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What Are Interchange Rates?

Posted by : Premraj | Posted on : Monday, December 10, 2018


As a business owner, your main goal is for your business to succeed. Success can be described as all kinds of different things, but often it entails some sort of profitable operation in terms of businesses. This means you need to be selling products and services to customers in a smooth and simple manner. Part of offering a user-friendly experience to your customers is giving them the ability to pay for products and services using a variety of payment methods.

That doesn’t come without some planning on your end. You need to be able to accept things such as debit and credit cards, process them, and then receive the payment. It also means you will probably be charged some sort of fee for this service, which may be an interchange rate. What is interchange, what can you expect to pay, and where is this money going? That’s exactly what we’ll take a look at in this blog so that you can become an interchange rate expert.

What is Interchange?

The first thing to ask is what exactly interchange is.  In a nutshell, it is the cost of a sale made by credit or debit card. When you accept a credit card as payment, there are a number of processes that it goes through in order to be approved and the money deposited to your account. This fee is meant to cover more than just the handling cost of the transaction, it is also meant to cover the risk when approving payment, bad debt costs, and even fraud.

Also, there are usually a couple of companies or entities involved, which tends to be the bank that issued the credit card and a merchant service provider.

MerchantScout is an example of a merchant service provider, which supports interchange++, or interchange plus plus. So, what is interchange++? This actually makes reference to a pricing model wherein the merchant will be charged a fee by the payment provider or acquirer.

The fee structure or rate is created using three main components. These components are the interchange fee, which is a percentage fee; the processing fee; and the card scheme fee. These three fees are added up and then that total is what the merchant will be charged. This charge occurs on each transaction that is made.

Now this is just one way of going about it, but typically it can offer more transparency when being compared to the more well-known fixed blended rate model. This model obviously sets a fixed rate rather than using a variety of components. There isn’t any sort of transparency and often the fee charged can come as a bit of surprise to the merchant.

Taking a Closer Look at the Three Components

As mentioned, there are three components that make up the interchange plus plus fee structure. The first one is the interchange fee. This is set as a percentage and is the amount that is charged to the bank that has issued the card. With that said, there are more than 100 different types of interchange fees. You will see fees as low as 0.20% and can reach as high as 1.80%, so there is a rather large difference.

The processing fee also varies greatly ranging from 0.50% to 1.0%. Typically, the processing fee is lowered as the merchant’s volume increases. This is the fee that the payment provider charges for their processing services.

Lastly there is the card scheme fee, which is charged by the actual card such as MasterCard or Visa. This is their own fee for using their network. Again, you’ll see a variety of price points that range from 0.10% to 0.65%. The fee takes into account a number of criteria.

These Rates are Always Changing

Another thing to keep in mind about interchange fees or rates is the fact they are always changing. There is no set rate that is created at the start of the year that is abided by until the next calendar year, nor is it dependent on when you set up your merchant account. Instead, these rates fluctuate.

Interchange Fees Account for a Whole Lot of Money

What’s also interesting is the fact that these fees or rates account for so much money. In terms of the fees that merchants pay to banks, interchange fees make up the greatest percentage. While it may seem like you are shelling out a lot of money as a business on these interchange fees, the fact of the matter is that it’s just all part of the costs of doing business. You can’t afford to not offer debit and credit card as a payment method to your customers, so in turn this is the fee you are forced to absorb.

Interchange rates and fees can seem a bit overwhelming for new businesses just starting out who are not yet familiar with how the system works. With a little time and some basic research though, you’ll be able to understand the fee structure much better and then anticipate just how much you’ll be spending on the fee.

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