From Wikipedia: Interchange fee 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, which is often referred to as a discount rate, an add-on rate, or passthru.
For cash withdrawal transactions at ATM's, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).
These fees are set by the credit card associations, and are by far the largest component of the various fees that banks deduct from merchants' credit card sales, representing 70% to 90% of these fees. Interchange fees have a complex pricing structure, which is based on the card brand, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, phone order). Further complicating the rates schedules, interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.
Did You Know? There are over 300 interchange rates charged by Visa, MasterCard, and Discover.
Also, there are three rate classes - Qualified, Mid-Qualified, Non-Qualified
To add more confusion there are three methods of pricing - 3 Tier/4Tier, ERR, Interchange Plus
Most merchants ask "what is my rate?"
The right question is "how is my account priced?"
Rates Are Deceiving The number of interchange "categories" and distinctions between them is mind-boggling but only a few are likely to concern you. Typically, your MSP will set up your account with a "discount rate" (aka qualified/base rate). Beware of "promotional rates" that advertise a very low qualified rate. What they won't tell you is your "non-qualified" rate can be as high as 5% (I saw a merchant recently who had a non-qualified rate of 5.46%)! The average percentage of qualified transactions for a merchant is about 33%. Here's an example that illustrates this point:
Tiered vs Interchange Plus Pricing Example
- Monthly Sales = $30,000
- Promotional rates as low as 1.59% (this is your Qualified rate - on average only 33% of transactions are Qualified)
- The Mid-Qualified and Non-Qualified Rates as high as 4.00%
Tiered monthly cost = $959, Interchange monthly cost = $660
Annual savings is $3588
What is Interchange Plus?
To reiterate, Interchange is the cost direct from Visa, MasterCard, and Discover. The "plus" is simply our markup over Interchange.
What merchant account pricing model do the major national retailers have?... Interchange Plus
Now we can offer small business owners, like yourself, the same great Interchange plus pricing. Literally, it can save you thousands of dollars every year.
Benefits of Interchange Plus Two costly problems arise when you are priced on a tiered-structure with a qualified, mid-qualified, and non-qualified rate. First, it doesn't reflect the lower discount rate you should receive, for example, when a customer pays with a debit card. Second, when a transaction "downgrades" you're probably paying a huge mark-up from the interchange cost to your provider.
Here's an actual example that illustrates these benefits:
- Business Type: Yoga Retreat Center
- Tiered-pricing structure with qualified, mid-qual, and non-qual rates
- 40% of their transactions were “non-qualified” (w/huge markups)
- No rebate given on debit card transactions b/c of tiered-pricing
- Effective rate of 3.41% (total fees / transaction amount)
- Base rate of 2.39%
- Non-Qual rate of 3.14%
Results: with Interchange Plus Pricing the retreat ended up saving $1,625 per month or $19,500 a year!
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What is Interchange?
Interchange is the actual cost charged to all Merchant Service Providers (MSP) by Visa, MasterCard, and Discover to process a credit card transaction. These rates vary by brand and type of card (and also by the way the transaction is handled).
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