The Ultimate Guide to Interchange (August 2019)

If you are unfamiliar with the payments processing industry, you likely don’t know much about its problems either. It’s riddled with hidden fees, convoluted contracts, and shady salespeople, all of which cause unnecessary headaches for merchants. The good news? A savvy merchant can avoid these problems by choosing a transparent processor and negotiating well. There is one constant in the processing industry, however, that is inescapable: interchange. As a merchant, you will always have to pay interchange, no matter the terms of the contract you agree to with your processor. It's terribly complex with many facets to understand, but allow us to break it down for you as simply as we can:

What is Interchange?

Here at SwipeSum, we want to help all merchants get a grasp on interchange as best we can. It’s one of the most-asked questions we get from our customers, but unfortunately, it’s not easy to give a concise answer. Visa, Mastercard, Discover, and American Express all have their own explanations. Fair warning though, these explanations are wordy and the charts displaying interchange rates contain an intimidating amount of numbers. The best explanation of interchange that we can offer is this: interchange is the wholesale cost of conducting a credit or debit card transaction.

Why Do Merchants Have To Pay Interchange Fees?

For a merchant, it’s much more important to understand why you pay interchange fees rather than understanding exactly what interchange means. It's understandable that a merchant would be upset to see a portion of every sale paid back to the bank, just for accepting credit card payments. But once you understand the reason for these fees, we guarantee that you’ll be more willing to accept that little revenue loss.To understand the purpose of these fees and what they cover, it's beneficial to first understand what happens in every credit card transaction, the parties involved, and how they interact. They are the cardholder, the merchant, the cardholder’s bank (also referred to as the issuing bank), and the merchant’s bank (or acquiring bank). Let’s say you own an electronics store and a customer comes in and purchases a $100 set of speakers using a credit card. When the customer swipes their card, their bank pays your bank the money for the speakers. Your bank then passes the money onto you minus a merchant discount fee (which would typically be around $2 on a $100 purchase), meaning you would only receive a portion of the revenue from that sale. This fee is charged to you for accepting credit card payments.At this point, you and the customer are out of the equation; you have your money and the customer has their speakers. But, the two banks are still at work. From here, your bank passes back a portion of this merchant discount fee to the customer’s bank. This portion of the fee is what is known as interchange.So what is the point of interchange and why are there fees associated with it? Well, there are a number of reasons. First, when the customer’s bank issues them a credit or debit card, they are allowing them to conduct card transactions, thus driving business to all merchants. This is due to the convenience of using a card rather than making sure to have the right amount of cash on hand or writing a check.Second, paying interchange rates enables you to become a part of the network your customer’s cards already work in (Visa, Mastercard, etc.). This is actually a big money saver, because if you wanted to accept card payments otherwise, you would wave to start your own private card label and create the network yourself. The third reason for interchange fees is that your business will get paid fast on credit card purchases, usually on the same day as the purchase. This is great for your business, but not so much for your customer’s bank because while they pay your bank (and in turn your business) immediately, security and fraud detection measures delay their payments such that they might not get reimbursed by the customer for up to 30 days. This is a lot to cover, but these are the main reasons that merchants pay interchange fees for accepting credit cards. While it may seem like a lot to pay these fees for each and every transaction, the benefits greatly outweigh the costs. By accepting credit cards, you are driving more traffic to your business, avoiding being forced to start your own private card label by joining the card networks, and getting paid fast while your customer’s bank may have to wait to get reimbursed. Because of all these benefits, it makes sense as to why there is a fee attached.

So, How Much Does It Cost?

As is the theme with interchange, there is no concise answer to this question. Each card brand determines their own interchange rates and they are usually updated on a quarterly basis. The three main factors that determine interchange rates are merchant type, acceptance environment, and cardholder’s choice of payment card. Different combinations of these three factors produce different levels of risk for the card issuing bank, and interchange rates are adjusted accordingly. For example, a transaction conducted in-store with a debit card would incur a smaller interchange rate than a transaction conducted online with a credit card because there is less general risk for the card issuing bank. Simply put: There is no universal interchange fee. There are many determinants that affect the interchange rate that a merchant must pay, and this rate is different for every card swipe. Interchange charts provided by the major card networks give you access to these rates, but knowing them by heart isn’t going to be very helpful.As you’ve probably noticed, interchange is a complicated subject and no one becomes an expert overnight. However, as a business owner, it would behoove you to educate yourself so you can better understand interchange fees and why you are paying them. At SwipeSum, we want to help you in that endeavor. It's our hope that this article gives you a better understanding of interchange and points you in the right direction for your own further research.Of course, if you have any further questions about interchange, do not hesitate to contact us at save@swipesum.com.