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Understanding Interchange

Many merchants and merchant services providers are confused by interchange and its impact on the fees that merchants pay to accept credit and debit card payments. Many have heard the term “interchange” but are not quite sure what it is. In addition to interchange, the card associations – Visa, MasterCard and Discover – assess other fees to cover the costs of maintaining their payment networks and systems.

See below for an explanation of interchange, or click the links below for more details on particular topics.

What is Interchange?

When a customer (cardholder) makes a purchase with a credit card, such as a $100 pair of shoes at a shoe store, the bank that issued the credit card (the issuing bank) funds $100 to the shoe store before they collect that money from the customer.

Interchange refers to fees paid by the merchant’s bank to the issuing bank for this service. Interchange covers the cost to convert a charge on an accountholder’s card to a cash deposit at the merchant’s bank account, including billing services, credit risk, fraud risk, and float.

Interchange accounts for the vast majority of merchants’ costs for accepting card-based payments, regardless of how the merchant is priced.


Why is Interchange Important?

Interchange is important because it helps drive growth of the payment system. Interchange fees earned by card issuing banks provide financial motivation for them to promote and issue more cards to more cardholders. Interchange also helps cover the risk associated with doing so. Adding more cardholders to the system increases the benefits to merchants of accepting credit and debit cards.

Interchange also helps expand the market of accepting merchants by tailoring interchange programs to certain types of businesses. For example, smaller ticket transactions receive a lower transaction fee so that it is not too costly for merchants to accept card-based payments. The card associations attempt to maintain a delicate balance with interchange. If interchange is too high, merchants will not accept cards; if interchange is too low, then issuing banks will not issue cards.

What Determines Interchange for a Transaction?

Interchange is determined for each transaction based on the industry of the merchant, the type of card, the way the card is accepted, the transaction size, and other factors. Here are some common examples of factors that drive interchange costs:

Manually entered and e-commerce transactions have higher interchange costs because without the swipe data, there is a greater risk that the transaction may be fraudulent. (Address verification mitigates this risk.)
Rewards cards have higher interchange costs to fund the reward programs to the cardholders.

Debit cards have lower interchange than credit cards because of the lower credit risk.

Merchants with small ticket sizes can qualify for interchange rates that have lower transaction fees to reduce their costs.

Commercial cards have higher interchange rates to fund corporate and purchasing card programs that include rewards, spending controls and detailed reporting.

How can Merchants Lower Interchange Costs?

Merchants can follow best practices for card acceptance to obtain the lowest possible interchange rates for their business. For example:

Swipe the card whenever the card is present.
When it is necessary to manually enter a transaction because the terminal is having trouble reading the card, verify the cardholder’s address using the Address Verification Service.
Settle (batch out) your terminal or point-of-sale software every day to avoid downgrades and higher interchange rates.
Make sure you obtain a valid authorization for every transaction.
Restaurants should properly enter tip adjustments before the batch is settled.
Hotels should enter the check-in/check-out dates and folio numbers.
Enter the invoice number when prompted.
Enter the tax amount when prompted.
What Other Fees do Associations Charge?

In addition to interchange, which goes directly to the card issuing banks, the card associations assess other fees for the use of their networks and systems. It can be difficult to keep up with the list of these fees because the card associations have introduced several fees in recent years. Association fees include:

Network fees
Foreign card fees (for cards issued outside of the U.S.)
MasterCard Network Access and Brand Usage Fee (NABU)
Visa Acquirer Processing Fee (APF)
Visa Fixed Acquirer Network Fee (FANF)
Visa Transaction Integrity Fee (TIF)
Visa Authorization Misuse Fee
Visa Zero Floor Limit Fee
How Often Do Interchange Rates Change?

The card associations regularly update their interchange programs to promote more card issuance and acceptance. They add new interchange programs and change rates and fees to do so. It is most common for the associations to implement changes in April and October each year, but changes may also occur at other times.