What is Interchange, Again?

October 1, 2018

October 1, 2018

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FeeFighters uses Interchange Plus pricing in our credit card processor marketplace. The biggest chunk of change that processors charge is Interchange, but what does that really mean?

Two of the things that confuse merchants the most are:

  • Why they are charged different amounts when different kinds of cards are used
  • Who gets to keep the 1.5% – 3.0% of their hard-earned sales that are siphoned away as “discounts” and “fees”

A big part of the answer to both of those questions is: “Interchange”.

What is Interchange?

Interchange is the set of rules that define how much of a cut the issuing bank (the bank that issued the customers’ credit card, big issuing banks include Capital One and MBNA) gets to keep from the credit card transaction.

The part of the transaction that you see:
The back-end of the transaction (where the money flows):


How Big ids Interchange?

Interchage is the largest piece of the transaction, usually 70-90% of processing fees. Basically, the card issuing bank captures most of the economics of the transaction.

Morgan Stanley estimates that interchange is, on average, 1.75%, or 81% of the total fees charged to the merchant on the transaction.
The Kansas City Fed estimates that interchange is, on average, 1.60%. However, their data was from 2003 and earlier, which may account for the difference in the estimates, since Interchange tends to rise every year.


Why Should I Care?

When negotiating a deal with your credit card processor it helps to know how much of a cut they are getting for two reasons:

It lets you know how much they are making off or you and therefore how much room they have to negotiate
The main rate that a processor will quote is on a standard credit card transaction. With the rise of rewards cards and debit cards, these “standard” cards make up the minority of transactions. If you focus your energy on negotiating a good “standard” rate, with a fair markup for your processor, they probably will sneak in a much larger markup on the rewards and debit cards. An example of that can be found in “Reading a Merchant Processing Statement“

Until recently interchange rates were secret, but now you can get a full description of them at the Visa and Mastercard websites: Visa interchange rates , Mastercard interchange rates.For a chart of different interchange rates, click here.

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