In previous posts we discussed the 3 tier system most processors use for merchant account set ups and how they bundle interchange rates into each. In this post we will explain what these interchange rates are and what they mean for your processing costs.
Interchange is essentially the fee issued by the purchasing card holder's bank (issuing bank) to the merchant's bank (acquiring bank) for accepting a credit card. This fee is taken out by the issuing bank from the amount paid to the merchant's bank when the transaction processes or batches out. Then, the merchant bank takes out whatever fees or 'discount rate' they have added on for their cost and the rest is delivered to the merchant.
This can be a bit confusing for some but basically what it means is that you have two different financial institutions getting a piece of the pie every time you take a credit card. There is really no way to get around this unless you are a Walmart or Costco. The financial institutions who own Visa and Mastercard have created this system to be what it is and unless Congress steps in and changes the rules (which they are looking into as we speak) these interchange rates are here to stay. The good thing however, is that every financial institution, ISO, processor, etc must play with the same numbers so there is uniformity across the board. By educating yourself on how these rates work in regards to your business you as a merchant can save thousands of dollars a year if you are set up correctly.
The key to all of this is understanding how the interchange rates are broken up. Basically, each type of Visa and Mastercard card has its own interchange rate. These values are typically reviewed and adjusted about twice a year and can be found on Visa and Mastercard's websites. The important thing for you as the merchant to be aware of is what type of clientèle you are dealing with and what type of credit cards they are using. If you are a small mom and pop store that deals with your average citizen for example, there is a good chance you are taking a lot of check debit cards and basic credit cards. In this case, you might be best off with a basic three tier system that includes 'off line debit' to maximize your rate on those check cards as well as taking ATM transactions when you can as opposed to an interchange setup with a high add on cost (more on this in a second.)
If you are a company selling industrial products to corporations and foreign businesses however, you probably want to make sure you are either A) getting a great deal where these cards are bundled into a tier that is equal to the mean interchange cost or B) are getting straight interchange rates + a small percentage add on. This is how many companies get killed on their rate. As we stated in a previous blog post, many processors will quote an extremely low rate to businesses for a tiered system that doesn't include certain types of cards whose interchange is higher. Often times, these types of cards are put into a tier called non qual where a very high flat rate is issued; far above the interchange cost. This can be quite costly to certain businesses who take a lot of these cards. This is why it is very important to read your statements and be aware of the type of cards you are taking.
Most merchant banks are going to set up their clients with a 3 tiered system where specific interchange types are lumped into different groups or tiers. However, it is also possible to get set up on strictly interchange where each card will have it's own base rate + a flat add on cost issued by the merchant bank. This is ideal for companies who are taking a lot of corporate or foreign cards, do a ton of volume or do a lot of swiping and keying in together. The problem is that many processors won't do this set up or only do interchange set ups for companies processing at least $500K a month in credit cards. However, because of the immense pressures with the current economy on these processors to get accounts, many are setting up interchange accounts for anyone who asks. Most people aren't aware of this type of set up so never ask. This knowledge alone can save you a lot of money. However, the key still lies in knowing what types of cards your business deals with. Sometimes, interchange isn't the best set up, especially if the merchant bank adds on a heavy flat fee.
The best thing to do really is to find and open and honest company willing to take a look at your current processing costs and consult on whether or not interchange is right for you. We do that here every day. There is a good chance that in doing so you will save considerably.
