What is Interchange?

Processing a credit card sale involves several underlying costs. Each time a credit card transaction is processed, various entities play a role. First, there's the acquiring bank, which Allied Payments represents. Allied Payments and other similar entities are known as Merchant Service Providers (MSPs). MSPs offer a range of merchant services, always acting on behalf of the merchant. Next, you have the card-issuing bank. This bank issues the credit card to the customer making the payment and represents the customer. Finally, credit card associations, like Visa, Mastercard, or Discover, determine the transaction processing rates.

For every credit or debit card transaction, the MSP pays the card issuing bank a pre-set fee. This fee is called the Interchange rate or credit card Interchange pricing. Interchange rates reflect the cost each bank incurs for their cards. Generally, cards offering more benefits, such as rewards or points, come with higher Interchange rates because the card-issuing bank needs to cover extra costs. In contrast, processing simpler cards, like debit cards, is cheaper and thus has lower Interchange rates. Debit cards typically withdraw funds directly from a checking account, making them low-risk for banks. Interchange rates also differ based on how the card is accepted—lower rates apply to swiped or dipped sales, while higher rates apply to keyed or online sales. These Interchange rates are consistent across all Merchant Service Providers, regardless of size; everyone incurs the same Interchange costs.

What Are The Interchange Rates?

Hundreds of varying Interchange rates exist. Each Interchange rate is comprised of two parts: a percentage fee based on the sale amount and a per-transaction fee. Commonly, Visa/Mastercard Interchange rates are presented as follows:

1.00% + $0.08

Though the tables can be complex, it is crucial to remember that all providers are subject to these rates and fees. Whether you are a large or small business, accepting credit cards requires compliance with Visa and Mastercard Interchange fees.

Visa Consumer Interchange Rates

Mastercard Consumer Interchange Rates

Card Association Fees

Aside from the Interchange fees that a merchant service provider must pay to the issuing bank, there are fees imposed by Visa, Mastercard, and Discover. These fees vary based on several factors, such as the monthly volume, whether customers physically present the card, the security measures you implement, possible international surcharges, and other considerations. Since many of these fees are contingent on the specifics of each transaction, predicting them with complete accuracy is challenging. However, the baseline fees charged by the card associations are generally around 0.12% of the transaction volume and $0.02 per transaction. Similar to the rates that merchant service providers owe to card-issuing banks, these fees are incurred by all service providers. This structure enables smaller providers like Allied Payments to compete with larger banking institutions. Card Association Fees form a part of the fundamental costs associated with credit card transactions, with the other component being the Interchange charge.

What Are Merchant Services?

When you process a transaction from a customer, your merchant service provider (MSP) must promptly pay all the indicated fees to the card-issuing bank and Visa/Mastercard/Discover. Also, your MSP must provide you with the transaction funds as soon as possible. This involves substantial behind-the-scenes work. Your MSP credits your bank account for any transactions processed before your customer pays their credit card bill. Managing your merchant account incurs operational expenses, so an extra fee is paid to the MSP beyond the Interchange fee (often called the merchant fee). This extra charge covers payment for managing risk, depositing funds, offering technical support, and keeping the account compliant with federal and state regulations.

Most merchants overlook Interchange rates when accepting credit cards, but the truth is that Interchange and card association fees generally make up at least 80% of the monthly service costs. Understanding Interchange rates can help you accept cards more wisely and ensure that your merchant service provider treats you fairly. That’s where Interchange-plus pricing becomes relevant.