Thursday, March 16, 2023

What Are Credit Card Interchange Fees

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Incidental Credit Card Processing Fees

Credit Card Processing 101: Interchange & Processor Fees

Incidental fees are only charged when a defined triggering event occurs. Chargeback fees are the most common example of an incidental fee.

Typical Price Range

Wholesale Incidental Fees

  • Processing Integrity Fees:;Whereas the main fees from the card associations are assessed on your every transaction, some fees are only charged as a penalty when you havent met the requirements for authorizing and/or settling transactions properly. These card brand fees typically include integrity or misuse as part of the fees name. They resemble transaction fees, as they are just a few cents per instance and tend to be grouped together on a statement with the rest of the more regular credit card transaction fees. Its common to incur a handful of these charges each month, but watch out if they become excessive.

Terminology To Get You Talking About Credit Card Processing Fees

Here is some common terminology that you should have a grasp of before moving forward:

  • A flat fee is a static cost that doesnt change with the cost of the purchase. Commonly for recouping computer network costs that include the hardware, software, and network connection.
  • A percentage is a cost that varies depending on the cost of the purchase. This is often for the financing risk.
  • A processing charge = flat fee + percentage.

At a high-level, the credit card processing fees encompassmerchant account fees, administrative fees, and incidental fees. Each has its own unique place within the payment processing cycle.

Why Do Interchange Fees Exist

Processing payments comes with costs: Credit card companies have extensive systems in place to securely and safely collect money from consumers and send it to a merchant, and they charge for that service.

These companies also offer a variety of benefits to cardholders including extended warranties, rental car insurance and credit card rewards and interchange fees help fund those benefits.

In fact, when the 2010 Durbin amendment limited interchange fees charged on debit card purchases, debit card rewards programs essentially disappeared. In countries where credit card interchange fees are capped, there are also far fewer rewards.

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Current Us Interchange Rates

The term Interchange rate refers to the fees charged by the card companies for use of their cards. These card companies;include Visa, Mastercard, AMEX, Discover. Interchange rates change twice a year in April and October. Payment processing companies make money by putting a;markup on top of the interchange rate. This is called cost-plus or interchange-plus pricing. Interchange being the card company;rate and plus; being the markup by the payment processor. Interchange-plus;pricing structure has the lowest rates and compared to all other pricing structures, including tiered and flat-rate pricing which are much more expensive.

How Is The Interchange Fee Paid


As noted earlier, merchants indirectly pay the interchange fees on transactions. In most cases, the fees are bundled into the merchants payment processing costs. Different processors offer different pricing structures, allowing merchants to pay a flat rate, pay by individual transaction, or perhaps use a tiered payment plan.

Bundled rates are often discounted, but bundles arent designed for transparent reporting and analytics. This can be problematic, since payment processors often combine the networks interchange fee with all the other various transaction fees paid to banks, gateways, and anyone else in the payment chain. Lumping all the fees together into one single payment may seem convenient, but merchants lose the ability to evaluate optimization efforts and determine the real cost of a transaction.

This raises the question: are interchange fees necessary?

Mastercard claims interchange fees ensure that businesses pay their fair share of processing. Visa simply says the fee reimburses issuers for lost interest resulting from a cardholders debt repayment grace period.

Issuers and card networks respond that the interchange rate only subtracts a small percentage of merchant profit from each purchase. But, for sectors where margins are tight, such as restaurants and gas stations, even that small amount can add up.

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How Is Interchange Determined

Think of interchange like tolls on a highway where the amount you pay depends on a variety of factors. In the case of tolls, it could depend on things like the type of vehicle youre driving, the time of day youre commuting, the distance youre traveling, and the type of road youre on. Interchange works much the same way, and there are four main factors that determine how much you will pay.

  • Card type. There are literally hundreds, if not thousands, of different card types out there. Debit cards, rewards cards, prescription cards, pre-paid cards, business cardsyou name it. And each type comes with a different fee. Debit cards, for instance, generally come with relatively low fees since they pose a low risk of fraud to the bank. Rewards cards, by contrast, typically charge higher rates so the banks can afford to pay out the rewards to the cardholders.
  • Transaction method.Broadly speaking, there are two main types of transaction methods: card present and card not present. A card-present transaction happens when a customer pays with a card in person, while a card-not-present transaction occurs when they pay some other way, such as over the phone or online. Since card-present transactions allow you to verify the users identity and check for other possible signs of fraud, they pose less risk to the bank and therefore have lower fees. While there are ways to reduce the chances of fraud, card-not-present transactions will almost always come with higher fees.
  • Changes In Canadian Interchange Fees

    Visa and MasterCard are changing their interchange fees starting on and , respectively. The dates are pushed back three months due to the impact of COVID-19. We are seeing the rates for some card types increasing, but overall, the majority of card types for both Visa and MasterCard are decreasing. This is in line with the commitment made by both Visa and MasterCard to the Canadian government in 2018 to lower interchange fees. MasterCard is also introducing a new ultra elite category called Muse MasterCard.;

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    Understanding A Visa Transaction

    Visa is a global payments technology company that connects consumers, businesses, financial institutions, and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. And while paying with your card in a store or online is easy and fast, there is a lot more happening behind the scenes.

    A typical Visa transaction actually involves four distinct players:

    How Credit Card Interchange Rates Are Calculated

    Cantor: Credit Card Interchange Fee System Harms All Consumers

    Common Interchange Rate Examples

    0.05% + $0.22

    0.05% + $0.22

    The rates in the table above represent only the tip of the iceberg. In the United States, the average interchange rate is around 0.3% for debit cards and 1.8% for credit cards. However, wed caution you that these numbers have very little value due to the enormous range of possible rates under which any given transaction might fall.

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    Fsa Hsa And Other Health Cards

    Aside from HIPAA security and compliance, a dental office needs to consider other forms of payment outside the traditional credit cards that may be used. Many patients will have either a Health Savings Account or a Flexible Spending Account that are a part of their health insurance plan. These types of accounts come with debit cards that can be used for approved medical expenses, including dentistry.

    In most cases, its a simple process for a merchant to be able to accept these types of cards. When your processor sets up your medical merchant account, you will be categorized with a list of merchant codes, or MCCs. These merchant category codes tell the POS terminal which types of payments are acceptable for this business, and subsequently what types of fees to charge.

    If your business is listed with the proper MCC code, you should be able to accept HAS and FSA cards with no issue. However, be aware that some of these types of cards have daily spending limits imposed by the patients bank. If this is the case, the card may be declined at your practice. Be sure to direct your patient to their administrator if this happens.

    What Are Interchange Fees And How Are They Calculated

    Definition: Interchange fees are transaction fees that the merchant’s bank account must pay whenever a customer uses a credit/debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud and bad debt costs and the risk involved in approving the payment.

    How are interchange fees charged to businesses?

    Card-issuing banks, payment processors , credit card payment networks like MasterCard and Visa, payment gateways, and the merchant’s own bank will all charge a percentage-based fee on every transaction, and these charges frequently appear as a single, bundled amount on the bills your payment processor hands you. Even this is something of an oversimplification, however, since there are actually about 300 individual interchange fees composing the “single” interchange fee you actually pay.

    Interchange fees are not static

    Based on the costs of moving money, the time value of money in terms of current interest rates, and the relative risk involved, credit card companies set and regularly adjust their interchange rates. Visa and Mastercard, for example, change rates twice a year, in April and October. While there are other fees that merchants pay for the privilege of making sales via credit and debit card, interchange fees are by far the largest, representing 70% to 90% of the total fees paid to banks by merchants.

    How interchange fees are calculated

    Transactional factors affecting interchange

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    Who Sets Interchange Fees

    Interchange rates are set by the payment networks that credit cards run on, including Visa, Mastercard, American Express and Discover. Rates vary depending on many factors, including what kind of purchase it is, where you make it, what kind of merchant it is, what bank issues the card, what specific card you’re using , and more.

    In general, American Express has tended to charge higher interchange fees, which means AmEx cards have historically been more expensive for merchants to accept.

    » MORE:How AmEx and Discover differ from Visa and Mastercard

    How Is The Interchange Fee Calculated

    Merchant Account Pricing

    Each card network maintains its own interchange rates, traditionally updated twice a year . Detailed information regarding the current interchange rates and fees for Visa and Mastercard are available online; here is more information about the Visa and Mastercard interchange fees.

    Interchange fees are usually calculated as a percentage of the sale plus a fixed fee . This ensures the issuer receives the optimal payment, even if the original transaction was for a high or low dollar amount.

    The exact percentage and formula will vary. The process of categorizing a transaction to determine the applicable rate is called interchange qualification. Qualification calculations happen on a per-transaction basis, and the applicable interchange rate will depend on a range of factors, such as:

    Processing Method

    Cards issued by banks offering rewards have higher interchange rates.

    Card Owner

    The interchange rate is influenced by the card owner, whether that is an individual, business, corporation, or municipal agency.


    Visa announced it will offer lower rates to merchants who opt to tokenize transactions using a Visa smart-payment token, starting in October 2021.

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    What Does Credit Card Interchange Mean

    The process by which an acquiring bank or acquirer will submit card transactions that have been approved on behalf of the merchant. There are several parties in a credit card transaction including the issuer, the processor, and the acquirer.

    The processes involved in a credit card transaction include the assessment as well as the collection and or the distribution of fees between the different parties. A credit card interchange is also commonly known as an Interchange and all the processes involved in a transaction are put in place to ensure that the transaction is safe and secure and that the necessary funds are available for the purchase to be completed.

    Interchange originally came about as a way for banks to recover the lost interest that results from credit card grace periods for repaying debt. In fact, Visa still refers to interchange fees as interchange reimbursement fees to this day. Visa does go on to say that the primary role of interchange is to create an equitable balance of incentives between the cardholders financial institution which issues Visa cards to consumers and a retailers financial institution that enrolls retailers and processes Visa transactions for them.

    Interchange fees are not static, and interchange fees for Visa and Mastercard, the two largest credit card brands, can be changed twice a year in April and October.

    Is Padding Interchange Legal

    Unfortunately, there are very few regulations in credit card processing. Padding interchange is not necessarily forbidden. That said, if its against your contract, you may be able to fight it.

    However, its far easier to avoid processors that play games like padding interchange. Start by becoming a CardFellow member. Its free, and your membership includes valuable protections when you choose a processor through our service. One of those protections is the requirement that you receive interchange costs at cost, with no padding. Even better, CardFellow processing experts regularly audit your statements to ensure youre not overcharged.

    Note that padded interchange refers to the processor adding on to the published interchange costs set by Visa or Mastercard. It does not mean that your transactions fell to a more expensive interchange category. If your transaction qualifies for a particular category, it should receive the rate for that interchange category. If the rate is higher, thats padded interchange.

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    The Final Word On Merchant Account & Processing Fees

    Each credit card processor has a different set of costs associated with its services. Many are unavoidable, but others can be negotiated. Per-transaction and account maintenance costs vary widely from one merchant to another, and average figures dont tell you much about what;your costs will be. With that in mind, here are some recommendations to help you get the best service at the most affordable price:

    • If youre running a very small or seasonal business, look for a highly-rated provider with flat-rate pricing, no monthly fees, and no long-term contracts
    • If you have a medium-sized business with a stable month-to-month processing volume, interchange-plus pricing will usually be your most cost-effective option
    • Large, established businesses can save even more money overall with a membership pricing plan
    • Regardless of the size of your business, avoid providers that will lock you into a long-term contract with an early termination fee
    • Avoid leasing your processing equipment under all circumstances
    • Read your proposed contract thoroughly before you sign up to gain a complete understanding of your fee structure
    • In many cases, its worth it to choose a slightly more expensive provider that has a great reputation for solid customer service and support

    Visa & Mastercard Average Interchange Fees

    Merchant Account Pricing – What Is Interchange – Fees, Rates and Why it’s important to you!

    Visa and Mastercard are the biggest card network companies in the world, so theirs are the interchange fees merchants will face most often. For both companies, the interchange will depend largely on the type of card used. As mentioned above, debit cards have significantly lower interchange rates than credit card ones. Furthermore, high-end rewards credit cards have higher interchange fees than non-rewards variants.

    Interchange fees for both Visa and Mastercard will also vary between different types of transactions.

    Card Type

    As of 2016, Discover cards accounted for approximately 8.1% of all cards in circulations.

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    Do I Need To Worry About Interchange

    Not really, because you cant change it anyway. However, theres a caveat, and its a pretty big one. Some credit card processors pad interchange, adding on to Visas and Mastercards published interchange rates without telling you.

    If your processor does that, youre paying more than you have to and may not even realize it. Whats even worse is that padded interchange is difficult to spot unless youre familiar with interchange costs.

    CardFellow members receive statement audits as part of your membership. Among other things, our processing experts check for padded interchange during audits. If you havent had an audit recently and would like one, sign in to your CardFellow dashboard or give us a call.

    Not a member yet? Membership is free, and signing up only takes a minute. Go here: Become a member.

    Interchange++: The Transparent Billing Structure

    Interchange++ is a pricing model that tracks the interchange rates. For example, the fees cap across Europe has been a huge benefit for businesses billed with Interchange++ because when interchange goes down the saving is passed to you. To quote the Interchange Fee Regulation:;”The outcome the European Commission expects is that merchants should know, for each transaction, the amount of the and the interchange fee and are therefore able to check if the benefit of the regulation has been passed to them.” You can read the full article here.

    The alternative to Interchange++ is blended pricing. Blended charges an average processing cost plus a fixed markup. Youre charged the same price for every transaction, which makes it easy to understand but its not transparent. You cant see what youre being charged for and theres no guarantee your processor will pass on any savings.

    Blended vs Interchange++ pricing: When interchange goes down, your costs go down

    You get to see exactly what youre charged for every transaction so theres no danger of hidden costs.

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    Faqs About Interchange Fees & Credit Card Processing

    Interchange fees are set by the major credit card associations . Each association publishes a schedule of fees that break transactions down according to categories such as card-present vs. card-not-present, business type, ticket size, credit card vs. debit card, and many others.

    Interchange fees reflect the level of risk associated with the given transaction type. Fees for credit card transactions are particularly high because the issuing bank has to loan the funds to the consumer to complete the transaction and then hope that this loan will be fully repaid on time. Interchange fees must also be high enough to compensate for the costs associated with processing the transaction, in addition to a reasonable profit.

    Interchange fees are set by the credit card associations , not the issuing bank. Thus, fees for using a Bank of America Visa Credit Card will be identical to those charged for using a Wells Fargo Visa Credit Card. However, fees for using a Wells Fargo Mastercard will not be the same as those charged for using a Wells Fargo Visa Credit Card.

    No. Interchange fees are established by the major credit card associations and are not subject to negotiation. Be very wary of any sales agent who promises to lower your interchange fees. While the total processing rate charged by your merchant account provider can be negotiated, your provider has to pay the published interchange fees to the cardholders issuing bank and cannot negotiate a lower rate for you.

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