Interchange fees are the transaction charges imposed on merchants when they accept card payments from customers, whether conducted online by an eCommerce business or in-person at a physical store. While interchange is commonly perceived as a singular per-transaction fee, it comprises charges from:
- The card issuer: the customer’s bank or credit card company
- The card network: e.g., Visa, Mastercard, Discover, American Express
- The acquirer: the merchant’s bank or payment facilitator
These fees vary based on factors such as the type of card used by the customer, the country where the card was issued, whether the transaction occurred online or in person, and more. This article delves into the intricacies of how interchange operates and outlines the processing fees associated with accepting card payments globally. Additionally, it clarifies the distinctions between Interchange++ and Blended pricing models, aiding businesses in determining the most suitable option for their needs.
Before we dive into the intricacies of interchange fees, lets do a quick refresher on the key players involved:
Acquirer: an acquirer refers to a financial institution or a third-party payment processor that establishes and maintains relationships with merchants for the purpose of accepting credit and debit card transactions. The acquirer is the entity that facilitates the authorization, processing, and settlement of these transactions.
Card Network: a card network, also known as a payment network or association, refers to an organization that establishes and manages the infrastructure that enables the processing of credit and debit card transactions. Card networks act as intermediaries, facilitating communication and transaction authorization between various parties involved in a card payment. Think: Visa, Mastercard, Discover, etc.
Card Issuer: the card issuer is the financial institution or bank that provides a credit card or debit card to a cardholder. When a cardholder makes a purchase, the merchant sends the transaction details to the card issuer for authorization. The issuer assesses factors such as the cardholder’s credit limit and account status to determine whether the transaction should be approved or declined.
Interchange Fee Mechanics
Thus, when a cardholder attempts to make a purchase using a debit or credit card, the following sequence of events occur:
- the acquirer transmits the transaction data to the customer’s card network.
- Subsequently, the card network forwards the transaction data to the card issuer.
- The card issuer conducts various checks, primarily to verify the availability of funds in the customer’s account, before informing the card network about the approval or declination of the transaction.
- The card network communicates this information to the acquirer.
- The acquirer proceeds to process the transaction.
- Following this, funds are transferred from the card-issuing bank to the acquiring account.
Upon processing each transaction, the acquirer incurs fees payable to both the card issuer and the card network. Subsequently, the merchant is obligated to reimburse the acquirer for these fees, adding a markup to address handling costs. The primary component of the payment processing fee is allocated to the card issuer, covering credit risks and the potential for card fraud. Additional portions of the fees are directed to the acquirer and the card network. Typically, fees are assessed as a percentage of the transaction value, supplemented by a fixed fee.
How are Interchange Fees Determined
Plastic card interchange fees are calculated based on a complex set of criteria and are typically determined by the card networks. Interchange fees are the fees paid by the merchant’s bank (acquirer) to the cardholder’s bank (issuer) for each credit card transaction. The specific formula for calculating interchange fees varies, but common factors include:
- Transaction Type: Different types of transactions, such as card-present (in-store) or card-not-present (online), may have different interchange rates. The method of processing, the level of risk, and the potential for fraud can influence the interchange fee.
- Card Type: The type of credit card used in the transaction plays a significant role. Premium or rewards cards often have higher interchange fees compared to standard credit cards.
- Merchant Category: The industry or category of the merchant can impact interchange fees. For example, fees may differ for transactions at a retail store, a restaurant, or an e-commerce site.
- Processing Method: The way the transaction is processed, including whether it involves a physical card, chip, or contactless payment, can affect interchange rates.
- Risk Level: The perceived risk associated with the transaction influences interchange fees. Transactions with a higher risk of fraud or chargebacks may have higher fees.
- Volume and Value of Transactions: The total volume and value of transactions processed by the merchant may also impact interchange fees. Merchants with higher transaction volumes may negotiate lower rates.
- Card Brand: Different card networks have their own interchange fee structures. Visa, Mastercard, American Express, and other networks each set their rates.
Moreover, certain regions have enacted legislation to limit interchange fees.
Within the European Economic Area (EEA), the cap for interchange fees is set at 0.3% of the transaction amount for consumer credit cards and 0.2% for consumer debit cards. Interregional card transactions are capped at 1.15% for debit cards and 1.5% for credit cards, with no cap imposed on commercial cards.
In Australia, interchange fees are capped at 0.8% for credit cards and 0.2% for debit cards.
In the United States, interchange rates on credit cards remain uncapped, with fees averaging around 2% of the transaction value. However, as a result of The Durbin Amendment in 2010, fees for debit cards and prepaid cards were capped at US$0.22 and five basis points multiplied by the transaction value.
Interchange++ v. Blended
There are two primary pricing models for interchange fees available to merchants: Blended and Interchange++. Each model presents distinct advantages:
- Transparency: Opting for the Interchange++ pricing model provides merchants with a detailed breakdown of fees charged by the card issuer, card network, and acquirer for each transaction.
- Variable Rates: Under this model, merchants are billed the actual card network fee, resulting in transaction costs that vary based on factors such as card type. This can lead to lower fees for consumer card payments compared to commercial card payments.
- Consistency: The Blended pricing model involves a flat rate for each transaction, typically comprising a percentage of the transaction value and a fixed cost. While acquirers may adjust rates for factors like domestic or international transactions, the Blended model simplifies fee forecasting for merchants.
- Potential Savings: This model offers potential savings and balances out costs. While fixed fees may result in savings for transactions with higher card network and issuer rates, they could lead to higher costs for transactions with lower rates. The aim of Blended fees is to provide merchants with a fair average rate per transaction.
Merchants can choose the model that aligns with their preferences and business needs, whether prioritizing transparency and variable rates with Interchange++ or seeking consistency and potential savings with the Blended model.
How to Make Money with White Label Debit Card Programs
In today’s environment, the rise of Fintech has opened the door for non-banks to issue branded debit cards. But the question becomes, is it profitable and how do these non-bank card issuers make money?
The interchange fees paid by the acquirer contribute to the revenue of the card issuer. This revenue helps offset the costs associated with providing credit, maintaining accounts, and managing the overall credit card infrastructure. The overall volume of transactions processed through the card network also contributes to the revenue of card issuers, as they receive a portion of the interchange fees for each transaction.
Moreover, non-bank card issuers can also generate revenue through other channels, including interest charges on outstanding balances, annual fees, late payment fees, foreign transaction fees, and various other fees associated with credit card usage.
Debit card programs can be extremely profitable, but requires a keen understanding and how interchange fees work and are assessed. For that reason, finding the correct white label provider, program bank or program manager is essential
Adam Tracy offers comprehensive payments system architecture consulting, including launching profitable debt and prepaid card programs. Be sure to reach out should you have any questions.
Otherwise, you can book a meeting here.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.
Find Adam: https://linktr.ee/adamtracy
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