Interchange Rates Are Not All Alike for Businesses

Many companies wrongly assume that they have little bargaining power when it comes to credit card processing rates they are forced to pay. Most companies incorrectly assume that the more volume that they do in credit card processing, the lower the rates they will be forced to pay. Although this is a factor, it is a very minimal factor in the total scope of credit card processing costs a business must pay to accept credit cards. In addition to transaction costs, gateway fees, communication costs and various other fees, the bulk of credit card processing costs is in Interchange Rates charged per transaction.

Interchange Rate is a term used in the payment card industry to describe a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using card networks such as Visa and MasterCard for purchases. In a credit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO (Independent Sales Organization), which is often referred to as a Discount Rate, an add-on rate, or pass-thru rate.

There are really four main factors that determine Interchange rates applicable to a given transaction:

* Merchant category—Both Visa and Mastercard identify merchants according to the line of business in which they are engaged. Interchange rates vary for different merchant categories. For example, because the supermarket industry tends to have very low profit margins, the networks set Interchange rates lower to encourage supermarkets to accept cards. Also, the method in which a merchant authorizes payments can affect the extent to which a card network’s system is used. Additionally, some merchant types may qualify for special incentive Interchange rates if a card network determines the merchant category has growth potential for card acceptance. For example, schools and utility providers receive lower Interchange rates to encourage them to accept cards.

* Type of card—Different Interchange rates apply to different types of cards. For example, both MasterCard and Visa have separate Interchange rates for general purpose consumer credit cards, reward credit cards, commercial credit cards (issued to businesses), and debit cards. The rates vary because the costs, risks, and revenues associated with these different card products vary for issuers; they also reflect the networks’ goal of providing incentives for both issuance and acceptance of cards. Reward cards or Business cards involve higher Interchange fees for a number of reasons.

* Merchant size (transaction volume)—Both MasterCard and Visa set lower Interchange rates for merchants in some categories that conduct high volumes of card transactions over their networks. For example, according to Visa’s default Interchange rates that were in effect as of October 2007, supermarkets that conducted a minimum of about 7 million Visa card transactions in calendar year 2006 qualified for lower rates than supermarkets that conducted fewer Visa transactions. This is not as big of a factor in pricing that most people assume.

* Transaction Type —Interchange rates differ greatly depending on how a card transaction is processed. For example, transactions that occur without a card being present, such as an over the phone transaction, carry a greater risk of fraud and higher Interchange rates apply to these transactions. Conversely, accepting a card through a card terminal, rather than key-entering the account number, provides more information to the issuing bank to verify the security of a transaction; therefore, swipe transactions are assessed a lower Interchange rate.

Based on the factors above and the fact that Visa and Mastercard both have literally thousands of different Interchange Rate combinations for every single transaction, it is extremely difficult for the average business owner to truly know if what they are paying to process credit cards is correct or the lowest rate possible. For example, it is the Independent Sales Organization (ISO), not Visa or Mastercard, that determine if the savings associated with special incentives to emerging markets will be reflected on the processing costs a business client pays. Many processors simply keep the resulting discount from Visa and Mastercard as profits for their own ISO rather than passing on to the customer. The client has often already agreed to a higher rate in their contract, so the processor is not obligated to pass on any savings from Visa or Mastercard that they may be eligible for. These lost savings opportunities and multiple other common situations in billing procedures can cost a company thousands of dollars.

 

Financial Mitigation Services knows and understands the credit card processing cost structure intimately. FMS clients receive the benefit of comparative cost data from thousands of similar businesses nationwide. Financial Mitigation Services has helped business clients across the country uncover millions of dollars in excess fees, errors and overcharges that they have been paying unnecessarily for credit card processing.

Call us today for a free analysis of your credit card processing costs. 1-800-797-5642

 

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