As a business owner, you must be aware that accepting credit card transactions comes with processing fees. A significant portion of the processing fee is called the interchange rate.
Known by many as interchange reimbursement fees, the purpose of interchange fees is to determine the individual transaction rates. It is followed by setting several categories. Each category requires specific eligibility and associated rates.
Every merchant has to pay an interchange rate. It is charged by the merchants on each transaction of credit/debit card payment. Although this fee is collected by merchant providers, ultimately, the bank that provided the credit card takes the fees.
Often, the topic of interchange fee becomes complex for people to understand. This article includes a simplified and detailed explanation of credit card interchange fees. This information will provide a basic knowledge of the entire concept.
What are the Average Interchange Rates for Debit/Credit Card Processing in 2021?
For credit card transactions, the average interchange rate is 1.81%. And, for debit card transactions, the average interchange rate is 0.3%.
When a credit/debit card transaction takes place, the transfer of funds occurs from the card holder’s bank to the merchant’s bank. This process is facilitated by credit card companies such as MasterCard and Visa. To provide this service, they collect a processing fee from the merchant’s bank.
This processing fee is what we call the interchange rate. It comprises a % of the total amount of a transaction plus a fixed base amount (e.g. 3% + $ 0.12). As these credit card companies determine and assess the fee, the cardholder’s bank receives this fee.
How Does Interchange Rates Work?
Typically, the business owners don’t pay the interchange fees directly. Instead, their merchant account bank pays this fee, and they repay their bank. When a merchant accepts a card payment, the amount takes some time to transfer from the card holder’s bank.
It usually takes 1-2 days to get the funds into the merchant’s account. The card holder’s bank transfers the money to the merchant’s bank. Also, the card holder’s bank deducts interchange fees and transfers the rest of the amount to the merchant’s bank.
How Are Interchange Rates Calculated?
Each credit card company maintains different interchange fee rates. The interchange rates are updated twice every year, once in the month of April and second in the month of October.
The interchange fees comprise a % of the total amount of a transaction plus a fixed base amount. For example, 3% + $ 0.12. In this way, the issuer gets an optimal amount of payment regardless of the low or high amount of transactions.
There are numerous interchange rates when it comes to credit card transactions. All these interchange rates are separately divided into different categories. This process of categorization of applicable transaction rates is termed as interchange qualification.
The interchanges rates depend upon various factors such as:
- Type of Transaction Data: If the security of the transaction is high, then the interchange rate will be lower. Thus, transaction data related to card security code qualifies for a lower interchange rate.
- Processing Method: If the transaction is card-present, the interchange rate will be lower. On the other hand, card-not-present transactions have a higher interchange rate.
- MCCs: Merchant Category Codes or MCCs have specific interchange rate categories.
- Type of Card: The type of card rankings for lower to higher interchange fees is – PIN debit cards, signature debit cards, standard credit cards, premium credit cards.
- Brand of Card: Rewards and other specialty card offers also impact the interchange fee rate.
- Owner of the Card: The rate of interchange is also affected by the cardholder. It depends on whether the card owner is a municipal agency, corporation, business, or individual.
Who sets Interchange Rates for Merchants?
Credit card companies such as MasterCard, Visa, Discover, and American Express set the interchange rates for merchants. Thus, the interchange rates of Bank of America’s Visa Card are identical to Wells Fargo’s Visa Card. However, the interchange fees of Wells Fargo’s MasterCard are not the same as those of Wells Fargo’s Visa Card.
Why are Interchange Rates high?
The interchange rates reflect the amount of risk that is associated with a particular transaction type. In the case of credit card payment transactions, the interchange fees are higher. It is because the card holder’s bank loans the money to the consumer and then waits to get the full money back on time.
Also, the interchange rates are higher to compensate for the costs related to the processing of the transaction. Additionally, the companies also look for a reasonable profit.
Who sets the Interchange Rates Percentage?
Credit card companies such as MasterCard, Visa, Discover, and American Express set the interchange rates percentage. Both the cardholder’s bank and the merchant’s bank have no control over the percentage of interchange rates.
The credit companies have different percentages set for each transaction type. However, MasterCard and Visa have almost the same average percentages. Also, the rates of American Express are higher as compared to MasterCard and Visa.
Can I Negotiate Interchange Rates?
The interchange rates are not negotiable. They are set by credit card companies and are not negotiable. Always be cautious of the sales agents who offer to lower the interchange rates. The processing rate that a merchant services provider charges to a merchant is negotiable but the interchange fees are not.
Which Transactions have the Highest Interchange Rates?
The transactions that are card-not-present have higher interchange fees. Also, manually entered transactions and a transaction where the consumer uses specialty rewards cards have higher interchange fees.
Final Words
Typically, interchange rates are related to chargebacks. The merchant’s bank monitors the activities of the merchant’s account and transactions. If there is any activity that is risky or suspicious, then it is noted.
The account of the merchant is terminated when the risk increases. If the merchant account and processing agreement are terminated, the business suffers long-term and severe consequences. These consequences may include hefty fines and chargeback fees.
If you have a merchant account, then you should lookout for a high interchange rate. Consistent high interchange rates occur due to faulty payment processing practices. That’s why you should look to optimize the interchange rates and ensure the efficiency of your business’ payment processing capabilities.
