Interchange Rates: Learning the Fundamentals

Getting Down to the Basics

Interchange Rates are a simple concept once you understand the key factors that make them up.  What industry you are in, what type of card you accept, what method of cards you accept- all influence what your Interchange Rate will be.  Identifying the answers to these questions and knowing what they mean will allow you to negotiate an appropriate Interchange Rate for your business.

How it Works

Interchange Rates work through a series of relationships: the actual fee is paid by an acquiring bank (the merchant bank) to an issuing bank (the customer’s bank).  Each fee is set by the appropriate credit card network and can be negotiated directly with your merchant account provider.

The dual sided system created by this relationship benefits customers, businesses, and the card networks alike.  Working off of the basic principal that more buyers equal more sellers, the card networks that support a high number of cardholders is more valuable to a merchant.  In turn a merchant who accepts a wide range of cards is beneficial to multiple card networks rather than one specifically.  In these relationships however lie a few common misconceptions that leave many people in the dark with what rate they will be paying.

Credit card networks do not function as one unit; companies like MasterCard and Visa are separate and therefore negotiate different Interchange Rates.  While these networks set the fees you will never negotiate your Interchange Rate directly with MasterCard or Visa.  Instead the relationship existing between yourself, your merchant account provider, and the card network means you discuss your rate with your merchant account provider.

Seeing a change between Interchange Rates throughout the day is not limited to customers using different cards.  The Interchange Rate refers to the largest portion of your fees accessed with credit card acceptance.  In simpler terms the size of the transaction influences the size of the Interchange Rate.  Smaller transactions have smaller rates while larger transactions have larger rates.

Determining Factors

Many factors work into the consideration of your Interchange Rate.  The industry you are involved in, the types of cards you accept, the size of your business, and how the transactions will be processed all reflect on your rate.

Within a card network like MasterCard or Visa multiple types of cards are distributed: personal, business, and debit.  Each card poses a different security risk.  The Interchange Rate reflects a level of insurance for a merchant’s acceptance of cards- providing incentives like a reward card or cash back.

The type of business you run can greatly effect how large your Interchange Rate is.  Between each industry existing today there is a disparity in profits.  In setting the Interchange Rate card networks analyze your profit margin to determine what fee will encourage credit card use without hurting the business.

The size of your business also weighs heavily on the Interchange Rate you will receive.  Card networks set a minimum number of transactions; if you are below that set you may qualify for a lower exchange rate.

The security of you business is a major concern for the card networks.  How you choose to accept payments can lead to a higher risk of fraud.  Businesses that use physical terminal swiping are more appealing than those that rely on Internet transactions.  The card networks use the Interchange Rate as a type of insurance for themselves, the more secure you business is the more likely it is you will get a better rate.

Small Business Concerns

Small businesses need to insist on the lowest possible Interchange Rate.  If you are unsure about what rate you should be asking for, looking online for typical exchange rates in your industry can help you get an idea.

Fees add up and knowing exactly what you are paying for is crucial.  Make sure that you read your merchant agreement closely, cover the fine print, and understand what you are reading.  If you have any questions about what the agreement says ask your merchant instead of paying for it in the end.  Often merchants hide fees and early termination costs in the fine print, which can end up costing your company a lot of money.

If an Interchange Rate is not clearly addressed this may be because your merchant refers to it as a “discount rate”.  The Discount Rate is not the Interchange Rate- it includes additional fees.  Again, make sure you communicate with your merchant account provider and be persistent until you get the lowest rate possible.  Try calling the company a few times and speaking with multiple representatives so that you get all the information.  Ask for a written Interchange Rate quote so that you know it meets the price terms you discussed. When all is said and done print the proposal and your merchant application in the event you ever need to use them in the future.

There are some additional things to take note of if you want to achieve the lowest Interchange Rate possible.  First you should talk with your merchant account provider to make sure the Interchange passes through pricing, do not settle on this.  When dealing with customers try to encourage debit card use.  Debit cards are a more secure transaction, which in turn means a lower rate.  Check to make sure your merchant category code is correct.  Always use the most recent payment technology and bundle transactions to keep your business safe.  Calculate your real rate on a regular basis and consider whether or not it would be more economical to switch to a different card acceptance provider.

Educating yourself on what Interchange Rates mean and how they affect your small business with help you get the lowest possible rate for your business.  Remember to always update your information; with technology constantly advancing, new rules, new pricing, and new terms can mean a better deal on your Interchange Rate.

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SMB Reviews
SMB Reviews 473 posts

SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

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