As a customer or a business person, you only see the surface level of credit card transactions. The customer swipes a card and the product or service gets paid for. What we don’t see is the intricate exchanges involved. The money starts at the customer’s bank account, passes through a payment processor, and ends up in the seller’s bank account.
The customer’s account is called the issuing bank, because it funds the purchase. The seller’s account is called the acquiring bank, because it receives cash for the purchase. And like all bank transactions, both these accounts accrue charges.
These rates are called interchange fees, and you see them on your card statement as ‘credit card fees.’ If you’re paying for a product or service, the buyer’s bank (or issuing bank) deducts a fee. When the money reaches the seller’s account, the seller’s bank (or acquiring bank) needs to recover that charge, so they also deduct a smaller amount from the seller.
Issuing banks and acquiring banks
The small ‘recovery charge’ that the seller’s bank deducts isn’t part of the interchange fee. It’s actually called a discount rate. This means when you buy something, it’s the acquiring bank that pays interchange fees, because the cash is deducted from the seller’s bank, and that deduction is passed down the seller. The seller receives the cash minus interchange fees.
On the other hand, if the card is used to draw cash from another bank’s ATM, then the acquiring bank deducts money from the issuing bank. This is why it costs much less to withdraw cash from your local ATM than it does to withdraw from another bank’s ATM. The price difference is caused by interchange fees, and it’s used to maintain the ATM machine.
To make it a little clearer, when you buy a product or pay for a service, your bank deducts money from that payment. The interchange charges will appear on the seller’s statement. But when you withdraw cash, the bank that owns the ATM will deduct interchange fees, and they will appear on your card statement. While it’s convenient, it can get very expensive.
Interchange fees vs chargeback fees
In cases where the transaction has a problem and the transaction is reversed, then the seller pays the reversal charges. They will automatically be deducted from their seller account in the form of charge-back fees. Think of it as sort of like the cost of a bounced check, but in credit card form.
Chargebacks only occur when there’s a problem with the transaction. Chargeback fees are often a fixed amount, whereas interchange fees are a percentage of the cash being transacted. The usual figure for interchange fees in the US is 2%. In Europe, it’s far cheaper at 0.3%for credit cards and 0.2% for debit cards.
Many times, your merchant processor will be affected by interchange fees. That’s why some processors refuse to handle businesses or regions that draw high chargeback and interchange fees. For more information about credit card interchange fees or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.