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What are credit card interchange fees and why are they important?

Posted by Alex Neir on Tue, August 03, 2010 @ 03:06 PM

What are credit card interchange fees?

This is a very good question and is important to understand if your business accepts credit cards or would like to. When thinking about interchange fees, it helps to think of it as a toll way.

Interchange Fees
Interchange is, in effect, a toll road that must be driven in order to access the card holders (your customer) account information at the card issuing bank. The interchange fee is the toll for accessing that information.

The interchange fee is paid by you (the merchant) to the card issuing bank. The issuing bank collects the fee to recoup the cost associated with enabling consumers with the ability to pay with a piece of plastic.

Another item to be aware of is the assessment fee. The assessment fee is charged directly by Visa and MasterCard to cover their operating costs. The Visa assessment fee is currently .0925% and the MasterCard assessment fee is currently .0950%. Both Visa and MasterCard regularity adjust these fees and typically do so in April and October. The assessment fee is always applied as a percentage the total purchase price of the product or service sold.

What are the current credit card interchange fees?
There are currently 315 different levels of interchange fees. The reason for so many different levels and fees is due to a few factors.

  1. The industry of the merchant. The industry of the merchant will be one of the initial factors considered when the interchange fee is applied. Some of the industry specifications include supermarkets, restaurants, hotels, passenger transport, etc.
  2. The means in which the card is transacted. The means in which the card is transacted refers to whether the card is present at the time of the transaction and swiped through a terminal or the card is keyed into the terminal for processing.
  3. The type of card that is transacted. The type of card that is transacted refers to the type a card presented by the customer. Typical card types include debit cards, check cards, reward cards, international cards and corporate cards.

What are some ways in which to reduce the interchange fees that are charged?

  1. Swipe the card through a terminal rather than key the card data into the terminal.
  2. Use an address verification service (AVS) when transactions are keyed into the terminal. This service helps to reduce fraud.
  3. Run your batch process daily.

Through adhering to these three scenarios you give yourself the best chance at qualifying for the lowest interchange fees. The goal is to avoid being downgraded. You will downgrade (pay a higher interchange fee) when criteria for the lower fee are not met. Every time the transaction moves further away from the required criteria, more risk is associated with the transaction and it will cost more to transact.

Interchange fees for a retail purchase of $100


Example

Visa Interchange Rates

Interchange Charged to You

The card is swiped through a terminal; the transactions are settled an a daily basis

1.68 % + $0.10

$1.78

Transaction is keyed into the terminal, AVS is used; All transactions are settled on a daily basis

1.85 %+ $0.10

$1.95

Transaction is keyed into the terminal, AVS is not used; All transactions are settled on a daily basis

2.39 % + $0.10

$2.49

The card is swiped through a terminal; The transactions are settled on a monthly basis

2.80 % + $0.10

$2.90

I hope this article is helps you and your business understand credit card interchange fees. If you would like additional guidance in avoiding mistakes when opening a merchant account please download our whitepaper.

Tags: Interchange Fees, Credit Card Processing Fees, Payment Processing