Definition of Interchange Rates

You may notice when dealing with a merchant service provider that you’ll have to spend money on interchange rates. The interchange rate is something a merchant service provider will manage when handling the credit card transactions you process. An account provider will market its processing rate up above the interchange rate, adding an additional fee to manage the payment system.

But what is an interchange rate, and how can it vary by network? Let’s examine how an interchange rate works, including how much it can be worth and who will receive the money.

The General Concept

Interchange rates are charges a credit card network will impose on a transaction. The network will charge a fee on each transaction as compensation for the card-issuing banks that process these deals. These fees compensate for:

• Handling costs
• Fraud prevention
• Bad debt costs
• The risk associated with approving the payment

Visa, MasterCard, and other card networks will establish interchange fees and produce different fees and rates for various card types. Issuing banks face risks when they issue credit cards to consumers, but they mitigate these risks by charging merchants who accept their cards.

Here’s a breakdown of the card payment process: The merchant’s bank (the acquirer) submits a payment request to the customer’s bank (the issuer) through the card network. The issuer then conducts several checks to decide whether to approve or decline the request, focusing primarily on preventing fraudulent use and confirming the customer has sufficient funds or credit available.

Once approved, the issuing bank transfers the funds to the acquiring bank or issues a rejection notice. Although this entire process occurs almost instantaneously, it involves a complex series of steps for which the issuing bank charges a fee known as the interchange fee.

Technically, the card network levies the interchange fee on the acquiring bank, but it is then passed on to the issuing banks as an incentive to promote their card services over others. This leads to a common understanding of the interchange fee as a transaction between the issuing and acquiring banks.

In practice, the issuing bank retains the interchange fee, and the acquiring bank deducts this fee when depositing the funds into the merchant’s account. Ultimately, it is the merchant who ends up paying the fee.

Who Gets the Interchange Rate?

As mentioned, the merchant pays the interchange fee for each transaction, which goes to the bank that issued the buyer’s card. A couple of other processing and routing networks also collect part of the interchange fee. The credit card networks collect a very small percentage of each transaction through assessment fees that go alongside the interchange charges.

How Interchange Fees Work

Interchange fees are crucial when a consumer uses a credit card or debit card to make a purchase. Several rapid actions are required — from authorization requests and fraud checks to payment processing. The interchange fee covers the cost of these processes. Depending on the pricing model, the interchange fee may be detailed as a percentage of the transaction cost or included with other processing fees in a bundled rate.

A portion of the interchange fee contributes to the credit card processing service, while the majority goes to the bank or credit card company associated with the used card.

Plus, interchange fees are dynamic; banks and card networks periodically adjust them to reflect changes in transfer costs, interest rates, and risk assessment. Visa and Mastercard, for example, typically revise their rates biannually in April and October. The pricing of interchange fees has attracted regulatory attention due to concerns that credit card companies may be profiting excessively from these everyday transactions. Despite this scrutiny, it is unlikely that interchange fees will be phased out in the near future.

Example of Interchange Rate

Imagine you use a credit card to purchase a pair of shoes for $150 at a retail store. The information about the transaction is sent to the store’s bank. The store incurs a fee for processing this payment, including the interchange fee. If the interchange rate is 1.5% of the purchase price, the merchant would pay $2.25.

Out of this $2.25, $0.30 might go to the store’s bank, $0.20 to the credit card network, and $1.75 to the card issuer. After these deductions, the store would retain $147.75 from the original $150 sale. As a customer, you wouldn’t notice these charges on your bill since you only pay the store’s price for the shoes plus any applicable sales tax.

How Much Is An Interchange Rate?

An interchange rate will vary, but the average is around 1.79%. That means the network will charge 1.79% of the total credit card transaction and collect those funds as compensation for the banks that issue these cards.

The merchant account provider will add a charge through an interchange-plus pricing platform. Some providers may also use a tiered pricing system. For example, a provider may charge an extra 0.3% plus 10 cents for each transaction in addition to the interchange rate the retailer is spending to cover the deal.

Some networks may also charge additional fees to process their cards. Visa and MasterCard process assessment fees of about 0.11% for each transaction these networks process. Here are examples of the latest Interchange rates by Visa and MasterCard:

Type of Card	Interchange Rates
Visa Debit CPS	0.80% plus an additional $0.15
Visa Debit CPS (Regulated)	0.05% plus an additional $0.22
MasterCard Debit	1.05% plus an additional $0.22
MasterCard Debit Regulated	0.05% plus an additional $0.22
Visa Credit CPS (Retail)	1.51% plus an additional $0.10
MasterCard Credit Consumer (Merit III Core)	1.65% plus an additional $0.10

To see the current interchange rates by Visa and MasterCard, you can refer here.

Interchange Pricing Models

Payment processors utilize several pricing models to charge businesses for the interchange fees associated with card transactions. Understanding these models is crucial for businesses as they directly impact card payment costs. Here’s a breakdown of the three main models, plus a less common approach:

• Flat-Rate Pricing:

This straightforward model involves a fixed percentage or a flat fee per transaction, irrespective of the card type or transaction method used. The rate remains constant regardless of the interchange fee, providing predictability but typically at a higher cost than other models. It’s particularly popular among small businesses with lower sales volumes and is commonly offered by payment service providers.

• Tiered Pricing:

This model groups interchange rates and the processor’s markup into three categories: qualified, mid-qualified, and non-qualified. Transactions categorized as “qualified” attract lower fees, whereas “non-qualified” transactions are more expensive. Categorizing transactions into these tiers is solely at the processor’s discretion, which can lead to a lack of transparency and difficulty in determining if you are being overcharged.

• Interchange-Plus Pricing:

In this model, a flat fee is added to the interchange fee for each transaction. It is known for its transparency, although verifying statement accuracy can require effort. Since the interchange fee varies per transaction, the total cost can fluctuate, but businesses always know exactly how much they are being charged over the base cost.

• Subscription/Membership Pricing:

This less commonly used model involves businesses paying a monthly membership fee in exchange for lower transaction costs. Similar to interchange-plus, the interchange fees are passed through to the business, but the processor’s markup is typically a flat per-transaction fee rather than a percentage. This can be advantageous for businesses looking for consistent pricing.

What Influences the Value of the Interchange Rate?

All credit cards will have different interchange rates. You’ll notice a few things that will influence how these rates will work:

• Different card schemes have varying interchange rates. For instance, the cost of a transaction using a Visa card may differ from that of a transaction using a Mastercard.
• Transactions people key into a system will cost more to handle due to the risk that someone entering a transaction isn’t there in person. These are also called card-not-present transactions, and they often occur online. Due to the added risk, you could spend a few tenths of a percentage point more on these.
• A reward card will feature a higher interchange rate. The card network will charge extra to offset the cost of whatever rewards the cardholders will receive. These include frequent flier miles, cashback offers, and points people can use for various products or services.
• The MCC assigned to your business influences your interchange fees. For example, Visa and Mastercard in the US and Australia offer lower rates to specific business types like charities, travel services, streaming platforms, and utilities.
• Commercial cards that focus on business operations may also have higher interchange rates. These corporate cards may include additional reporting services, limit control features, and rewards for businesses that need cards for their expenses.
• Debit cards will have lower interchange costs because the funds for a transaction will directly come from a customer’s bank account. Since the money is immediately settled, the risk of the customer being unable to cover the card amount is minimal.
• Domestic transactions, where both the card-issuing bank and the business are in the same country, usually have lower fees than cross-border transactions.
• Some low-value transactions may come with lower interchange rates.

Each network offers a full assortment of rates. They offer dozens of cards for different needs, including ones for business purposes, cards for first-time users, and even cards for college students.

Are Certain Card Networks More Expensive?

Each card network’s interchange rates will also vary. Visa and MasterCard typically charge lower rates than other networks, as they work with many banks to get their cards on the market.

American Express charges extra because It operates a closed system. Amex is both the card issuer and the issuing bank.

Discover is not as transparent over its rates, although it can dictate different rates by industry and risk level. Your business might get a lower rate than Visa and MasterCard lists, but no guarantee will happen for your system.

Can You Negotiate Interchange Rates?

Interchange rates are not negotiable. While you can negotiate the merchant fees with an account provider, you cannot negotiate the interchange rates. The card networks will require these rates to appear as they are and to be applied for all transactions based on whatever card someone uses.

If a processor claims to offer the best interchange rate, be cautious. These rates are set by payment networks like Visa and cannot be altered by individual merchants or processors, except for very large retailers like Amazon and Walmart, which have significant leverage due to their massive transaction volumes.

For most businesses that don’t operate on that scale, the interchange rate will be the same standardized rate applied across the board. This knowledge is empowering because it allows you to evaluate processors based on their transparency and the honesty of their fee structures rather than empty promises of discounted interchange rates.

Interchange Fees vs. Processing Fees: What is the Difference?

Interchange fees and processing fees are both essential components of the costs associated with electronic payment transactions, but they serve different purposes and are levied by different entities.

While interchange fees are determined and imposed by payment networks such as Visa, Mastercard, and American Express, these fees help cover the costs of processing transactions, mitigating risks, and supporting the services provided by card issuers.

On the other hand, processing fees are charged by the processors who manage the technical aspects of processing transactions. These fees cover the costs associated with transaction handling, authorization, and data transmission, ensuring that each payment is processed smoothly and securely.

What is Interchange++?

Interchange++ pricing is a pricing model used in payment processing that offers a high degree of transparency by providing detailed breakdowns of the costs associated with each transaction. This model includes:

• Interchange Fee: The fee set by the card networks and paid to the card-issuing bank.
• Card Scheme Fee: The fee charged by card networks like Visa or Mastercard.
• Processing Fee: The fee the payment processor charges for handling the transaction.

Large merchants often prefer interchange++ pricing because it allows them to see exactly what they are being charged for each transaction. For instance, if a merchant notices that many of their customers use debit cards, which incur lower interchange fees than credit cards, the merchant might adjust their marketing strategies to encourage using debit cards. This strategic flexibility is a key advantage of the interchange++ pricing model, enabling merchants to optimize their payment methods and reduce costs.

Interchange++ vs. Blended Pricing: What is the Difference?

Interchange++ (or Interchange Plus Plus) and Blended are two of the most popular pricing models for card transactions, differing primarily in terms of transparency.

Interchange++ offers a transparent breakdown of payment card costs, including the acquirer markup, card scheme fee, and interchange fee. This model ensures that merchants only pay the actual interchange fee charged by the card issuer, which can vary based on several factors and may sometimes be lower than a fixed rate.

On the other hand, Blended pricing consolidates all costs into a single charge that includes an average processing cost plus a fixed markup. This model applies the same markup to every transaction and does not disclose the breakdown of costs, making it simpler but less transparent. Additionally, there is no assurance that any savings from lower interchange fees will be passed on to the merchant in the Blended model.

How Can You Keep Interchange Rates Down?

While you cannot negotiate lower interchange rates for your business, you can keep those rates down if you know what you can do here. Here are a few things you can do to keep your interchange rates down:

• Complete as many chip or magstripe transactions as possible to reduce the amount of CNP transactions you complete. Many merchant account providers can supply useful POS terminals that will help you read these cards in moments.
• If you need to accept a CNP transaction, use an address verification service (AVS). The AVS will compare the address on a card with the address for the order, reducing the risk of fraud.
• Settle your terminal or POS daily to help you withdraw funds and avoid possible downgrades at your business. If you process more deals, you may get lower rates.
• Be accurate when listing tips, invoice numbers, tax amounts, and other factors when settling your account.
• Review your billing descriptor and the industry in which your business is listed to ensure it is accurate. You might spend more on interchange fees if you’re in an inaccurate industry where you might spend extra on something. You can submit a report to a network correcting your industry code if necessary.

The interchange rates you’ll find on the credit card market can be significant. Be aware of how these rates will influence what you will spend when processing credit card transactions. Anything too high might harm your cash flow, but you can keep your rates down if you handle everything right.

Conclusion

Interchange rates are pivotal in the credit card transaction process, impacting both merchants and consumers. These rates, set by card networks like Visa and Mastercard, encompass various factors such as handling costs, fraud prevention, and risk mitigation. While merchants are responsible for paying interchange fees, they indirectly affect consumers through pricing structures. Understanding the dynamics of interchange rates is essential for businesses to optimize their payment processing strategies.

Despite the inability to negotiate interchange rates, merchants can implement measures to mitigate costs, such as prioritizing chip or magstripe transactions, utilizing Address Verification Services, and ensuring accurate billing information. Additionally, awareness of factors influencing interchange rates, such as card type, transaction method, and industry classification, empowers businesses to make informed decisions.

By grasping the intricacies of interchange rates and employing strategic approaches, businesses can effectively manage transaction expenses and enhance financial efficiency in the competitive landscape of electronic payments.

Frequently Asked Questions