Interchange Fees Explained
In this blog post, I'll explain Interchange Plus Pricing and its benefits for your business. We'll cover interchange rates, how they operate, and why the interchange plus pricing model is the best choice for your business to save costs and increase profitability.
First, let’s define key terms you'll need to understand to get the most from this post.
Issuing Bank: The financial institution that issues a credit or debit card to a cardholder.
Acquiring Bank: The financial institution that enables merchants to accept credit and debit cards as payment for goods and services.
Merchant Service Provider (MSP): A company that provides businesses with the ability to accept credit and debit card payments.
Credit Card Network: A system that connects card issuers and acquiring banks so businesses can accept credit and debit card payments.
Okay, We've defined the key terms. Now, let's dive into interchange fees and how they work.
What are Interchange Fees?
Interchange rates are the fees that merchants must pay when accepting credit and debit card payments.
Card issuing companies set these fees to cover the risk and handling charges associated with card transactions. They are non-negotiable and make up the most significant percentage of fees for accepting credit cards.
Note Visa and MasterCard publish fee tables that include dozens of interchange categories. Discover and American Express don't publicly disclose their fees.
How do Interchange Fees work?
The acquirer pays interchange fees to the issuer every time a customer pays with a credit or debit card. The acquirer then charges the same amount to the merchant.
Fees vary based on many factors, including card type and transaction size. Fees typically range from 1.5-3% for credit cards and 0.1-0.25% for debit cards, plus a flat fee of around $0.05-$0.07.
Interchange fees are the foundation of all credit card processing charges and remain constant regardless of the processor.
Interchange Fees: Who pays them & how’re they determined?
Ultimately, the merchant pays interchange fees. Interchange fees flow from the acquirer to the issuer to merchants.
The interchange rate is determined by many factors, including the merchant's industry, card type, acceptance method, and transaction size.
Why Interchange Plus is better than Flat Rate Pricing
We've answered the question, "What are interchange fees?" and "How are they determined” the next part of this two-part blog post will look at the pros and cons of interchange fees and why opting for interchange plus fees is better than flat rate pricing.
If you are interested in changing to the interchange plus pricing structure for your business, then schedule an appointment with one of our team members today.