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Small Business Insight

Understanding Interchange

Depositphotos_86078996_m-2015.jpgInterchange is an infinitely complex subject, one that is confusing to many small retailers. The short explanation is that interchange is a fee that major credit card associations establish as payment for their services. Every time a merchant accepts a credit card in exchange for goods or services, this transactional fee is assessed.


The fee is assessed to help cover various handling costs and risks associated when the credit card companies approve the transaction. It isn’t the fees that are confusing so much as how those fees are assessed. The primary options available to businesses today are tiered pricing and Interchange Plus pricing.



Tiered Pricing

Chances are that if you own a business that accepts credit cards today you’re on a tiered pricing plan for credit card processing.

When a customer uses a credit or debit card as payment for your goods or services, the customer’s bank authorizes a payment transaction to your bank that is the amount of the purchase minus the interchange fee along with any other fees associated with the transaction. You will get a statement with the details after the fact.

It doesn’t matter how the credit card transaction is conducted. It can be swiped, keyed in, provided over the phone, used online, etc. There are fees for each transaction – even with transactions that are declined.

One of the primary criticisms of tiered pricing is the perceived lack of transparency. Because the interchange
billing processes are so complex and constantly changing, many merchants feel as if interchange fees are somewhat arbitrary.

Most card processing companies operate with three primary tiers, though some companies have as many as 12 different tiers – each with different pricing. Names may vary from one bank to the next but typically involve something along these lines for the three primary tiers:Wheres_my$_quote-2.png

1. Qualified
2. Mid-Qualified
3. Non-Qualified

The issuing bank will have a designated rate for each tier based on the type of card being used (rewards card, corporate card, gold card, platinum card, standard credit card, etc.) and how the card was processed (was it swiped in person, keyed in by cashier, entered online, or swiped with a ZIP code verification, etc.). 

A standard card, for instance, might weigh in as a qualified card, but if the ZIP code was entered incorrectly or the CVV card wasn’t entered you could be charged 1.79 percent as a qualified standard card PLUS 2.39 percent for the non-qualified verification of the card. The risk to the card company is greater due to the non-verification, so they are passing that risk on to the merchant.

All of these things are in addition to the credit card companies interchange and affect what tier the transaction falls into. Ultimately these factors determine how much the transaction costs. Unfortunately, you, as a merchant, have zero control over any of the determining factors because you can’t predict what kinds of credit cards your customers will be using.

As a merchant you are a little bit at the mercy of credit card companies and have to trust the fact that they aren’t taking advantage of you. Most merchants simply write it off as one of the many costs of doing business – especially if you want to accept credit card payments. Lack of clarity in the billing process and determining interchange fees
is part of the reason so many businesses remain reluctant to accept credit cards despite the many benefits they
offer businesses.

One of the bigger problems is when you get pricing quotes for merchant services, you’re almost always given the qualified rates, which only account for a portion of the transactions and doesn’t include the higher rates you are likely to be charged for the bulk of your transactions. This means you can’t fully rely on this as an estimate of what the actual service will cost your business.



Flat Rate Transactions

The answer to the uncertainty of tiered transaction involved Interchange Plus pricing. Interchange Plus rates are infinitely more straightforward. They involve two rates on top of the Interchange charged by the credit card company (Visa, MasterCard, American Express, Discover, etc.), a flat rate credit card processing charged by the issuing bank, and a small transactional fee.

The flat fee aspect may be a standard $0.20 per transaction – a very nominal fee for the convenience of accepting credit card transactions and one that large and small businesses can easily absorb. You pay the small transaction fee PLUS a flat interest rate based on the cost of the transaction, which could be something like 0.30 percent on every purchase. This makes the entire process more transparent and palatable to many merchants.

Flat rate transactions have been around for a long time. Initially, though, they were only available to high volume merchants. With recent advances in technology, flat fee merchant services like this have become more widely available and easier to offer to smaller businesses – even those that are just starting out.

Finally, treat your workers well on this busy day. Consider bringing in pizzas or baked goods to perk them up throughout the day – it’s going to be a busy one if all goes well and they will have earned a little boost to help get them through it.

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Tiered Pricing vs. Flat Rate Credit Card Processing

It is up to you to decide which option is a better choice for your business. For many businesses it does come down to the ability to understand the pricing structure of Interchange Plus pricing. It makes the accounting process easier and helps merchants feel more confident in the process when the interchange is easier to understand. That doesn’t mean it is the most cost-effective choice for your business. You will have to crunch the numbers for yourself, to determine which option is best for your business.

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