Interchange and Credit Card Fees Demystified for Business Owners
What is this “Interchange”?
Interchange is the major expense buried into a business’s credit card processing rates and most businesses need help understanding what it is and who controls it. With the new Durbin bill more education and discussion is sparking up around getting the control away from the banks. In fact the US Treasury will soon be in control of Debit Interchange.
The easiest way to think of Interchange is it is the wholesale cost – much like what your distributors charge you. In the same way your suppliers give you proprietary pricing information outlining the costs you’ll pay for goods and services – a credit card acquirer (processor) pays a wholesale rate for each card they process … a.k.a. the Interchange Rate.
WHO CONTROLS INTERCHANGE?
Your acquirer (Processor) has no control over Interchange – the rates are determined by the card brand (Visa/MasterCard/Discover/American Express). All acquirers (processors) buy Interchange at the same cost. So scale doesn’t equivalent to best cost structure on the largest component on what a business will pay for processing. Hence doing business with the largest processor doesn’t mean you get a better deal.
Interesting enough is when you dig into the card brands (Visa/MasterCard) what you find is that they are basically a group of the largest issuers of credit cards (B of A, Chase, Citi etc..) These same banks that set the rates are the beneficiaries of “Interchange”. It’s the wolf watching the hen house and it has been that way for a long time. Another interesting fact is that both Visa and MasterCard have become publicly traded companies in the past 3 years. This payments scheme is a major revenue source for the card Issuing banks.
So back to the processors, the one who are beaten up when they try to set you up for service.
Interchange Wholesale is available for you to see for yourself
Would you like to see for yourself? I thought so! Here are the links to the interchange pdf files you can download from the Associations (Visa/MasterCard) websites – (if nothing else now you can challenge your current provider with them).
For Visa Interchange: http://usa.visa.com/download/merchants/april-2010-visa-usa-interchange-rate-sheet.pdf
For Mastercard click here: http://www.mastercard.com/us/merchant/support/interchange_rates.html
Here is where we arm you to understand the scheme a little better. Where processors differ is in their mark-up and their pricing methods, and this is where the battle rages as merchant acquirers fall all over each other trying to get you to switch processors “for a lower rate”.
There are three main ways processors bill.
1) Differential – this is where you are quoted a base rate and pay an extra fee when the transaction is processed different than how you were set up. This could be because you took a different card type (Rewards, T & E, etc..) or because you failed to give additional information that helps you clear better.
2) Tiered- this is where you are quoted 3-4 rates and the cards dump into the buckets based off their Interchange expense.
3) Cost Plus or Interchange Plus – this is where you see true wholesale and then the processors cost are clearly laid out in a transaction and/or basis point format. Most opinions are this is the best one but that is not true, remember 80% of the expense is the Interchange but somehow we focus on the 20% way too much.
Our recommendation on how to select a processor.
1) Don’t focus on your rates – I know it sounds irrational, it’s just like buying a car and focusing on the monthly payment, see the big picture.
2) Focus on getting to the least cost of acceptance meaning these 3 points:
a. How do you clear your cards the best (AKA Interchange Management) Ask the sales person what they do to help you clear better, if you get a vague distorted answer you are dealing with a yahoo which our industry is polluted with.
b. Are you maximizing Pin Debit to leverage your cost per transaction
c. Understand why your cards are clearing differently and what you can do to lower them – THAT IS WHAT DATA ONE does well (my only plug in this article)
d. Now negotiate your processing cost down and when it sounds too good to be true, it probably is, the below will happen.
3) Get a processor that rate locks and doesn’t charge junk or annual fees, negotiating a good deal is nice but when they jack rates (most do) or charge you junk monthly or annual fees, your rates are now irrelevant. $200 a year versus .02 cents a transaction makes all that nogciating worthless now and you probably missed it because they conveniently tucked it away in the billing discretely.
But you still need one thing, understand their service model. Americans have this issue where we want the best deal upfront and then when the service is sub parr (sucks) and we are talking to an automated customer service rep we wonder why. Ask the questions upfront, payment processing is not just a commodity, it is critical to understand as it is a major expense to your business and bottom line.
My final advice – Do yourself a favor and focus on the Interchange, that is the meaningful part of your cost when it comes to card processing.
Questions? Send me an email and I’ll do my best to answer. firstname.lastname@example.org, we don’t charge for free advice or education.