According to Investopedia.com, interchange can refer to any “transfer of information from one computer to another. In business, this typically refers to an electronic data interchange (EDI), a system used to communicate strictly formatted messages that represent documents other than monetary instruments.” In other words, interchange basically means that electronic data is being sent and received between two or more parties. When we talk about interchange from the perspective of a merchant services account, what exactly does that mean?
Today, we will answer this question by defining interchanges for small businesses, how interchange fees work, explore the similarities and differences between credit card processing fees and merchant service fees, and answer some frequently asked questions.
What are Interchanges for Credit Card Processing?
Virtually all businesses now process credit card and debit card payments. In order to do so, most small businesses will work with a merchant service provider to establish a merchant account through which electronic payments can flow. A major part of this process is the interchange that takes place between merchants, credit card companies, issuing banks, customer banks, etc. This “interchange” is the process by which information about the purchase is approved or denied so the financial transaction can be completed.
In its simplest terms, interchanges are an electronic handshake between a business and the financial institutions that are facilitating an electronic payment. Not all interchanges are created equal. For example, payments processed with a chip card are encrypted, adding a critical layer of security to the interchange process. This is why swiping credit cards and/or accepting credit cards for e-commerce payments carry a higher risk of purchase fraud.
Interchange Fees for Small Businesses
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.” Interchange fees are an unavoidable part of doing business when accepting most forms of electronic payments. These fees are used to cover a number of costs incurred by the issuing banks including risk, handling costs, and bad debt costs. This is important to understand from the perspective of a small business owner, as those fees coming out of your sales aren’t simply going into the void!
It is also critical to note that interchange fees make up between 70 and 90 percent of the total fees that merchants pay to banks. The actual interchange fee rates per transaction can vary dramatically depending on the card type, the business details, the merchant account details, and much more. Interchange fees may also change over time. Typical rates hover around ~2 percent of transactional values (more on this in the FAQs section below).
Credit Card Processing Fees vs. Merchant Service Fees
There are a lot of terms that get thrown around when discussing interchange that can be confusing. Interchange fees, credit card processing fees, merchant account fees, incidental fees, and other jargon makes understanding basic fee structures more difficult than necessary. To better understand how interchange and their associated fees work, here are some definitions:
Credit card processing fees AKA Interchange fees: fees associated with credit card and debit card payment processing which are charges by credit card companies and their representative banks.
Merchant transactional fees: your credit card processor/merchant service provider will also likely charge a small fee per transaction. It is important to note that there are some merchant account pricing options such as membership merchant service agreements which may nullify merchant transactional fees. These are generally charged in conjunction with interchange fees.
Scheduled fees: depending on the nature of your merchant service agreement, you may also incur scheduled fees such as membership costs. These are separate from interchange fees.
Incidental fees: one-off fees such as installation, account openings, chargebacks, and other fees may also occur. These are unrelated to interchange fees.
Interchange for Credit Card Processing FAQs
What is a typical Interchange rate?
While each credit card company has their own fees and rates which may change over time, a reasonable expectation would be to pay approximately 2% of the total purchase amount. Merchant account fees are commonly calculated by a percentage plus a flat or a straight percentage. For example, you might choose an interchange-plus pricing model which incurs a very small percentage plus a flat charge per transaction.
Is there any way around Interchange fees?
Not if you want to process electronic payments. For business owners looking to save money on credit card processing fees, the best ways to reduce interchange fees include working with a reputable merchant service provider, selecting the best pricing options for your needs, and using best practices to avoid costly chargebacks and other penalties.
True Merchant Credit Card Processing Keeps Interchange Fees Low
True Merchant is a Better Business Bureau accredited merchant services company which focuses on helping small businesses. We understand that the details of processing debit card and credit card payments are often the last thing on business owners’ minds. That is why we offer transparent, fair pricing models for our top-notch services including CardSecure, NFC payments, online payment solutions, and much more!
To learn more about how True Merchant can help your small business, please contact us today by calling or filling out an online form. One of our qualified merchant services professionals will be happy to get you started.