Today’s consumer expects to have several payment options when buying anything from anyone in today’s marketplace. Technology and innovation are exponentially increasing the pace of how we communicate and live.  Supply and demand that once needed weeks to turn over now can be accomplished within an hour in some cases.  A major component to this ability to satisfy consumer want and need centers around the purchasing process with many major retailers using new technologies to track clients and have them make purchases quickly and easily, sometimes with the simple click of a single button. Around 185 million U.S. consumers carry plastic, that’s well over half of the country (you can figure at least three quarters of all adults) with the average person carrying three bank credit cards, four retailer credit cards, and one debit card.


Knowing this, it’s easy to understand why accepting credit cards is a must for any business. In order to accept card transactions you need to get a merchant account.  When applying for a merchant account you will come across a term used frequently during many payment processing discussions. That term is interchange.


What is Interchange?


Simply put, Interchange is the cost of doing business within the merchant services industry when dealing with Visa, MasterCard, or other card brands to accept customer payments.  Every time a credit card payment is processed, there is a predetermined percentage of the sale assessed to the merchant. These fees are charged to facilitate the card transactions through their systems.


There are different levels of Interchange which range from less than 1% usually for debit card purchases to more than 3% for business or rewards credit cards.  Inter change can also be affected by the way in which the transactions is processed such as swiped versus manually keyed transactions.  The Federal Reserve sets certain guidelines for these Interchange fees. Any issuer may not receive an interchange fee that is greater than 21 cents, plus .05% multiplied by the value of the transaction.   Most retailers understand that these fees are a cost of doing business, and are well worth the ability to take payment from those that want to make card-based payments.


Interchange fees are not paid by the consumer, and are not considered a tax. They cover the general cost to provide the card service, customer service, system operations, card production costs, security, and so forth.  Basically, you should accept Interchange fees as the set base cost to accept the card brand within your business. The rates and fees above interchange are the variable costs required to process those transactions based on varying factors as an individual merchant.


The Levels of Interchange


Interchange rates generally correlate with the cost that each bank has for their cards. The more perks a card has; the higher the Interchange rates.  This is done in a strategic manner to recoup costs. Debit cards are the most inexpensive of cards to process because funds come straight from a person’s bank account and there is in effect no credit extended and thus Interchange fees reflect this.


Interchange rates also vary based on how the card is accepted. Fees are lower for swiped sales in brick and mortar stores; yet higher if the transaction is keyed-in also known in the industry as a forced transaction.  Likewise, Interchange is higher for e-commerce, mail order, and telephone order transactions simply because the card is not present for the merchant to run through security protocol when the purchase is made.  The type of business or billing model you have as well as the product or service you sell can affect Interchange.


There are literally hundreds of different Interchange rates. Each has two components: a per-transaction fee and a percentage fee of the total dollar amount of a given transaction. When viewing an Interchange table, it’s important to note that every merchant service provider regardless of size is required to pay these fees. There is no way around it and it doesn’t change based on the size of your business.


Merchant Services Providers and Interchange


Interchange probably isn’t the first thing you think of when looking for a merchant account. Oddly enough, it represents an overwhelming majority of the costs associated with credit card processing.  If you think you can dodge these costs by using a third party processor such as PayPal or Square; it sounds right but the reality is those costs are built into their flat-rate options.  To take that a step further, most of these third party processors have used ease-of-use to distract from the unnecessarily high rates & fees they charge merchants.  Those flat rates are usually close to costs of the most expensive interchange transactions.  Paying variable rates might seem confusing and it certainly can be.  It usually takes several years for someone within the payment processing industry to master interchange, but variable cost pricing is set-up in a way that gives merchants the best opportunity to experience lower costs and fees.


At the end of the day, what really matters is your effective rate.  This is the rate you are charged based on all transactions over a given month.  Merchant service providers such as Painless Processing will show you what your effective rate is and how much you can save by switching to Painless Processing for all of your payment processing needs.


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