Interchange Fees
A lot of attention is being paid to interchange fees as of late. Various retail groups are pushing Congress to reduce them, while Visa and MasterCard, and their member banks, are lobbying heavily in the opposite direction. It is likely that a new legislation will be passed sometime this year, although it is everyone’s guess exactly how it will regulate the interchange fees. A previous article in this blog shows how the interchange plus pricing compares to the tiered pricing model but perhaps a closer look at the interchange fees is needed.
The interchange represents by far the largest share of the total processing costs that merchants pay for accepting card payments. Various sources put its share at anywhere between 70% – 90%, but it is estimated that interchange fees made up about 75% of the total processing fees U.S. merchants paid in 2008. Both Visa and MasterCard publish their interchange rates annually and they are available for everyone to see. Discover and American Express do not use interchange, as they act as both an Issuer and Acquirer for transactions involving their cards.
Interchange is the fee that a processing bank (also known as an acquiring bank, an acquirer, or a processor) pays to a card issuing bank (the issuer) when a payment card (issued by the issuer) is used by a consumer to pay for a product or a service, provided by a merchant who has established a card payment processing relationship (merchant account) with the processing bank. The issuer pays the processing bank the transaction amount minus the interchange fee. The processor then pays the merchant the transaction amount, after subtracting both the interchange fee and its own card processing cost, thus bringing the transaction cycle to an end. It is important to understand that the interchange fee is established by the Card Associations (Visa and MasterCard) and collected solely by the issuer. The fees charged by the processing bank are established and collected by the processing bank, not by Visa and MasterCard. Even if interchange fees are regulated in one way or another, this will have no effect on what the processor charges.
Both Visa and MasterCard publish dozens of different interchange fees, varying by card type (regular consumer, rewards, commercial, purchasing, etc.) and transaction environment (card-present or card-not-present). All interchange fees, however, are comprised of a percentage of the transaction amount (for example 1.90%) plus a fixed fee (for example $0.10). Neither Visa nor MasterCard disclose the exact mechanisms of establishing these rates and we do not know many details. Typically, payments that are taken in a card-not-present environment (e-commerce and MO / TO) are processed at a higher interchange than payments taken in a card-present environment. That is the reason why internet and direct marketing merchants pay higher payment processing fees than brick-and-mortar merchants like grocery stores or donut shops.
Whether interchange fees are regulated or not, merchants are not likely to gain any leverage over them. Still, it is in your best interest to know which interchange fees are applicable to your payment processing environment, so that, when reviewing a pricing proposal from a prospective processor, you will be in a much better position to make an informed decision. There are several card processing pricing structures and you can review how they compare in our Interchange Plus Pricing vs. Tiered Pricing post.
Learn how to lower your card acceptance cost
Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:
- Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
- E-Book – Payment Card Acceptance Guide (19 pages).
Says:
May 22nd, 2010 at 5:31 pm
[...] with face-to-face transactions and reward store-front merchants with lower interchange fees. Interchange fees are the fees that card issuing banks collect from each transaction that involves one of their [...]
Says:
May 23rd, 2010 at 12:42 pm
[...] your other transactions, and will automatically deposit the payment amount, after subtracting the interchange fee and its own processing cost, into your designated checking account. At the same time it will submit [...]
Says:
May 28th, 2010 at 5:13 pm
[...] that is debited from the card issuer’s account is equal to the transaction amount, minus the interchange fees (the processing fees, established by Visa and MasterCard, which processing banks pay to card [...]
Says:
May 28th, 2010 at 5:39 pm
[...] Visa and MasterCard publish interchange fee tables with the various payment processing rates that apply to credit and debit card transactions. [...]
Says:
May 28th, 2010 at 6:03 pm
[...] and MasterCard assess for every payment card transaction processed by participating merchants. The interchange fee is then passed on to the financial institution that had issued the card (card issuer) used in the [...]
Says:
June 1st, 2010 at 10:47 am
[...] have joined the banking industry in battling proposed limits on Visa’s and MasterCard’s interchange fees. Also called swipe fees, interchange are the fees charged by issuers to retailers every time a [...]
Says:
June 6th, 2010 at 12:49 pm
[...] fees, estimated at about 75% of the total processing fees U.S. merchants paid in 2008, is called interchange fee. It is published bi-annually by Visa and MasterCard and is collected by the card issuer. The [...]
Says:
June 8th, 2010 at 9:59 am
[...] with setting “reasonable and proportional” limits on these fees, known as “interchange fees” in the payment card industry, which are currently set bi-annually by Visa and [...]
Says:
June 10th, 2010 at 9:03 am
[...] merchant and the customer. In order for MO / TO and e-commerce merchants to qualify for the lower interchange rate offered to merchants operating in a card-not-present (Visa: CPS, MasterCard: Merit 1), the [...]
Says:
June 10th, 2010 at 6:06 pm
[...] processing bank then deposits the total transaction amount, minus the interchange fees and processing costs, into the designated merchant’s bank [...]
Says:
June 11th, 2010 at 9:51 am
[...] Credit card companies are lobbying hard against an amendment in the Senate bill, that would limit interchange fees on debit card transactions and allow retailers to offer customers a discount for using other [...]
Says:
June 16th, 2010 at 9:19 am
[...] Richard Durbin, D-Ill., has scheduled a hearing for Wednesday, June 16, on how much interchange fees cost consumers. Interchange, or swipe, fees are set by Visa and MasterCard and are collected by [...]
Says:
June 18th, 2010 at 9:00 am
[...] are urging the House-Senate conference committee to drop a measure that would impose limits on interchange fees for debit card transactions. The interchange fees are set bi-annually by Visa and MasterCard and [...]
Says:
July 21st, 2010 at 9:36 am
[...] In summary, clearing is the movement of data from the processor to Visa or MasterCard, and from there to the issuer. Settlement is the process used to exchange funds between processors and issuers for the net value of the transactions cleared for a given processing day. The electronic infrastructure that processes the exchange of transaction information and money between issuing and processing banks is called interchange. [...]