Credit and debit cards make it faster and easier for customers to make purchases, and—according to the card industry—boost sales. But retailers and other businesses that accept these cards pay for that service in the form of “interchange;” the portion of each purchase that goes back to the banks and issuers that help facilitate the process.

Some merchants feel that cost is too high. “The credit card interchange system serves as a hidden tax, both on merchants and consumers, and raises the costs of all products. These credit card fees have rapidly increased over the past several years,” said Henry Armour, the CEO of the National Association of Convenience Stores (NACS), a trade association with nearly 4,000 members representing various retailers which has been lobbying for quite some time to reduce interchange related costs. It’s estimated that US businesses currently pay over $35 billion a year in interchange related costs to card issuers and many feel that this expense is too high.

“The credit card interchange system serves as a hidden tax, both on merchants and consumers, and raises the costs of all products. These credit card fees have rapidly increased over the past several years.”

While one could categorize interchange as a “hidden tax”, the reality is that there is indeed a service being offered by the banking system that needs to be paid for. Interchange serves as a way to compensate card issuers for taking on the risks upfront of marketing, underwriting and distributing cards into the marketplace, as well as to create the infrastructure that makes instant purchases all over the world possible. Card issuers are paid the revenues from interchange to compensate them for taking on these upfront costs.

To try and combat the costs, big box retailers lobby through associations like the NACS and have scored major wins over the last couple of years in reducing their specific interchange-related processing costs. However, these wins and lower interchange costs have not trickled down to smaller merchants.. The only weapon in the arsenal of small merchants to control processing costs is through shopping between different Merchant Service Providers (MSPs). The issue, though, is that many small merchants do not fully comprehend how interchange works and the costs they are paying. As a result, many lack the ability to effectively shop between MSPs and often fall prey to bait and switch tactics of unscrupulous agents.

The Benefits of Interchange Series

To assist small merchants, I’ve created this three part series that will describe how to:

Understand what interchange costs your business,

Negotiate better rates when possible;

Understand the best rate structure to use;

Process transactions to save money on interchange;

And shop or the best deal whenever possible, and process transactions in the most cost-effective way.

What is Interchange?

Many small business owners have heard this term before when in groups of business association members or just through various media sources, but what exactly is interchange? Simply put, interchange is a collection of wholesale costs for every single type of transaction that a business would run at point of sale from their customers. You have interchange for credit cards, which also includes debit cards that are ran as credit cards at the point of sale (also known as offline or signature debit cards), then you have interchange for debit cards which involves entering a pin number (also known as online or pin debit).  Credit card and offline debit card interchange categories and pricing are set by c Visa, MasterCard, Discover and American Express. Typically, there might be anywhere from 100 – 200 different categories of interchange with different pricing levels set by these card brands.

When Visa and MasterCard set interchange pricing, they try to set them strategically to where they aren’t too high where merchants wouldn’t want to accept credit cards, or  too low to where Issuing banks (who receive the revenue from interchange) would opt out of taking on the upfront risks associated with issuing cards. . Discover and American Express control the issuing of their own bank cards and have in prior years been criticized by merchants for having much higher processing costs than Visa and MasterCard. To address this issue, Discover released its Discover Acquiring program and American Express recently released its Opt Blue program, both providing merchants more efficiency and cost control.

Visa and Mastercard Interchange Charts

Visa and MasterCard will usually provide the public with a new interchange rate chart in April and October of each year; here are the two most current Visa and MasterCard interchange rate charts below:

Visa Interchange (Per October 2015)

MasterCard Interchange (Per April 2015)

Discover Acquiring and American Express Opt-Blue

Discover and American Express interchange publications are handled much differently than that of Visa and MasterCard. Only within the last couple of years have Discover and American Express simplified the acquiring side of their business to where MSPs could be offered base interchange prices, set the final rates with mark-up for profit, and have both card brands appear on the same monthly credit card processing statement alongside Visa and MasterCard. These processes are accomplished through the Discover Acquiring Program and the American Express Opt-Blue Program.

Discover Acquiring: Discover does not release interchange charts to the public; they mainly release them to MSPs. However, interchange categories and pricing of Discover Acquiring work similarly to that of Visa and MasterCard. As a result, as a small business owner, you could utilize the categories and pricing of Visa and MasterCard as a baseline to forecast what the costs will be under the Discover Acquiring Program.

American Express Opt-Blue: American Express does not release a standard interchange pricing chart because technically, each approved MSP will be provided their own individual Opt-Blue price list. As a result, consult with your MSP directly to discover what your final costs will be for the Opt-Blue Program.

Pin Debit Networks Interchange

There are 11 major Pin Debit Networks and they include:

1. ACCEL
2. AFFN
3. Alaska Option
4. Credit Union 24 (CU 24)
5. Interlink
6. Jeanie
7. Maestro
8. NYCE
9. PULSE
10. SHAZAM
11. STAR

The process works the same as Credit Card and Offline Debit Card Interchange, where the Pin Debit Networks will setup a category with base pricing, then the MSPs mark-up that pricing for profit. However, to access the Pin Debit Network your location must be setup to accept Pin Debit, which will usually require a terminal with an internal pin pad or an external pin pad that’s connected to a processing terminal. Both pieces of technology allow the customer to enter their pin number during the checkout process and functions as one of the most secure forms of payment card transactions.

Due to there being many Pin Debit Networks, it can be difficult to keep up with all of the interchange categories and pricing as a lot of these networks (similar to Discover Acquiring and American Express Opt-Blue) report said interchange to MSPs directly rather than releasing charts to the public. However, a great source to follow is that from Wells Fargo:  Pin Debit Networks Fee Schedule (Per November 2015).

The Series Continues

In the next section , I will go over different rate structures that your MSP could utilize for pricing of your merchant account and the benefits/drawbacks of each structured option. Then, I will continue the discussion with looking at how your business can process transactions in such a way to avoid overpaying with interchange category downgrades.

John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor’s degrees in Accounting, Business Management and Journalism. Tucker has over 9 years of professional experience in Commercial Finance and B2B Sales. Connect with Tucker on LinkedIn by clicking here, or contact Tucker at Tucker@1stCapitalLoans.com or at 586-480-2140.