What is Interchange?
Interchange is defined as the amount of each transaction paid to the card issuing bank. Each transaction clears through interchange on its own merits. This means that a swiped consumer credit card will clear at one interchange level (lower cost) while a keyed (non-swiped) or e-commerce transaction will clear at another (higher cost) interchange level. There are currently 400 different interchange categories. The Interchange fee depends upon the Interchange Qualification of each individual transaction. These fees are non-negotiable and are the same for every merchant who accepts Visa or MasterCard. no matter how big or small.
What are Assessments?
Assessments are the amount of each transaction paid to either Visa or Mastercard. This is a fixed fee they earn on each transaction. Currently the assessment levels are set as follows:
Visa Assessment is 0.11% +$0.0195 on each transaction
MasterCard Assessment is 0.11 + $0.0185 on each transaction
What is “Tiered or Bundled Pricing” and Why is “Interchange Pricing” better for me?
All of the Fortune 500 companies are on an Interchange Pricing Plan because it saves you money. The vast majority of US merchants are priced on what is known as a Tiered or Bundled pricing program. This means that a typical merchant will have a “Qualified” rate for their debit and non-rewards credit card transactions that clear at a fixed low rate, a “Mid-Qualified” rate for their transactions that downgrade to a higher interchange level (usually for non-swiped or Rewards/WorldCard transactions, and a “Non-Qualified” Rate for those transactions which clear at at the highest rate not covered by the first two pricing levels.
Bundled into each of these tiered levels are dozens of different interchange costs. Typically, the Qualified” rate is the lowest, most competitive rate but few of your transactions will go into this category. Mid-Qualified will be typically 1% higher and Non-Qualified will be 2% higher or more. The processor has the right to put any card into any categories he chooses, except for debit cards. These non-competitive rates are inflated with big margins above actual cost. As much as 50% or more of most merchants transactions will downgrade into the much higher Mid or Non-Qualified rate categories.
Most Processors have publicly acknowledged that the vast majority of their processing income is obtained on these downgraded transactions. In fact, it has been publicly acknowl edged by the world’s largest processors that 90% of their merchant processing profitability is earned on their downgrade fees (Mid-Qualified and Non-Qualified rates).
We only use Interchange pricing, which eliminates the opportunity to overcharge merchants by downgrading transactions. Our merchants pay true interchange on each transaction with a fixed % mark up based on monthly volume. In our opinion, this option is in the merchant’s best interest. We have yet to find a merchant whose tiered pricing is not significantly more expensive than what is available via our interchange pricing plan. (We have reviewed thousands of processing statements from our competitors_
What is the Reason for the Interchange fee?
Interchange compensates card issuing institutions for their risk and the expenses they incur to process transactions. The fee amount is based on the level of risk associated with funding a particular transaction – the more perceived risk (based on transaction type(swiped, keyed, etc.), the higher the interchange cost. There are built-incentives to encourage each merchant to do everything possible to reduce the level of risk associated with a particular transaction.
For example, if a business-t0-business merchant adds a PO # and tax amount he qualified for a Level 2 Interchange rate which can lower their interchange rate from 2.95% to 2.o5%. If they further add line item data such as freight charges, item descriptors (valves, pipes, etc), units of measure (box, carton, bundle, etc.) they will then qualify for Level 3 Interchange rate of 1.80%.
Think of it as the fee the acquiring bank pays to the credit card issuing bank in order to process a credit card transaction involving a card holder’s account. The conditions under which you accept credit cards and process transactions affect how high the fees will be. The interchange fee is determined by the nature of your business and the processing procedures you follow. Visa and MasterCard set these rates twice a year in April and October by assessing the level of risk associated with funding and expenses involved in processing a transaction.
To take advantage of the lower Level 2 and 3 interchange rates, you must be categorized as a business-to-business category recognized by Visa and MasterCard and use technology capable of passing line item data.
So What Will My Rate Be for Interchange Pricing?
There is no easy way to answer this question, because there are over 400 different interchange levels from 0.05% for a regulated debit cards to 3.15% standard processing rate for certain commercial cards. You will pay true wholesale interchange cost plus a fixed low processing cost based on a set % of volume processed.