What is interchange?

We get it – this “interchange” thing is confusing! We’ll explain everything below.

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It's the base cost of a credit card sale

There are many entities involved whenever you process a credit card transaction. First, there is the acquiring bank, who Dharma represents. Dharma and is referred to as a Merchant Service Provider (MSP). The MSP represents you, the merchant. Secondly, there is the card-issuing bank. The card-issuing bank represents the customer, and is the bank who physically issued the credit card to the customer who’s paying you. The final entity is the credit card associationsuch as Visa, MasterCard, or Discover. They are responsible for setting the rates at which these transactions process.

For every credit/debit card that exists, there is a pre-set rate that the MSP pays to the issuing bank. This rate is known as the Interchange rate. These rates correlate with the cost that each bank has for these cards. Typically, cards with more “perks” or “extras” will have higher associated Interchange rates, because the card-issuing bank has additional costs to recoup. (Think rewards, points, or airline miles.) Other cards are very cheap to process, and thus, have lower interchange rates. (Think debit cards – this is essentially taking money from a checking account, and are low-risk transactions for a bank.) These Interchange rates apply to all Merchant Service Providers, from the largest providers to the smallest. We all have the same Interchange costs.

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So... what are the interchange rates?

There are hundreds of different interchange rates. Interchange rates will always have two components: a percentage fee of the volume of the sale, and a per-transaction fee. Typically, the Interchange rate will be written like this:

  • 2.00% + $0.10

The tables are complex, but the important thing to remember when viewing these tables is that every provider is subject to these rates/fees. No matter how big or small, if you want to accept credit cards, you’ll need to abide by these rates:

Visa Interchange Rates

MasterCard Interchange Rates

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Card Association Fees

In addition to Interchange fees that the merchant service provider must pay to the issuing bank, there are fees that are charged by Visa/MasterCard/Discover. There are several different fees that they asses, that are based on many factors, like the amount of volume you process per month, whether or not your customers physically present the card to you, the types of security precautions you take, possible international surcharges, and others. Since many of these fees depend on the circumstance of each transaction, they’re impossible to predict with 100% accuracy. However, the basic fees that the card associations charge are roughly 0.12% of volume, and $0.02 per transaction. Just like the rates that merchant service providers must pay to card-issuing banks, these fees are paid by all providers. It’s what allows smaller providers like Dharma to compete with the larger banks. Interchange refers to the underlying costs of credit card transactions. Click here for a full list of all Card Association Fees.

Because Dharma believes in full-disclosure, we offer the following information about Interchange and what it means to you.

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So where do I fit in?

When you accept a transaction from a customer or donor, your merchant service provider is required to immediately pay all of the above fees to the card-issuing bank and Visa/MasterCard/Discover! In addition, your merchant service provider needs to give you the funds for the transaction right away. This requires a lot of work in the background. Your merchant service provider funds your bank account for any processed transactions, even though your customer hasn’t actually paid their credit card bill. Managing your merchant account carries operational costs, and so there is an additional fee paid to the merchant service provider above Interchange. This additional cost reflects payment for managing risk, depositing funds, providing technical support, and maintaining the account within federal and state regulations.

Most merchants don’t consider Interchange rates when they accept credit cards – but the reality is that Interchange and card association rates typically represent at least 80% of the monthly service costs. That means that a proper knowledge of Interchange rates can help you take cards the smart way, and ensure that you’re getting treated fairly by your merchant service provider. That’s where interchange-plus pricing comes into play.