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  • Writer's pictureDane Young - Credit Card Guy

August 2022 Newsletter Understanding Interchange



This subject could easily be called the most confusing subject in the Credit Card Processing Industry. The intent of this article is to simplify it as much as possible while still providing a good explanation of what interchange actually is and how it plays a role in the pricing you pay as a merchant to accept credit cards.

Put simply, interchange is a fee that is determined by Visa, MasterCard, Discover and American Express. These entities are also known as the Card Associations. The Card Associations collect interchange through the merchant's credit card processing company. Interchange fees are the same for every processing company and apply equally to every business, no matter how large or small.



To comprehend interchange, you need to understand what an issuing bank is. Simply put an issuing bank is a bank that issues a credit card to an individual. You may have a card that got through, as an example, Chase Bank. In that case, Chase Bank is the issuing bank for your credit card.

When credit cards first came on the scene back in the late 1950's, the issuing banks made all of their income from charging cardholders interest on their purchases. As more cards were being used, credit card purchasing volume increased very quickly. Fraud also increased very quickly as well. The issuing banks decided that they needed to start collecting fees from the merchants, not just to cover the logistics involved but also to cover cost for fraud. Hence started interchange.

In the beginning most banks charged merchants between 3.00% and 4.00% to accept a credit card. In order to slow down fraud, the Associations mailed a weekly fraud booklet to merchants. This booklet contained a list of credit card numbers that were fraudulent. If a transaction was over $75, the merchants were required to look in the book to see if the card was in there. This system was certainly not fail-proof and fraud continued to increase.

In the early 1980's a process was started that was called electronic draft capture. This process allowed the Associations to put their fraudulent cards in a computer database that was accessed by telephone lines using a credit card terminal. This revolutionized the credit card industry. This also helped reduce fraud greatly. Because of the reduction in fraud, issuing banks lowered the cost to process cards and created new interchange rates.



As the industry grew, many different card types were introduced. As an example, Rewards Cards offered airline miles and cash back. These cards were more costly for the issuing bank. Because of that the banks passed higher fees to the merchants for accepting these cards. Debit cards deduct the funds immediately from the cardholders checking account. The fraud associated with these cards is actually much less than extending credit to a cardholder, so the fees for these cards was reduced to the lowest interchange rate. Then came Business Cards, Fleet Cards, Purchasing Cards. There are also cards issued specifically for Government use. Now there are Chip Cards, Apple Pay, Google Pay and others. Each type of card carries differing risk and costs. The risk and the cost of features offered drives the different interchange rates for each of these card types. The greater the risk or cost, the higher the interchange fee.

In addition to the card types, the Associations created different interchange categories for varying industry types. There is small ticket interchange for convenience stores and the fast-food industries. There are categories for travel, government use, very large tickets, etc. There are also categories for swiped transactions and keyed-in transactions. Rates are also different for ecommerce merchants and for non-profits. There are currently hundreds of interchange categories.

In the event you want to dig a little deeper into this subject, here are the links to Visa and MasterCard's Interchange websites.



Typically interchange, combined with multiple other Card Association fees are responsible for over 80% of the cost to a merchant to process credit cards. Because interchange drives the bulk of what you pay to process credit cards, it is important that you have a credit card processor that, first of all understands interchange and secondly knows how to help you get the lowest interchange rates. As an example, non-profits get lower interchange rates, but only if the processor has them set up correctly. Businesses that accept non-swipe payments need to be classified correctly to get the best interchange. So, as you can see, it definitely pays to have the right Merchant Services Consultant to help you get the right solution for your specific business needs.

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