For example, brands like Discover, MasterCard and Visa charge interchange fees.

Why Interchange Fees Exist

Interchange fees are charged to merchants in order to compensate the banks that issue debit cards or credit cards for any interest that may have been lost. The issuing banks normally lose interest due to the grace period that is issued to the cardholders before they repay the debt on the card. However, the main role of an interchange fee is to establish a reasonable balance of profit between the retailer’s financial institution and the financial institution of the cardholder.

How Interchange Fees are a Part of Credit Card Processing

When a transaction takes place, the cardholder’s bank will pay the company’s bank for the purchases made by the cardholder. The interchange fee for this transaction is subtracted from this amount. Once this has been done, the acquiring bank will pay the merchant for the leftover balance. However, a markup is subtracted from this amount in order to pay for processing the transaction.

The business that is selling a product or service to the cardholder will ultimately receive a gross amount of money for any sales that were made. However, various markups and base costs are subtracted from the amount of money that the business receives for selling different products or services. These costs often include the provider’s markup, assessments, various dues and interchange fees.

Different Factors that Influence Credit Card Processing Interchange Fees

It is important for a business to know all about interchange fees in order to make sure that credit card processing services benefit the company as much as possible. This means that one will have to do the best that they can in order to learn more about the different factors that can change the interchange fees are charged. Companies should also learn more about which factors could be controlled. Various factors that can influence interchange fees include the merchant category code, the transaction data and the processing method that is used. The merchant category code is used to describe the various types of business categories. The company will fall under a specific merchant category code designation and this can influence the interchange fees that are owed.

There are some interchange factors that a business will not be able to control. This includes the owner of the credit card or the debit card, the brand of the card and the type of card that is being used for the transaction. Interchange fees can change based on if the cardholder is a municipal, a corporation, a business or an individual.

It is equally important to try to make sure that the transactions that are processed could qualify for the lowest interchange categories possible. The process of changing a company’s credit card processing options in order to perform this act is known as interchange optimization.

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