Interchange is the basis for credit card processing cost; you can’t obtain a competitive credit card processing solution without an understanding of what it is and how processors leverage it to inflate processing expense.
In this article, I’m going to lay the groundwork by explaining what interchange is, and then I’ll show you how to apply this knowledge to find a competitive credit card processor.
The term interchange literally refers to the money transferred from an acquiring bank to an issuing bank when a bankcard transaction occurs. However, it’s more useful and practical to think of interchange as the wholesale cost of credit card processing on which all rates are based.
You don’t need to be an expert on interchange to find a competitive credit card processor, but you do need to understand the following key points.
- Interchange is the basis for credit card processing cost.
As I noted earlier, interchange refers to the rate and fee an acquiring bank pays an issuing bank for a bankcard transaction. For example, the interchange rate and fee for a swiped Visa credit card transaction is currently 1.51% plus $0.10. This means that the business’s acquiring bank will give a cardholder’s issuing bank 1.51% of the dollar amount of the transaction plus a flat $0.10 each time a customer’s traditional Visa credit card is swiped as payment. The acquiring bank isn’t going to pay interchange out of its own pocket, so it essentially passes the cost to the credit card processor, which in turn passes it to the business that ran the transaction.
- Interchange is public knowledge, and there are hundreds of different rates.
There’s really no guess work when it comes to credit card processing rates. The interchange fee schedules that list the rates that credit card processors pay banks are readily available online here: Visa Interchange Fees, MasterCard Interchange Fees If you take a look at the interchange fee schedules, you’ll notice hundreds of different rates between Visa and MasterCard. Interchange rates differ depending on several different variables: the type of card, brand of card, to whom or what a card is issued, acceptance method, information provided with a transaction, and more. The sheer number of interchange categories can be intimidating. However, take comfort in the fact that the rates will be the same for all processors regardless of how familiar you are with them.
- Interchange qualifies on a per-transaction basis.
Qualify is the word used to describe when a particular interchange rate applies, and interchange qualifies on a per-transaction basis. For example, a business may be charged a different interchange fee for three transactions all involving the same item at the same exact price depending on the details of each transaction, such as card type and acceptance method.
- Interchange rates are the same for all credit card processors.
Interchange rates are set by issuing banks, which are members of the Visa and MasterCard card associations. Since banks set and control interchange rates, the rates are exactly the same for all credit card processors. Many processors claim to be “direct processors” or “wholesale processors,” but this is simply a marketing tactic. In reality, every processor pays the same exact interchange rates.
- Interchange accounts for the majority of processing cost.
Credit card processing is comprised of three components of cost: interchange, assessments and markup. Barbara’s article over here explains all three components quite well, but for the purposes of this article, it’s important to note that interchange is the largest component of cost. With a competitive credit card processing account, interchange will account for around 60-75% of gross cost.
Now that you know the basics of interchange, here’s how to apply your new-found knowledge to find a competitive credit card processor.
- Pay as close to interchange as possible.
Now that you know interchange is the base cost of processing, your goal is to get the rate your business pays for each transaction as close to the interchange rate as possible. The most important variable in achieving this is separating interchange from the processor’s markup by securing the correct pricing model.
- Get the optimal pricing model.
Credit card processors use two general types of pricing models to charge businesses for credit card processing. The first and most common type is called bundled pricing, and the lesser known type is called interchange plus. Bundled pricing combines a processor’s markup with interchange, allowing the processor to conceal interchange and levy hidden surcharges. Interchange plus pricing separates a processor’s markup from interchange, which makes this type of pricing transparent and competitive.
- Compare processors’ markups.
Once you separate a processor’s markup from interchange, finding the most competitive processor is a simple matter of comparing markups. On interchange plus pricing, a processor’s markup will be shown as one fixed percentage and one fixed transaction fee. For example, 0.25% plus $0.15 would be a typical markup. These fees combined with any other fees such as monthly fees, annual fees, and so forth combine to make the processor’s markup. Comparing each processor’s markup and finding the lowest will ensure your business pays the lowest possible amount over interchange, which is what makes a competitive credit card processing solution.
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- Interchange: The Basis for Credit Card Processing Cost - 26 November, 2013