Why are retailers so upset about U.S. Interchange Rates?

Interchange Series – Part 1


If you go to Google News and search for “Interchange Fees,” you will find a variety of articles talking about the war between big banks and retailers over Interchange Fees.  In talking to small business owners, two things are obvious to me:  while small businesses are affected by this debate, their processing companies have largely failed to educate them about the specifics.

The payment processing industry has a major flaw concerning interchange fees.  Because these fees are usually passed on to the merchant and do not affect the bottom line profits of the processor, they are rarely, if ever, discussed.

This is very bad for business owners because interchange fees make up at least 70% of the total cost of processing payments.  If these fees go up, rather than alerting the merchant or trying to find creative ways of lowering the fees, they are just passed on to the business.

In this three-part series, I am going to introduce interchange fees to you, explain how they affect your costs, and talk you through a few simple tips to save money on your payment processing.  Let’s start with this article to provide a basic understanding of the commonly asked questions about Interchange Fees.

Commonly asked questions:

What is Interchange?  When you process a transaction for $100 in your business, you know already that not all $100 goes into your bank account.  If it does, a good chunk is taken back out at the end of the month in the form of fees.

What is happening behind the scenes is that the consumer’s bank is not sending the full $100.  Usually the bank sends between $98 and $99.50.  This additional 0.5% to 2% is the “Interchange Fees.”  This amount is kept by what is called the “Issuing Bank” (the customer’s bank) and is theoretically used to cover the costs of providing the card service to the consumer and the risk of fraud on the transaction.

Who sets the interchange rates?  Visa and Mastercard, who do not charge or collect interchange fees, are the ones who set the interchange rates.  They play an important role as the third party.  They endeavor to create interchange fees high enough to entice banks to issue cards to consumers while still low enough for business owners to accept the cards that are issued.

There is a debate raging in the U.S. payments and retail industry specifically about the level of interchange fees which are charged.  The U.S. has some of the highest interchange fees in the world compared to other developed countries since (unlike the UK, Canada, or Australia) we have not significantly regulated these fees.  This is an interesting debate, and there are certainly two valid sides to this argument.

Can I lower the Interchange Fees charged on each transaction?  In most cases, you can significantly reduce the interchange fees that are passed through to you on a statement.  You must first make sure you are on “Interchange Plus Pricing” to ensure you are able to see your interchange costs.  With all the complexity in our industry, that you have total transparency with your pricing structure is imperative.  If you are on Tier Pricing or some variation of Flat Rate Pricing, these do not provide you with detailed interchange costs.  I would advise that you switch to Interchange Plus Pricing.

Once you have a statement showing your interchange rates, take time to get some interchange consulting and review your statement to look for areas of savings.  There are many small operational changes you can make which will dramatically affect your overall costs.  Two such examples are entering more card holder information or settling your terminal quicker.

If you would like to learn more or have an expert take a look at your statement, simply reply to this email.  We will follow up with you!

Have a great day,

James Shepherd

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