What are Interchange Fees?

What are Interchange fees?

Interchange fees are the single largest component of your discount rate pricing. [Recent Interchange Updates]

Interchange fees paid by merchant-acquiring banks to cardholder-issuing banks are in place to cover the cost to convert a charge on a cardholder's card to a cash deposit at the merchant business checking account, including cost factors like billing services, credit and fraud risk, profit, etc.

All payment systems utilize Interchange as a key driving component in forging markets. Notice all card products have some type of Interchange: Discover, American Express, Diners, Debit, and even smart cards. Interchange fees are particularly fundamental with charge cards whose balances are paid in full each month.

Interchange is important to a payment system because it facilitates growth. It helps to overcome the which comes first question "the chicken or the egg". Without cardholders, merchants would have no incentive to accept credit cards and without merchants, cardholders would not carry cards.

The network effects of adding cardholders and merchants into the payment system increase the value of the system. The more places that accept credit cards, the more valuable it becomes to carry a card.

An Interchange rate payable when the card is used that is high enough for the card issuing bank to make a profit provides financial incentives for banks to market, issue, and accept credit risk of cardholders.

To sign up merchants, the system has to show enough value in bringing in new customers with a credit limit to make immediate purchases so the retailer no longer has to extend store credit or take credit risk or payment over time. By paying merchants immediately and eliminating the cost of billing and collections, merchants are willing to pay the Interchange fee charged by the issuing bank.

The trends on Interchange fee changes are:

1. Volume tiered pricing (example: lower Interchange rates for merchants processing millions of transactions)

2. SIC code and transaction size qualifications (example: the Small Ticket category under $15 for select MCC/SIC like 5814 QSR)

3. Registration requirements for merchants to qualify for reduced fee programs (example: Service Industries category)

4. Compliance requirements for merchants to qualify for reduced fee programs (example: reduction by using Verified by Visa)

5. Interchange will continue to Increase due to:

a) Pressures from other card issuing competitors who offer issuers higher Interchange income
b) Legal expenses and settlement costs
c) PCI DSS, Compliance with Patriot Act, Homeland Security, banking and payment system infrastructure protection mandates.

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How do you then expand markets and grow the system? By managing Interchange levels. For example, it was not too many years ago that personal checks (paper) dominated the grocery/supermarket industry. Today, through the use of special Interchange levels set at a reduced rate specifically for grocers, electronic card payments rule. Or take the example of business, corporate, and government purchasing cards. In the beginning, Interchange rates were set high to provide an incentive to card issuers to outfit business owners and their employees with credit cards to manage spending. Now with a market of business card cardholders, more businesses are accepting cards from other businesses for payment. This balance of Interchange rates is delicate - if Interchange is too high, merchants don’t sign up, and if it is too low, issuers don’t issue cards.

As you know, MasterCard (MC) and Visa are competing card companies and have different market share depending on card type. For example, banks can choose to issue a MC card product or a Visa product. You guessed it, this choice is in part made based on the Interchange levels and income to be made. Why not issue a MC if I can make more income each time one of my cardholders uses this card at a merchant? These Interchange pricing issues speak to the competitive pressures on market share.

What's the future of Interchange? Interchange is growing more complex each year. Technology advances have made it easier to implement and manage a wide array of specialized Interchange rates and fees by card type and merchant. New indicators built into the system will allow not just by industry segmentation, but merchant segmentation within an industry. Interchange based on ticket size is another popular concept. Smart card products are likely to have reduced Interchange to help pay for the billions in terminal infrastructure upgrades is another example.

Sophisticated merchants understand that the "rate as low as " approach to sales is more in place to manage sales rep turnover at the merchant account provider than it is for their benefit. Vantage is here to provide a clear view of Interchange and help you structure your billing in the most beneficial and cost effective way.

If you want the best merchant rates and are not too concerned with billing complexity, then let us show you a merchant services quote on an Interchange plus pricing plan.

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What are Interchange fees?

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