Credit Card Fees (Interchange Explained)

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What is Interchange?

Interchange is the fixed cost for each card type issued by Visa, Mastercard, Discover, American Express and other credit cards for US merchants. It is regulated by the Federal Reserve, and changes every April and October. There are hundreds of different rates, based on the type of card and issuing banks. Visa, Mastercard and the other credit card companies publish these rates on their websites and every processor in the US has these exact same fixed costs.

What/who gets paid interchange?

Interchange is paid to the card-issuing banks, credit card companies and processing networks to cover the cost of each transaction. When a card is authorized, both the card issuing bank and the processing network are called upon to authorize and accept or reject the transaction based on available funds/credit. Visa, Mastercard and the other credit card companies make up the bulk of the fees for interchange to cover the cost of accepting these payments as well as the risk.

Why do interchange fees vary?

Interchange is based on risk and rewards. A debit card with no credit associated with it, used in-person would qualify for an interchange rate of only 0.05% + $0.22, whereas an AMEX corporate rewards card taken over the phone could cost upwards of 2.89%. The more risk, the higher the interchange rate. Instances where a card is either swiped or dipped will cost less than a transaction processed during a phone call, or made through a website since these transactions are less prone to fraud.

Why do I have to pay a processor on top of interchange?

Visa and Mastercard won’t do business directly with the majority  of merchants unless they are the size of Costco. Since credit card transactions can be disputed for a fixed period of time, and since fraud exists, there is a risk associated with each transaction. Processors fill in that gap by accepting the risk for a small fee on top of the interchange rate. Fees above interchange are also completely unregulated, which is why two merchants with the exact same business type, volume and credit history could have two wildly different rates. Ultimately, the cost above interchange is whatever the processor and the merchant agree to.

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