How Pricing Works

Understanding Interchange

Spend any amount of time learning about merchant services and you will encounter the term “interchange”. What is it? How does it work?

Put simply, interchange is the underlying cost of processing customer credit cards.

The Complex World of Credit Card Processing

Processing credit cards – it seems so simple, at least on the surface. However, that’s a very superficial understanding. It requires multiple entities, different technologies, different banks, credit card associations, and so much more. Every entity involved has a range of different charges it assesses in the process, whether we’re talking about card-issuing banks or payment gateways.

These fees are frequently bundled together into a single charge dubbed the “interchange” fee. There can be as many as 300 individual interchange fees lumped into a single amount depending on the situation and the entities involved.

What Do Interchange Fees Cover?

Interchange fees are assessed to cover a broad range of factors – authorization costs, fraud-related losses, and the bank cost of funds. For instance, they can be assessed on manual card entries to help cover the risk of fraudulent sales. They can also be assessed to help offset the costs of administering a rewards or “perks” program.

It’s all about recouping costs and hedging against risk. For that reason, debit cards usually have lower interchange rates than credit cards. Rewards cards usually have higher rates than standard credit cards. Swiped cards come with lower interchange rates than manual entries, and online sales incur higher interchange rates than in-person sales.

Calculating Interchange Fees

Credit card companies are responsible for setting interchange rates. Visa and MasterCard each set new rates in April and October. Discover, American Express, and other card issuers set their rates differently.

While the credit card companies set the rates, the fees are paid by every merchant bank or institution conducting a transaction with a cardholder who uses that company’s card. This applies equally from big box stores to eCommerce companies and everything in between.

In most cases, interchange fees are set as a percentage of the sale, plus a flat fee component. In some cases, the flat fee may be as much as .30 per transaction.

Interchange-Plus and the Importance of the Right MSP

At National Processing, we believe in transparency and accountability. We always represent you, the merchant, and work to support your ability to do business and serve your customers. We are always upfront about processing fees and costs, including interchange fees and their components. We are also happy to answer any questions you might have about the fees assessed and how they break down.

We also believe that it is important to consider interchange rates when accepting credit cards. After all, these fees come out of your bottom line. Understanding interchange rates and how they work can help ensure that you can build a strong, thriving business.

One way that we go to bat for our customers is the use of interchange-plus pricing. Instead of countless, unpredictable variations, you pay a constant, flat margin on top of the base interchange rate. With that knowledge, you can set your prices accurately, understand where you are making money, and benefit from a fair pricing model.

Other companies hide their profit from their customers. These firms round their pricing to barely cover the highest interchange rates, and then make extra money off low interchange cards, padding their bottom line at your expense.

At National Processing, we stand for clarity, understanding, transparency, and honest pricing. Contact us today to learn more.