Interchange fees are regarded as transaction fees that the bank account of the merchant should pay whenever a customer would use the debit or credit card for making a purchase from the respective store. The fees are then paid to the bank that issues the card for covering the overall handling costs, bad debt costs, and fraud-related expenses along with minimizing the risks associated with approving a specific payment.
Charging Interchange Fees to Businesses
Banks that issue cards along with payment processors (might or might not be the issuing bank), the own bank of the merchant, the credit card payment networks like Visa & MasterCard, and the payment gateways –all are responsible for charging a fee based on some percentage upon every transaction. The given charges mostly appear as a wholesome, bundled amount on the bills handed over the respective payment processor.
Interchange Fees Not Being Static
On the basis of the overall costs involved in moving money, the respective time value with respect to the ongoing interest rates, along with the involvement of the related risks, most of the credit card companies out there are known to set as well as frequently adjust the given interchange fees. For instance, MasterCard and Visa are known to change the given rates twice in a year –in April & October.
At the same time, there are other additional fees that the merchants are expected to pay for the sake of making sales with the help of debit or credit cards. Out of all these fees, the interchange fees tend to be the largest and represent around 70 to 90 percent of the total fees that are paid to the banks by the merchants.
Calculation of Interchange Fees
The calculation of interchange fees is done by a series of complicated variables. For simplifying the overall costs for the involved merchants, the credit card companies out there tend to compute the given interchange amount into some flat rate along with a percentage of the total sales (along with taxes). In the United States alone, amounts in billions of dollars are paid by the merchants for covering the given fees on an annual basis. The average rate of the same comes out to be around 2 percent of the total purchase amount.
Transactional Factors that Affect Interchange
- Type of Card: Debits cards having PINs tend to feature lower rates in comparison to credit risks due to the involvement of lower risks. Moreover, every credit card company is going to charge a different rate. Reward cards are responsible for paying for the benefits that are given to the cardholders. This is done by charging higher values of interchange rates to businesses. However, the overall benefits might make the consumers to make more purchases.
- Size and Industry of the Business: Rates are known to vary depending on the size and type of the business. For instance, supermarkets are known to pay higher interchange rates in comparison to gas stations. At the same time, larger merchants mostly tend to have lower rates as they tend to have ample reasons for successfully negotiating with the credit card companies or banks.
- Type of Transaction; POS or Point of Sale transactions tend to be less risky in comparison to the CNP or Card Not Present transactions. This is because a chip can be easily scanned, a PIN entered, or signature taken. Both online as well as MOTO (Mail Order Telephone Order) are classified as CNP transactions while charging a higher interchange fee.
Interchange Fees –Part of Doing Business
Any business enterprise out there allowing its customers to make purchases with the help of debit or credit cards is expected to pay some amount of interchange fees. While no online retailer out there would like to see prospective benefits deducted from the respective sale, the overall net gain from the acceptance of debit and credit cards tends to far outweigh the overall costs of interchange fees.
MasterCard and Visa Interchange Fees
MasterCard and Visa tend to be the largest credit card companies out there in the world. As such, the respective interchange fees charged out of these payment giants from the merchants are going to be significant. For both the companies, the interchange is going to depend significantly on the type of card that is being used. As already specified, debit cards tend to feature a lower interchange fees in comparison to the credit cards. Moreover, high-end rewards in association with credit cards tend to feature higher interchange fees in comparison to the non-reward options.
Working of the Interchange Fees
Generally, as a business owner, you are not expected to pay the interchange fees directly. Rather than this, the acquiring bank is responsible for paying the same. You are only repaying the acquiring bank the given amount.
Upon accepting a debit or credit card as a mode of payment, the money is not known to come from the account of the customers right away. However, you do receive a deposit of the respective funds easily –mostly in a matter of 1-2 days. The processor or the acquiring bank would deposit the given funds in the respective bank account. The issuing or the cardholder’s bank would then remove the given amount of money from the account of the cardholder. The issuing bank would then deduct the respective interchange fees while giving the remaining to the acquiring bank.
However, the overall exchange that takes place between the acquiring bank and the issuing bank does not turn out to be equal to the original amount of transaction. This implies that the acquiring bank has not been capable of making any money until now. Therefore, these banks go ahead with charging you the available difference between the original amount of transaction and the amount that has been deposited in the respective bank account, along with some markup.
In its right sense, the acquiring bank is responsible for paying the interchange fees to the issuing bank in the first instance.
