What is Interchange?
You may have heard the word "Interchange" before... but what does it mean?
Interchange refers to the costs of credit card transactions. Because Dharma believes in full-disclosure, we offer the following information about Interchange and what it means to you.
There are many entities involved whenever you process a credit card transaction. First, there is the acquiring bank. The acquiring bank is who Dharma represents, and is also referred to as a Merchant Service Provider (MSP). Secondly, there is the card-issuing bank. The card-issuing bank represents the customer's bank, and is the bank who physically issued the credit card to the customer who's paying you. The final entities are the credit card networks, such as Visa, MasterCard, and 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 associated rate that the merchant service provider pays to the issuing bank. This rate is known as the Interchange rate. Visa/MasterCard/Discover update their tables of Interchange rates twice a year with minor adjustments. There are literally hundreds of different Interchange rates, because there are many hundreds of different card types and purchasing scenarios. Typically, cards with more "perks" or "extras" will have higher associated Interchange rates. This is due to the fact that the card-issuing bank has additional costs to recoup, such as paying for rewards, points, or airline miles. These Interchange rates apply to all Merchant Service Providers, from the largest providers to the smallest. We all have the same Interchange costs.
The Interchange rate 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
In addition to the 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. These factors include 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 0.11% 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.
Can I see the interchange rates?
You sure can! 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 Visa/MasterCard/Discover, you'll need to abide by these rates:
So where do I fit in?
When you accept a transaction from a customer/donor of yours, 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. Click below to learn more.