subject: Merchant Interchange Rates - What Are They and Who Controls it? [print this page] Merchant Interchange Rates - What Are They and Who Controls it?
WHAT IS THIS MYSTERIOUS THING CALLED INTERCHANGE?
I once read that explaining interchange to your merchant is like explaining sex to your teenager - if you don't do it - someone else will!
The easiest way to think of interchange is to think of it as a wholesale pricing structure - like you experience in your own business. In the same way your suppliers give you proprietary pricing information outlining the costs you'll pay for goods and services - a credit card merchant acquirer pays a wholesale rate for each card they process... a.k.a. the Interchange Rate.
WHO CONTROLS INTERCHANGE?
Your acquirer (the company who you signed a contract with to process credit cards) has no control over interchange - the rates are determined 100% by Visa and Mastercard - and all acquirers pay the same rates. Where they differ is in their mark-up, and this is where the battle rages as merchant acquirers fall all over each other trying to get you to switch processors "for a lower rate".
You know what's interesting though? Visa and Mastercard actually publish interchange on their websites - so the rates we pay as your acquirer are out in the open for one and all to look at. But good luck understanding it!
It's a safe bet that 80% of the sales reps who contact you don't understand it themselves!
A LOOK AT THE CHARTS
Would you like to see for yourself? I thought so! Here are the links to the interchange pdf files you can download from the card companies websites - (if nothing else you can have fun with it the next time a rep comes in -- you can show it to them and ask them to explain it).
For Visa Interchange go here. For Mastercard here.
TIERS I, II and III:
One thing you'll notice on the charts is different card rates for different "tiers".
Here's what it means: Tiers 1,2 and 3 are the worlds largest retailers, who process over $50 million a month in credit cards. As you would expect, with that kind of volume they have a lower rate structure than the average small business merchant does.
WHO PAYS WHO:
Interchange is paid by the acquirer (your processing company) to the issuing bank. An issuing bank is the bank that issued the credit card. Some of the most well known credit card issuers include: Bank of America; Citi Bank; Capitol One; Chase; and Advanta.
In the instance of a chargeback the money paid is refunded to the acquirer by the issuer.
HOW IT WORKS:
Your customer walks in the door and you swipe his or her card through your terminal (or they click Agree to Pay on your site), and an electronic request goes from you to your acquirer, through them to the proper card network association (VISA or MC), and from the network to the issuing bank for authorization.
At that time the issuing bank checks the cardholders credit line and outstanding balance, and if there is available credit the issuer will authorize the transaction.
The card issuing bank then charges the acquirer an interchange fee which matches the interchange chart by industry, type of card, etc. - which gets charged to you, the merchant, by the acquirer, along with their mark up so they can make a profit. That, in a nutshell, is how it works!
But it's not over yet...!
HOW ACQUIRERS PROFIT
While I can certainly understand a merchant wanting to lose as little of their money as possible to pay for a credit card transaction -- they're not being taken advantage of by their acquirer -- any more than a merchant is taking advantage of THEIR customers. i.e., If you don't mark the price of your goods up higher than what you paid for them -- you won't be in business long. The math simply won't allow it.
Well it's no different for your acquirer. Everything they process has to be marked up above the fee paid to the issuer in order to make a profit. But that's not all. The following is a list of costs an acquirer has to factor in when setting their processing rates and fees.
THE ACQUIRERS COST
Before they can even break even, here are some of the costs your acquirer has to cover:
Interchange
Assessments (by Visa, MC, and Discover)
Base II Fees
Acquirer's Overhead Costs
Commissions and Residuals to a Sales Team
This is why it helps to remember that, just like you, your acquirer is in a very competitive industry. Meaning it has to be honest in the marketplace, or lose business to their competitors. And charging a fair rate is one way of doing so!
But you still need one thing more - service that excels! Because what good are low rates if you're working with a company that ignores you, doesn't answer phone calls, doesn't explain their fees, is dishonest, and cares only about getting your money?
