Transaction Processing & Electronic Payment Solutions

Membership has benefits

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• Credit & Debit Card Processing
• eCommerce Solutions
• Customized Gift Cards
• Loyalty Rewards Programs
• Check Acceptance Services
• Other Services

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Merchant Solutions for your business.

What is Interchange?

Developed by the MasterCard and Visa card associations, Interchange is the wholesale pricing established for all transaction types. It accounts for the vast majority of the rate paid for credit card processing.

Interchange pricing depends upon industry category, the method by which the card is accepted, and the card product accepted. For example, card present merchants pay less than card not present merchants. Corporate cards carry higher Interchange than consumer cards, due in part to corporate demands for more detailed reporting levels. Transactions not settled for processing electronically or not in a timely manner carry higher Interchange to cover manual processing or increased chargeback liability. Foreign cards have Interchange fees to cover currency conversion. There are special Interchange categories for emerging markets like quick service restaurants (fast food), utility billing (gas, electric, water, cable) and business-to-business purchasing cards. All card products have Interchange: Discover, American Express, Diners, Debit, and even contactless cards.

An Interchange rate payable when the card is used provides financial incentives for banks to market, issue, and accept the credit risk of cardholders. In turn, merchants willing to pay the Interchange fee charged by the association bring in new customers (cardholders) to make immediate purchases. The retailer no longer has to extend store credit, take credit risk, or accept payment over time.

As more cardholders and merchants are added into the credit card payment system, the more valuable the system becomes. The more places that accept credit cards, the more valuable it becomes to carry a credit card.

How does the system grow? The card associations carefully manage Interchange levels. There is a delicate balance in setting appropriate Interchange levels. It has to be attractive to both the issuing bank and the acquiring merchant. If Interchange is too high, merchants don’t sign up, and if it is too low, issuers don’t issue cards. For example, it was not too many years ago that personal checks (paper) dominated the grocery/supermarket industry. Today, through the use of special Interchange levels set at a reduced rate specifically for grocers, electronic card payments significantly out pace paper checks. Or look at business/corporate/government purchasing cards. When first introduced, Interchange rates were set high to provide an incentive to card issuers to outfit business owners and their employees with credit cards to manage spending. Now with a market full of business card cardholders, more businesses are accepting business cards as a form of payment.

Interchange has evolved over time and currently consists of approximately 50 separate categories, each with its own specific qualification criteria and rate. Two key reasons for the proliferation of Interchange categories are the risk of fraud and data requirements. Technology advances make it easier to implement and manage specialized Interchange rates. New indicators built into the system allow rates set not just by card type and merchant industry, but merchant segmentation within an industry. And, as new technologies like contactless cards come to market, Interchange will continue to evolve.

First National Merchant Solutions can help educate you on the best practices of accepting credit and debit cards to ensure that you are paying the most favorable Interchange rate.

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