What Are Interchange Fees?

If you’ve heard the word “interchange” but haven’t been able to discover exactly what it is, then this article will help. Business owners may not have all the information that they need about all the aspects of credit card processing. They may feel bewildered about the jargon used by those in the business and may sometimes not feel confident enough to ask for clarification.

Some Interesting Facts About Interchange Fees

  • Interchange fees are dynamic and card associations regularly adjust the rates
  • They are set and regulated by card associations like Visa and MasterCard
  • Whatever the goods or services a business sells, the seller has to pay a variety of processing fees for every credit/debit card transaction. Of these, interchange fees charged by the card associations typically make up 90% of the total processing charges
  • Currently there is sometimes a lack of transparency in the charges, but reforms like the Durbin Amendment have begun to address this issue

What They Are

Interchange fees:

  • They are interbank fees paid between issuing and merchant banks to facilitate card payment transactions
  • Transaction fees are paid by the merchant bank account to the issuing bank when a customer uses the card
  • These fees are intended to cover handling/processing costs, bad debt, and fraud risk

The interchange fees range in the amount of about 2% per purchase, but interchange fees are dynamic and they’re based on the time value of money, costs of moving funds, current interest rates, risk involved, and other factors. However, to simplify matters, credit card companies usually calculate a flat rate which is added to a percentage of the total sales.

Factors that impact interchange fees:

  • Type of transaction: Card-not-present (CNP) transactions are considered more risky than point-of-sale (POS) transactions. Similarly, mail or telephone orders are also more vulnerable to fraud. Accordingly, these transactions are typically charged higher interchange fees
  • Type of card: Debit cards with PIN are considered to be low risk and the interchange fees are generally lower for them. Credit cards are charged higher, based on each card company’s rates. Cards with rewards are also liable to be charged higher fees
  • Nature of business/industry: These rates are based on size of the business and the type. For instance large merchants can receive better rates because of the high volumes transacted. However, certain businesses such as supermarkets, for example, may nevertheless have to pay more.

There are some controversies connected with interchange fees. In many countries, financial regulatory bodies have flagged the methodology used in determining rates as a process similar to price fixing. Merchants payment coalitions are litigating for more competitive and transparent systems.

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

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