How Interchange Rates affect your business

I want to take this opportunity to give merchants a more clear understanding of what Interchange Rates are and how they ultimately affect what they pay for accepting credit cards. So many times when I bring up Interchange Rates to a business owner, I get a blank stare like a deer in headlights. Their merchant processing provider has never taken the time to educate them which is good for the processor, bad for the merchant. So, let me see if I can clear things up a bit.

I have seen many articles written over the years saying that “interchange should be banned” or that “interchange fees” are excessive or many other negative spins on this topic. Now, I’m not saying that I’m here to defend their levels or the necessity of these fees. The purpose of this article is simply to bring some clarity to what they are and how they figure into your pricing as a business expense.

I’ve seen it sad that Interchange fees are a “hidden tax” on consumers. Well, this is a falsehood since they are neither hidden, nor are they a tax. In fact, it’s not the consumers that pay these fees, it’s the merchants they do business with. To address the misconception that they are hidden is simply untrue. Interchange Rates are publicly disclosed on both Visa and MasterCard’s websites. Simply do a search for “Visa Interchange Rates” or “MasterCard Interchange Rates” and you’ll see for yourself. They are there but, understanding them completely is another thing that takes time and effort. And again, it’s not a “tax” paid by consumers. The cost is totally absorbed by merchants. Let me explain the process of paying with a credit card like this:

When a credit card is presented for payment of goods or services, the merchant swipes the creditcard through their credit card processing terminal and here’s what happens next….all in a matter of seconds:

The transaction is electronically routed through their credit card processorThe credit card processor electronically routes it through the network (Visa or MasterCard) and the network earns an Access Fee (Visa @.0925% and MasterCard @.110%).The network then electronically routes it through the card issuing bank for approval or denial and this issuing bank earns the Interchange Rate (there are currently well over 200 different interchange rates based on the card or transaction type)Then the whole process reversing from the issuing bank, through the network, back through the merchant services provider, and finally, back to the merchant’s terminal with the approval. The processor charges the merchant a Discount Rate for providing the service which shows up on the merchant statement in various formats each month. And, typically at the end of the month, the processor debits all the fees from the merchants bank. The difference between the Discount Rate and the Interchange Rates and assessments is what the processor earns

Well, I guess that’s enough for you to chew on right now. There are other issues relative to Interchange that will be the subject of future articles and also on my blog. I hope this article has helped you to get a better understanding of the system and where all the fees come from and where they go. Stop being overcharged by your current payment processor….Contact our low rate merchant credit card processing company today to learn more about Interchange Plus and other topics related to payment processing for small businesses.