The Inside Connection

Interchange: What It Is and Who Pays It

bestpractices1All payment card transactions involve what is called an interchange fee. You may have heard the term, but it’s possible that you’re not clear about exactly what it is and why it’s charged. The overall process is complex, but we can offer a simplified explanation of what happens.

Q: What exactly is interchange?

A: It is the process in which the money involved in a credit-card transaction moves between the customer, the merchant, the financial institution that issued the card, and the card payment processor.

Q: What is an interchange fee?

A: It is the fee charged by the card-issuing bank to the payment processor (or “acquirer”) for each transaction. The interchange fee is bundled into the total fees merchants pay for transaction processing. The interchange amount is the same for all payment processors.

Q: How much is it?

A: The interchange fee varies according to the type of transaction and other aspects, like whether the card was swiped or the number was manually keyed in by the merchant. It usually consists of a small flat charge plus a percentage of the value of the transaction.

Q: Who sets the fee?

A: Usually the credit card associations like Visa®, Discover®, or MasterCard®.

Q: Who pays it?

A: Initially, the payment processor (e.g. Veracity).

Q: What does it pay for?

A: The cost to the card issuer of performing the transaction, providing security, and other services.

Q: How does it work?

A: Here is the basic process:

  1. The customer presents a card for payment to the merchant.
  2. The card details are transmitted to the card issuer for authorization.
  3. The issuer approves the transaction.
  4. The issuer pays the money to the card processor, minus the interchange fee.
  5. The processor pays the merchant, minus a fee for the transaction. The transaction charge (sometimes called the “discount fee”) recoups the interchange fee the processor already paid to the issuer plus a processing fee.

The interchange fee usually accounts for the bulk of the transaction fee that a merchant pays a payment processor.

When you understand the basics of interchange, you can more easily understand your overall processing costs and make informed decisions about the payment programs you use in your business.

[cta]Do you have other questions? Veracity Payment Solutions is the resource you need to understand and manage your payment transactions. Contact us at 866-944-0055 or by email.[/cta]

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