Credit Card Interchange

Posted on Saturday, January 05, 2008 by Bryan Johnson

Interchange is the wholesale pricing of Visa, MasterCard and their co-issuing financial institutions in the credit card processing industry.

Visa and MasterCard branded cards account for roughly 70% of all debit and credit cards in circulation. When financial institutions issue credit or debit cards to a consumer or business, they make the Interchange fee every time that card is used to purchase something. Visa and MasterCard, the co-issuers, make a very small margin on top of the financial institutions set fee. The financial institutions make roughly 80% of all credit card fees charged.

Businesses of course that accept credit cards as a form of payment pay these fees. Discover and American Express are non-bank cards meaning that they don't use the thousands of banks nationwide to issue their cards to consumers and businesses. Discover and American Express determine their fixed, almost non negotiate rate structures.

Discover recently announced that they will be changing their business model to be more like Visa and MasterCard and have a set Interchange structure that merchant service providers can mark up and then bundle with Visa and MasterCard credit card processing. The move is to try and broaden acceptance and simplify processing for merchants who will now only receive consolidated pricing and one monthly statement for Visa, MasterCard and Discover. American Express will still be separate.

The exact Interchange rate that is charged on a particular transaction depends on a number of variables. In fact, there are over 170 different interchange rates that are determined based upon the card type (e.g. debit, credit, rewards, corporate), business type (restaurant, retail, ecommerce, gas station, etc. ), acceptance method (swiped, internet, phone), settlement or batch time frame and what information is submitted with the transaction (e.g. Address Verification Service (AVS)). There are a few other more advanced variables that influence the Interchange rate.

Merchant account providers mark up the wholesale Interchange rates and offer merchants credit card processing services. To simplify the complexity of the Interchange structure, most merchant service providers will offer a 3-Tier pricing program. This means that a merchant will have one rate for swiped transaction, another for non-swiped cards and another for corporate cards. Sometimes a 4-Tier pricing structure is issued with the addition of a swiped debit card rate. The interesting thing about these pricing structures is that a there may actually be 40 different interchange rates that are charged to the merchant but the merchant account provider just buckets all of these rates into the three different categories.

Some merchant account providers may bucket Reward cards in the the second most expensive tier and another company may bucket them into the third and most expensive tier. That's why it's very challenging to compare rates from one provider to another.

Other related posts:
Where do credit card fees come from?