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 feel to manage the payment system.
But what is an interchange rate, and how can it vary by each network? Let’s look at how an interchange rate works, including how much it can be worth and who will receive the money.
The General Concept
An interchange rate is a charge 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.
Visa, MasterCard, and other card networks will establish interchange fees. They will produce different fees and rates for various card types.
Who Gets the Interchange Rate?
The merchant will pay the interchange fee for each transaction. The fee then goes to the bank that issued the buyer’s card. A couple of other processing and routing networks will also collect parts of the interchange fee. The credit card networks will collect a very small percentage of each transaction through assessment fees that go alongside the interchange charges.
How Much Is An Interchange Rate?
An interchange rate will vary, but the general 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 an additional 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 to go alongside the interchange rate the retailer is spending for covering the deal.
Some networks may also charge additional fees to process their cards. Visa and MasterCard both process assessment fees of about 0.11% for each transaction these networks process.
What Influences the Value of the Rate?
All credit cards will have different interchange rates. You’ll notice a few things that will influence how these rates will work:
- 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. You could spend a few tenths of a percentage point more on these due to the added risk.
- 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 flyer miles, cashback offers, and points people can use for various products or services.
- 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.
- Some low-value transactions may come with lower interchange rates.
Each network will have a full assortment of rates. They offer dozens of cards with different needs, including ones for business purposes, cards for first-time users, and even for college students.
Are Certain Card Networks More Expensive?
The interchange rates will also vary by each card network. 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 Amex runs a closed system. Amex operates as 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 there’s no guarantee that will happen for your system.
Can You Negotiate Interchange Rates?
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.
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.
- Use an Address Verification Service if you need to accept a CNP transaction. 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 setup each day to help you get your funds out and to avoid possible downgrades at your business. You may get lower rates if you process more deals.
- Be accurate when listing tips, invoice numbers, tax amounts, and other factors when settling your account.
- Review your billing descriptor and the industry your business is listed in 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.