Credit Card Processing 101: What is Interchange?

As business owners, you have enough to worry about. That’s why we are here to help you keep track of interchange rate changes. If you are wondering, “What is an interchange rate?” read on for a quick explanation of interchange rates and how they work. As a North merchant, you will be notified of any changes at the bottom of your monthly statement.

What are they?

Interchange is the money that gets transferred from the acquiring bank to the issuing bank for each transaction. These fees account for a portion of credit card processing costs and are established by the card brands of open-loop processing systems – Visa, MasterCard and Discover.

How do they work?

For daily discount merchants, when a credit card transaction occurs, the cardholder’s bank pays the merchant’s sponsor bank for the cardholder’s purchase, minus the interchange fee for the transaction. The merchant’s sponsor bank then pays the merchant from the remaining balance, less the amount taken for processing the transaction.

For monthly discount merchants, merchants are funded the full amount of the sale and the fees are then debited at the end of the month, or on a monthly billing schedule.

All interchange fees are set by the card brands– Visa, MasterCard, and Discover  modify some of their fees twice a year, usually in April and October.

Do these fees vary?

The interchange fee associated with each transaction depends on the interchange category that the transaction falls under, as set by the card brands. There are a few factors that can influence the interchange category, these include:

• The processing method – was the transaction one where the card was swiped, keyed, or in a card-not-present environment like online?
• Transaction data – if you process card-not-present transactions, the amount of information supplied at the time of purchase can impact the rate, information like the zip code of the cardholder.
• Merchant category code – each business type processing credit cards is assigned a merchant category code (MCC). Specific interchange rates are applied to certain MCCs. For example, an auto repair shop will have a different MCC than a gas station or a hair salon.
• Card type used – was the card a credit card, debit card, or a prepaid card?
• Card brand – each card brand, as explained above, sets their own rates.
• Card owner – a rate can depend on whether the card used at the transaction is issued to an individual, business, corporation or municipal agency.

New rates announced for 2015

Recently, the Card Associations announced some pricing adjustments to the interchange rates and fees. The following adjustments have gone into effect this past January, and new rates will be announced again prior to the end of 2015:

• For Visa, there will be an increase to the Visa assessments by 2 basis points (0.02%) for all credit products; debit products will remain the same.
• MasterCard announced there will be an increase to the MasterCard assessments by 1 basis point for all signature debit transactions, and for consumer and commercial credit card transactions under $1,000.
• MasterCard also announced the introduction of the Digital Enablement Fee of 1 basis point (0.01%), which will be assessed on all consumer credit, commercial and signature debit dollar volumes for select card-not-present transactions.