Interchange Fees Briefly Explained

As a merchant, you might be wondering what interchange fees are all about. Understanding interchange fees can be important. Briefly, interchange fees are paid by payment processors to the credit card companies (Visa or MasterCard) for being able to accept customer payments by credit card.

How it works:

The instant you accept a card payment from a customer, a whole chain of technical processes are set in motion. The card reader prompts the customer to verify their details, if successful the encrypted details are passed through complicated security systems for authorization, and back again to let you know if the transaction is approved or declined.

Although that all takes just seconds, there are complicated IT systems, servers, firewalls and security systems in place to relay the sensitive data from one stakeholder to another, and finally back to you, the merchant.

If the transaction is approved, the card provider has effectively guaranteed your payment for the sale, and this also comes with some risk. So considering all the complicated software, hardware and risks involved in every credit card transaction, it becomes obvious that it must come at a cost.

Interchange fees for credit cards are the costs of all these processes that must be balanced out between all the role players. Interchange charges are collected from processors for being able to utilise all these complicated systems to ensure quick and safe card payments.

How are fees calculated?

Interchange fees are complicated, and they are not static. When a credit card transaction is processed, the cardholder’s bank, or issuing bank, pays your bank or acquiring bank, for the purchase less the interchange fee for the transaction. Your bank then pays you from the remaining balance, less a mark-up fee for processing the card payment. You eventually receive the amount of the sale less a series of base costs that include interchange, dues, and your bank’s mark-up fee.

All interchange fees are set by the credit card networks and are the largest component of the various fees that most merchants pay for being able to accept credit cards. Interchange fees paid by your card processor represent up to 90% of all fees charged to merchants for a successful transaction.

For more information about interchange fees,  or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.