What is Credit Card Interchange and How Does it Work?

Interchange-plus pricing is an alternative to fixed-rate pricing available upon request to credit card merchants.  It involves passing through to the merchant the actual costs charged by the credit card companies.  In the long run, it generally offers the lowest pricing for high-volume merchants; however, because pricing varies based upon numerous factors, some individual transactions may be more expensive, so it is not always recommended for low-volume merchants who prefer predictability in pricing.

What are interchange fees?

Interchange is a direct fee, usually in the 1%-2% range, that is charged directly by the credit card companies (e.g., Visa, MasterCard, American Express, or Discover) in order to process transactions. This fee is public, published by the credit card companies, and subject to change–and it does change regularly. It is based on a very complex pricing structure, which takes into consideration the type of credit card, its brand, the region and jurisdiction in which the transfer is made, and the type of the transaction (in-store, phone order, online, etc.).  As a result, the fees can vary widely, and are often difficult or impossible to predict in advance, making it hard for a merchant to know how much they will receive in any given individual transaction.  That is why these fees are more practical only for large-volume merchants who can average the interchange fees across many customers, without having to worry about their profit margin on any one particular transaction.

What is the “plus” part of interchange-plus pricing?

Your payment processor will add a fixed percentage (typically significantly less than one percent of each transaction) on top of the Interchange rate, which is passed through at the processor’s cost.  This additional percentage is used to cover various costs, including overhead, customer service, and chargeback risk (i.e., the risk that one of your customers will reverse a charge, and the processor will be unable to recoup the charge from you, leaving the processor responsible for paying that expense).  When a processor offers fixed-rate pricing, they bear this risk instead, and, in fact, it is possible for a processor that charges fixed-rate pricing to lose money on an individual transaction.  This is because the processor is always responsible for paying the interchange rates, regardless of what the merchant is charged.  However, because processors handle very large numbers of transactions (by combining the total transactions of many different merchants), they are able to make sure that they don’t lose money on the average transaction, over time.  It does involve some risk, of course, but managing risk is the core function of what a credit card payment processor does!

For more information on interchange-plus pricing or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.

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