Interchange & Pricing
On this page we will discuss what “Interchange” is and how it plays a role in the over all cost in what a business will pay to accept credit cards.
The first thing is to understand the parties in the credit processing process to define the terms:
Issuing Bank: The bank or financial institution that issues the card to the end user
Acquirer: Any bank, financial institution that maintains credit card processing relationship and receives all transactions from the seller to be distributed to the credit card issuing banks.
Processor: A large data center that processes credit card transactions and settles funds to merchants. A processor connects to the merchant on behalf of an acquirer via a gateway or POS system to process payments electronically.
“Interchange” or “Interchange Reimbursement” is a fee paid to the issuing bank. Interchange Reimbursement fee is set by the card associations, i.e. Visa, MasterCard and Discover. There are over 400 different categories of interchange. A transaction will be accessed an interchange cost based on how the card is processed, when the transaction is settled, the type of business that accepts the credit card, just to name a few variables. Most business will only be effective be a small faction of interchange categories. A business that accepts and processing credit card in reality does not “pay” interchange. It is paid by the acquirer / processor. For more on the different categories, links are provided below.
The real question is what it will cost for a business to accept credit cards and how the pricing is structured. Let’s tackle two, “Interchange Plus Plan” and “Tier Rate Plan”. In an Interchange Plus arrangement the acquirer passes the interchange cost directly thru to the merchant. Then the acquirer will add some cost or the “plus” part in the “Interchange Plus Plan” This makes it very easy for a business to compare cost from one firm to another.
For a “Tier Rate Plan” is taking the different interchange categories, group and bundle into tiers or different broad buckets. Normally one will see three to four tiers. Each tier is priced high enough to cover the highest interchange fee plus a margin. When one receives a statement in this arrangement there is no mention of interchange cost because it is now becomes a discount fee and transaction cost. Consequently you will pay higher fee for all of the other interchange categories in the tier. On many merchant statements with the “Tier Rate Plan” one will see qualified, mid-qualified and non- qualified. With “Interchange Plus Plan pricing model the cost is transparent because the true cost is shown there by eliminating the margin padding that can take place in a bundled or tier plan.
Also worth mentioning is some companies will use a hybrid between a Tier and Interchange Plus and try to disguise to look to be “interchange plus” but, the interchange fees are marked up and not true interchange cost. This info is disclosed in the application / agreement, if one understands what they are reading. Good luck reading the fine print!
With all this said it is important to also look at the big picture and the overall cost. One needs to pay attention to other cost like the monthly recurring fees, contract terms, etc. More of this can be found on our Home Page. Call or email us today to learn more. If you accept credit cards currently, we will be glad to provide a free no obligation analysis of your current plan.
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