Interchange Basics When Accepting Credit Cards

When I talk to a new business owner looking to accept credit cards, one of the first questions is naturally, “How much does it cost to take credit cards?”  However, if you talk to a business owner that already accepts credit cards, if he’s completely honest he’d probably answer, “I have no idea how much it is I’m paying or how they come up with that bill every month!”  I’ll do my best in simplifying a very complex topic so new and old owners alike can feel more comfortable in assessing the costs.

When it comes to paying merchant services fees, businesses are either paying way too much for a very simplified billing structure,(ie. Square) or may or may not be getting a great rate with a more complex billing plan.  What makes this even more confusing is that there is no uniform billing structure in the merchant payment processing of bank cards.  Each processor has its own format and even within each processor, there are numerous different fees that may or may not be charged as well as various pricing methods.  I often wonder if many of the processors purposely utilize confusing billing methods to keep the merchants in the dark.

I do know that a big factor in the complexity of merchant statements is the wholesale cost to the merchant provider in the form of interchange.  Interchange is the underlying consistent cost to every processor that ultimately goes to pay the banks that issue the credit cards.  Every processor is assessed the same buy rates on the cards they process.  This cost, as well as others, must be passed on to the merchant.  It is up to the processor how they pass the costs on, mark them up and bill the merchant.

So often I get asked, “Okay, how much is interchange?”  And that’s where I take a deep breath, because it’s not an easy answer.  Interchange fees aren’t just one rate.   Anyone can go to the Visa and Mastercard sites and see the rate structure for themselves.  Click the links here for Visa and MasterCard.  As of this writing, the April 2013 structure is in effect, but category changes, rates change and additions are added approximately every April and October.  You’ll notice that Visa’s rate sheet is ten pages with about 100 different categories.  Mastercard will just make your head spin with 131 pages and hundreds of categories!   Basically the various categories have different fees consisting of a percentage and a transaction fee.  These rates are based upon different variables including the type of card, industry type accepting the card, how the card was processed, and even the issuing bank.

So the next question I often get is, “Well, can you give me a ballpark of what interchange is?  Maybe an average would be helpful”.  Unfortunately, even that is going to fluctuate greatly based upon the business model, average ticket, card mix and other factors.  It will even vary from month to month for each merchant.  I’m very reluctant to quote any kind of estimates, since I can’t predict what type of cards will be accepted.  However, by looking at the charts, interchange can range from .05% and 22 cents for regulated check cards all the way up to 3.25% and 10 cents for some Mastercard credit cards.

Interchange FlowAlthough interchange is the largest set cost to the processor, there are additional processing costs.  Dues and Assessments, NABU fees, APF Fees, Cross Border Fees, FANF and so on are all paid to the card brands.  For more detail, a quick google search should leave you scratching your head.  For now, let’s just say Visa, Mastercard and Discover will get paid roughly .10% and about 2 cents per transaction on volume and a Visa Fixed Acquirer Network Fee that starts at $2.00 a month per merchant.

Processors also will have a cost to process through the networks.  These are known as authorization fees or transaction fees.  All of these fees are before operational costs, marketing costs, risk and loss costs etc.  All must be covered and somehow a profit must be made as well.  Depending on the rate structure a merchant has, he may not see all of these fees clearly, but the payment processor is charging, in some manner, enough to cover their costs and also include a margin for profit.

As you can see, even as simplified as I can make this, there is a high level of complexity with Visa/Mastercard/Discover processing costs.  As a merchant, you don’t necessarily have to be an expert at interchange tables, but you’d better have a relationship with a trusted payment card advisor that will help keep the end costs reasonable.

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  1. […] beyond the rate!  As explained in this article, all credit card processors have the same cost with interchange and must make a modest profit beyond that.  How a provider achieves that mark-up can sometimes be […]

  2. […] Rate Guaranteed!”  (And yes, I offer that too, just like all the rest.  If you understand interchange rates, you realize it’s all a marketing ploy.)  What I haven’t seen by other bank card companies is […]

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