What is interchange?

Interchange is the part of your processing bill that nobody in the chain you can talk to actually keeps.

Who gets it

When a customer pays by card, the issuing bank is advancing the money and carrying the risk of that cardholder not paying. Interchange is what it receives for doing so. Your processor collects it from you and passes it on. Every processor pays the same published rate on the same transaction, which is why two providers quoting very different prices are competing on their markup rather than on interchange.

Alongside it sit assessments, which go to the card networks themselves, and your processor's markup, which is the negotiable layer. See merchant processing statement for how the three appear on a bill.

What moves the rate

Interchange is not one number. The networks publish schedules with many categories, and which one applies depends on:

• Card type. Debit, standard credit, rewards credit and commercial or corporate cards carry different rates.
• How the card was accepted. In person with a chip read, keyed in by hand, or online, each with different fraud exposure.
• Your merchant category code, which classifies your business.
• The data submitted with the transaction. Address verification on card-not-present sales, and additional invoice-level data on commercial cards.
• Timing. Settling a batch outside the expected window can move a transaction to a more expensive category.

Because the schedules are published by the networks, you can look up the current categories yourself rather than relying on a sales representative's description of them.

One regulated corner

Debit interchange for card issuers above a statutory asset threshold is capped under the Federal Reserve's Regulation II, adopted under the Durbin Amendment to the Dodd-Frank Act. The cap formula and the threshold are in the regulation. Debit from smaller issuers is not covered, so your debit costs depend on which banks your customers use.

What you can actually influence

You cannot negotiate interchange. You can change which category your transactions land in:

• Take cards in person and read the chip where the sale allows it.
• Send address verification data on card-not-present transactions.
• Submit the additional data fields for commercial and corporate cards, which can qualify them for lower categories.
• Settle batches within the expected window, every day.
• Make sure your merchant category code is right for what you actually sell.

What the markup is, once interchange comes out

Illustrative only — $120,000 of monthly card volume across 3,000 transactions.

Suppose your blended rate is 2.75%, so you pay $3,300 a month. Suppose your actual weighted interchange plus assessments works out to 1.95%, or $2,340. The processor's markup is $960 a month — 80 basis points.

Price the same volume on interchange-plus at 0.30% plus 10 cents a transaction: $360 plus $300, or $660 a month, 55 basis points.

The difference is $300 a month, $3,600 a year, on identical card acceptance. Nothing about the business changed and no published interchange rate moved.

Two things follow. A blended rate conceals the markup by construction, and the only way to see it is a statement that itemises interchange separately. And a low-sounding blended rate can carry a very large markup on a debit-heavy business, because debit interchange is generally the cheapest category and a blended rate does not pass that saving through to you.

The downgrade, and what it costs

A transaction that fails the data or timing requirements for its expected category settles in a more expensive one. The usual causes: a card keyed rather than read, address data missing on a card-not-present sale, a commercial card submitted without the extra invoice-level fields, and a batch settled outside the window.

Illustrative only — 6% of $120,000 of monthly volume downgrading by 45 basis points costs $32.40 a month. Modest. The same 6% downgrading by 90 basis points on a business running $600,000 a month is $324 a month.

The figure is rarely dramatic, and the reason to chase it is different: every cause on that list is a process problem you fix once and it stays fixed. Ask your provider for a report showing transactions by interchange category with downgrades identified. A provider who cannot produce one has given you a statement you are unable to audit, which is its own answer.

Passing the cost on

Surcharging and cash discounting have both become common, and both are governed by two separate rule sets at once: the card networks' own rules, which impose limits, signage, notice and registration requirements, and state law, which restricts or conditions the practice in some states. Debit is treated differently from credit.

Before adopting either, get written confirmation from your provider of what the networks require of you, and check your own state's current position rather than relying on a sales presentation. If it is done wrong, the consequences — fines, chargebacks, termination of the merchant account — land on you rather than on whoever suggested it.

Why this matters when comparing quotes

A quote is only meaningful as a markup over interchange. A provider quoting a single blended rate is quoting interchange plus assessments plus markup as one figure, and moving your card mix will move that figure without anyone changing your contract. Ask for the markup separately, and compare markups.

What to ask for before you switch providers

1. Three months of statements with interchange itemised, from the provider you have now. If your current statement is blended, ask for an interchange-qualification report; most processors can produce one on request.
2. A quote expressed as interchange-plus, with the percentage markup and the per-transaction fee stated separately rather than rolled together.
3. Every other fee in dollars — monthly, annual, PCI, gateway, batch, statement, chargeback, minimum-volume and early termination.
4. The term, the auto-renewal clause and the termination fee, in the contract rather than in an email from the salesperson.
5. Confirmation of who owns the terminals and what happens to them if you leave.

Then rebuild your last three months on the new quote, using your own card mix and transaction count, and compare the totals. A rate comparison between two providers tells you almost nothing, because the two rates are measuring different things. A recomputed bill on your own volume tells you the answer.