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What is Interchange, and Why is it Important to You?

As a merchant, you’ve likely heard the phrases the kind of transaction. For example, rewards cards have
“interchange” and “interchange rate” and are aware that higher rates than basic cards, and mail order or phone
you are charged a dollar amount for interchange. But you transactions have higher rates than transactions where the
might not know the details of interchange, and why the card is physically presented at the time of purchase.
rates can vary. This article walks you through interchange
Visa and MasterCard typically adjust interchange rates
and explains in simple terms how it impacts your business
twice a year in April and October, although occasionally
— and your bottom line.
they update the rates in other months. Adjustments occur
What is interchange, and why is it charged? as the marketplace changes. Sometimes the rates go up.
At other times, they remain the same or even decrease,
Interchange is the fee charged for passing financial
depending upon the situation. To view the latest
transactional information back and forth between you (the
interchange rate changes, visit the bankcard association
merchant), a payments processor (such as Heartland
websites:
Payment SystemsTM), the bankcard companies (Visa® and
MasterCard®), and the banks that issue credit, debit and Visa:
prepaid cards. This fee is imposed by Visa and MasterCard, USA.Visa.com/merchants/operations/interchange_rates.html
not by Heartland. You pay this fee on every card transaction MasterCard:
you process. MasterCard.com/us/merchant/how_works/interchange_rates.html
Why do you need to pay interchange? Do you have to pay interchange?
You pay this fee so issuing banks can recoup the costs of As a merchant, you can’t avoid paying interchange — it’s
distributing credit, debit and prepaid cards to cardholders; part of the cost of accepting credit, debit and prepaid cards
pay for their marketing efforts and fraud monitoring/fraud at your place of business. But, there are steps you can take
reduction initiatives; and defray the cost of other functions to make sure you are getting the best interchange rates
related to card issuance. possible on your transactions.
You may also be aware of assessment fees. Like How can you reduce your interchange charges?
interchange, assessment fees are imposed by Visa and
There are three fundamental actions that impact the rate
MasterCard. Unlike interchange, money generated from
you’re paying: Are you swiping the card or key entering
assessment fees goes directly to Visa or MasterCard to
cardholder information? Are you using Address Verification
cover their operating costs, rather than to issuing banks.
Service (AVS) on keyed transactions? Are you settling your
Currently, Visa’s assessment fee is .0925 percent, and
terminal and account on a daily basis?
MasterCard’s assessment fee is .0950 percent; both are
assessed on the purchase price of a product or service. How you handle these three scenarios will affect your
chances of qualifying for the best rate and avoiding being
What are the current interchange rates?
“downgraded.” When a transaction is downgraded, it
As of April 2008, there are 254 interchange rates. Why so means you pay a higher interchange rate because certain
many? Interchange rates are complicated because card qualification criteria were not met. Every time a transaction
companies like Visa and MasterCard do not have one set moves further away from the requirements of the expected
rate that applies to every industry or every sale made. The rate — and closer to the possibility of fraud — the
actual interchange rate charged may vary based on the way transaction is downgraded, and you pay more for
the card information is provided, the type of card used and interchange.
Let’s examine the three common downgrades to see how
they impact the interchange rate, and let’s use a Visa The Effect of Different Scenarios
in-store retail transaction of $100 to illustrate the effect. on the Interchange Rate
(See the sidebar "The Effect of Different Scenarios on the of a Retail Purchase of $100
Interchange Rate of a Retail Purchase of $100" for a quick
comparison of the effects of the different rates on your
bottom line.) Visa What You
Scenario Interchange Pay for
The lowest interchange rate on a transaction occurs when a
Rate Interchange
card is swiped through the terminal. The interchange rate of
a card-swiped, $100 retail transaction equals 1.54 percent +
10 cents ($1.64). If, for some reason, the terminal can’t read Card swiped
the card’s magnetic stripe (the card is damaged, for at terminal; 1.54 percent
example), you can key enter the information. That, however, transactions + 10 cents $1.64
increases the interchange rate. If you must key enter settled daily
information, you can help lower the increased interchange
rate by using Address Verification Service (AVS), a fraud
prevention tool. Key-entered
at terminal,
AVS automatically compares the components of the 1.85 percent
using AVS;
cardholder’s address, such as the zip code, to the billing + 10 cents $1.95
transactions
address of the card. If there is a discrepancy, the transaction settled daily
downgrades. Continuing with our example of a $100
purchase, a key-entered retail transaction where you use
AVS and receive a match has an interchange rate of 1.85 Key-entered
percent + 10 cents ($1.95). If you don’t use AVS, you’ll see at terminal,
2.30 percent
a large jump in the interchange rate on this same transaction not using AVS;
— 2.30 percent + 10 cents ($2.40). The difference between +10 cents $2.40
transactions
paying $1.64 and $1.95 or $2.40 really adds up!
settled daily
Another step to reduce your interchange rate is settling (or
“batching”) your terminal and transactions at the end of
each day. Your payments processor only has two days to Card swiped
get your retail transactions processed and forward them to at terminal; 2.70 percent
Visa and MasterCard, which in turn forward them to the transactions + 10 cents $2.80
issuing bank. If you settle your accounts only weekly or settled monthly
monthly, your transactions will downgrade due to missing
the two-day time frame. Late batching results in higher
interchange and delayed payment.
Let’s go back to our initial Visa retail card-swiped •••
transaction with an interchange rate of 1.54 percent + 10 P. Gayle Hoskinson is manager of interchange and
cents ($1.64). If you don’t settle daily and decide instead to compliance at Heartland Payment Systems. Heartland, a
settle only once a month, that very same transaction now NYSE company trading under the symbol HPY, delivers
has an interchange rate of 2.70 percent + 10 cents ($2.80). credit/debit/prepaid card processing, payroll, check
You’ve nearly doubled the amount you’re paying in management and payment solutions to more than 250,000
interchange, and that’s money out of your pocket. businesses nationwide.
As you can see, you can save a significant amount of money Heartland is the founding supporter of The Merchant Bill of
if you swipe a card instead of key entering it, use AVS to Rights, a public advocacy initiative that educates merchants
prevent fraud and settle your transactions on a daily basis. about fair credit and debit card processing practices. For
Why pay more than you need to for interchange? It’s your more information, contact Heartland Payment Systems at
business and your money — keep as much of it in your 866.941.1HPS or visit HeartlandPaymentSystems.com and
pocket as possible! MerchantBillOfRights.com.