Accepting Credit Cards – Back to Basics: Interchange

January 9, 2015

All payment card transactions involve an interchange fee. You may have heard the term, but it’s possible that you’re not clear about exactly what it is and why it's charged. The overall process is complex, but we can offer a simplified explanation.

Q: What exactly is interchange?
A: It is the process in which the money involved in a credit-card transaction moves between the customer, the merchant, the financial institution that issued the card, and the card payment processor.

Q: What is an interchange fee?
A: It is the fee charged by the card-issuing bank to the payment processor for each transaction. The interchange amount is the same for all payment processors. Frequently, the interchange fee is bundled into the total fees merchants pay for transaction processing.

Q: How much is it?
A: The interchange fee varies according to the type of transaction and other aspects, like whether the card was swiped or the number was manually keyed in by the merchant. It usually consists of a small flat charge plus a percentage of the value of the transaction.

Q: Who sets the fee?
A: Usually the credit card associations like Visa, Discover, or MasterCard.

Q: Who pays it?
A: Initially, the payment processor.

Q: What does it pay for?
A: Interchange covers the cost to the card issuer of performing the transaction, providing security, and other important services.

Q: How does it work?
A: Here is the basic process:

  1. The customer presents a card for payment to the merchant.
  2. The card details are transmitted to the card issuer for authorization.
  3. The issuer approves the transaction.
  4. The issuer pays the money to the card processor, minus the interchange fee.
  5. The processor pays the merchant, minus a fee for the transaction. The transaction charge (sometimes called the "discount fee") recoups the interchange fee the processor already paid to the issuer plus a processing fee.

The vast majority of the fees paid by merchants go back to the card-issuing banks as interchange. The card brands also add fees termed dues and assessments, on average .11% of the transaction. Once the banks receive interchange and the card brands (Visa, Discover, MasterCard, etc.) receive dues and assessments, the processor receives the remaining amount for their role in processing the transactions.

While interchange doesn’t vary between processors, not all interchange fees are equal. The interchange rate assessed for each transaction depends upon the type of card the customer is using (credit, debit, rewards, etc.) and how that transaction is presented (card present or card not present). Because the pricing structure is so complex, processors often simplify billing by dividing the rates into levels or tiers.

  • Qualified — Sometimes misleadingly called the discount rate, this is the basic fee charged to the merchant for all standard transactions.
  • Mid-qualified — This rate is applied to transactions in which some data is not captured automatically or at all. For instance, if the card information is manually entered instead of swiped, one should be prompted by the terminal for the cardholder’s zip code. The zip code entered must register a match to avoid being assessed at the higher, non-qualified rate. An exception would be a swiped rewards card. Even though all the data has been captured, the transaction will be assessed at the mid-qualified rate.
  • Non-qualified — This highest rate is applied to corporate and high-value rewards cards, or when qualifying information like the zip code is not collected.

While interchange rates remain standardized, the category a transaction is placed into can vary. A processor should work with you to establish the best pricing model for your business based on the types of cards you accept most often.  

Contributed by Veracity Payment Solutions. Through the Michigan Chamber’s partnership with Veracity, you have the opportunity to accept credit, debit and other electronically based transactions at just 0.2% above cost. Email Veracity or call them at 866-944-0055 to learn more.