Interchange is the most important component of the fees a merchant pays to accept credit cards. In fact, understanding interchange is vital in making certain that a merchant has the best possible rate structure for their business.
Interchange—also known as “bank reimbursement fee”—is the fee paid to the bank that issued the credit card to a merchant’s customer. This fee is paid each time the card is used. The amount is determined by a variety of factors.
For example, when a customer presents a ABC Bank Visa card to a merchant for payment, ABC Bank will receive a fee, or commission. The interchange fee paid to the issuing bank constitutes the overwhelming majority of the discount fees the merchant pays to process that transaction. The amount of interchange is the same for all credit card processors. In addition, both Visa and MasterCard assess a small additional fee, which is added to interchange, to fund their operating expenses.
Interchange fees are determined by a combination of factors, including:
- The merchant’s type of business
- Type of credit card (credit, debit, corporate, reward, etc.)
- How the transaction is processed.
- Timeliness of the merchant’s batch settlement.
Type of Business
Traditional retail businesses generally pay the lowest interchange fees, with restaurants and hotels paying slightly higher rates. Internet merchants, direct marketers and business to business merchants typically pay higher rates.
Type of Credit Card
The type of credit card used for purchase will have a direct impact on the interchange fee paid. Debit cards carry the lowest interchange fees, with commercial cards (business-issued, corporate, purchasing, etc.) carrying higher fees in many cases, specifically when these cards are key-entered or used at restaurants or hotels.
How the Transaction is Processed
One of the most significant factors in determining the interchange fee is the method used for actually processing the transaction. Swiped transactions, settled within 24 hours carry the lowest rate, while key-entered transactions carry higher rates. Multiple authorizations for a single transaction, voice authorizations, and/or failure to use address verification for key-entered transactions are among the factors that can cause higher discount rates to be assessed by the card issuer.
Timeliness of Batch Settlement
To receive the lowest possible rate structure, a merchant’s transactions must be settled daily. Delays in batch settlement will increase the discount fees assessed for the transactions.