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Interchange is the fee that businesses pay directly to credit card issuers for the service of processing their credit cards. Visa and Mastercard publish their rates for public knowledge, while American Express does not. After doing some digging, we found that the American Express 2007 Annual Report reveals that, on average, Amex’s discount rate was 2.56% (2007), 2.57% (2006) and 2.58% (2005).
Compare this to Visa’s interchange rate, which averages out to be 0.77% lower.
Keep in mind that the average Amex discount rates shown above are an average and include a much lower interchange rate that large companies can negotiate with Amex. A great example of this kind of partnership is Amex’s deal with Costco (as discussed in Paying with Plastic p. 169). After accepting only Discover card for eight years, Costco signed an exclusivity agreement with Amex which industry experts say put Costco’s Amex interchange rate at about 1.11%. In return, Costco customers had membership cards which doubled as American Express credit cards.
Compare that 1.11% to the fact that small businesses pay about 3.25-2.75% for Amex interchange.
Let TransFS help you find the best deal on credit card processing for your business. Start here to get multiple bids from top quality processors at no cost, all apples-to-apples comparison, and transparent pricing. What you see is what you get. Users save an average of 40% on credit card processing with the most transparent pricing: interchange plus.
What is Interchange, again?
TransFS uses Interchange Plus pricing in our credit card processor marketplace. The biggest chunk of change that processors charge is Interchange, but what does that really mean?
Two of the things that confuse merchants the most are:
- Why they are charged different amounts when different kinds of cards are used
- Who gets to keep the 1.5% – 3.0% of their hard-earned sales that are siphoned away as “discounts” and “fees”
A big part of the answer to both of those questions is: “Interchange”.
What is Interchange?
Interchange is the set of rules that define how much of a cut the issuing bank (the bank that issued the customers’ credit card, big issuing banks include Capital One and MBNA) gets to keep from the credit card transaction.
The part of the transaction that you see:
The back-end of the transaction (where the money flows):
How big is interchange?
Interchage is the largest piece of the transaction, usually 70-90% of processing fees. Basically, the card issuing bank captures most of the economics of the transaction.
- Morgan Stanley estimates that interchange is, on average, 1.75%, or 81% of the total fees charged to the merchant on the transaction.
- The Kansas City Fed estimates that interchange is, on average, 1.60%. However, their data was from 2003 and earlier, which may account for the difference in the estimates, since Interchange tends to rise every year.
Why should I care?
When negotiating a deal with your credit card processor it helps to know how much of a cut they are getting for two reasons:
- It lets you know how much they are making off or you and therefore how much room they have to negotiate
- The main rate that a processor will quote is on a standard credit card transaction. With the rise of rewards cards and debit cards, these “standard” cards make up the minority of transactions. If you focus your energy on negotiating a good “standard” rate, with a fair markup for your processor, they probably will sneak in a much larger markup on the rewards and debit cards. An example of that can be found in “Reading a Merchant Processing Statement“
Until recently interchange rates were secret, but now you can get a full description of them at the Visa and Mastercard websites: Visa interchange rates , Mastercard interchange rates.For a chart of different interchange rates, click here.
The insurance industry, including carriers, brokers and agents increasingly accepts credit cards. Typically such businesses accept payment from their customers over the phone or computer, more similar to an internet business than a retail store.
Insurance companies have the added benefit, however, of a special category for Mastercard transactions (no special category exists for Visa, however). The full mastercard interchange guide is available at mastercard.com and below is a summary.
| Card Type | E-commerce Rate | Insurance Rate |
| Consumer Credit (non-rewards) | 1.89% + 0.10 | 1.43% + 0.05 |
| Consumer Rewards | 2.04% + 0.10 | 1.43% + 0.05 |
| Consumer World Rewards | 2.05% + 0.10 | 1.43% + 0.05 |
| Consumer World Elite | 2.50% + 0.10 | 2.20% + 0.10 |
The Mastercard insurance interchange rates are significantly lower than for other industries. To ensure you are getting the lowest possible rates:
- insist on interchange plus pricing
- ensure that you are set up to qualify for your industry-specific rates
- audit your bill afterward to ensure you are getting those rates
The Retail Industry Leaders Association (RILA) recently reported that ultimately consumers are the ones bearing the brunt of paying for inflated interchange fees. Interchange fees have been in the spotlight in Washington, especially with last month’s report from the GAO (Government Accountability Office) which suggested that credit card companies and their banks are the ones profiting from higher fees, as merchants and consumers face rising costs.
The RILA has encouraged Congress to take action, as has The American Consumer Institute, which claims that this holiday season, the average household will pay $337 in “swipe fees.” Higher interchange fees have also hindered job creation in a sluggish economy where every dollar counts.
“Retail job creation is stifled in part by the rapidly escalating costs associated with credit card interchange ’swipe’ fees,” said John Emling, senior vice president of government affairs for the group. “Every additional dollar taken by banks through these excessive fees is a dollar unavailable to hire new employees and lower costs for customers.”
Read more: http://www.consumeraffairs.com/news04/2009/12/retailers_interchange.html#ixzz0ZIi3BaTV
Image thanks to http://www.flickr.com/photos/51035555243@N01/116585861/
Photo by Thomas Hawk http://www.flickr.com/photos/thomashawk/
As a frequent visitor to NYC (at least 6 times / year) and Boston (which recently added a similar program) I really like the ability to pay for cabs with a credit card and I wish Chicago had it too. A recent Huffington Post article Cash or Credit? In a Taxi, It Depends Which Side of the Partition You’re On describes some of the challenges faxed by cab drivers in that situation.
A recent story in the New York Times reported that credit card use in the city’s yellow cabs has risen steeply, suggesting that cabbies are making more money because of it… To the contrary, it appears they in fact have been hit with a pay cut, in the form of credit card processing fees, payment delays, bunk cards, chargebacks, and system failures.
While most businesses, from bodegas to bars, are charged an average of 2% on credit card processing fees, when you swipe your card in a cab, the driver has to pay a hefty 5% for the transaction. This fee is placed on the total metered fare, including the tolls, the tip, and now, even on the fifty-cent MTA surcharge. Why are New York’s cabbies paying so much more than everybody else?
Because of all the middlemen.
That 5% goes back to the garage or medallion broker, where the owners take an average cut of 1.5%. The rest is passed along to the TLC-selected vendor supplying the device. That company takes out another average cut of 1.5% and then, finally, passes the rest on to the bank that is actually processing the credit card. Multiply these numbers by millions of cab rides a year and it becomes clear that a few people are making truckloads of money on drivers’ backs.
That’s actually not that different from most smaller businesses (see previous article average credit card processing rates) – small businesses usually pay a 1%-3% markup over the wholesale (or interchange) rate for their transaction. There are two reasons for it – 1. it costs more for the processors to reach them so the processors need to build those sales costs into the price and 2. they operate at a big informational disadvantage and are taken advantage of by the processors and/or the middlemen.
It stinks that the cabbies are not given choice in which processor they use. If they had a choice they could shop on their own (or use TransFS!!) to cut out the middlemen and get a fair deal.
Resources for Retailers
Yesterday I had the pleasure of speaking at length with a TransFS user who is a member of the Wine and Spirits Guild of America. He told me about his quest to learn as much about credit card processing as possible in a marketplace with few resources.
Luckily, he came acrossTransFS and discovered the wealth of resources on our site, as well as our comparison shopping engine for credit card processors. He suggested posting some resources for business owners in the same predicament as he was…so here they are!
Tiered Pricing for Merchant Accounts
Why You Should Want Interchange Plus Pricing
Reading an Interchange Plus Processing Statement
Businesweek recently profiled a small boutique’s struggle and success in getting lower credit card processing costs. With revenue of $350,000, the business was able to save about $4,000 using the strategies listed below.
A recurring trend that we see from our users is they are told by processors the fee they are paying is one number, but then when the business researches and calculates their actual rate, it equals sometimes double or triple what they thought they were paying. The same happened to the business profiled in the article, which leveraged some research to bring down her fees.
We applaud business owners’ efforts to learn as much as they can about the credit card processing industry, and we function to provide businesses with an unbiased, apples-to-apples comparison from top quality processors. We know it’s a tough, complicated market which functions to confuse business owners, so we strive to make the process simple and easy for businesses. Below are some helpful tips to cut processing costs which we’ve mentioned before, however they are highlighted in the Businessweek article:
1) Get multiple bids from processors- Plan on getting at least three bids from multiple processors when shopping for a credit card processor. Businesses can leverage competing bids, but also get an idea as to a suitable range for cost.
2) Never lease a terminal- The business in the article was paying $50/month to lease a terminal when one can be purchased for more than half the cost of leasing. This is a typical practice, so make sure to do as much research/cost analysis as possible on buying a terminal.
3) Negotiation is the name of the game- Use the research from shopping to go back to processors with aggressive cuts. The margin for sales is incredibly high, so are rates are much more flexible than businesses realize. Make sure to try and get rid of monthly fees.
4) Make sure to fully understand billing statements- Even after the contract is signed, make sure processors don’t sneak in random fees or arbitrary costs. Confusing billing statements are standard industry practice from processors capitalizing on their clients’ misunderstanding.
5) Interchange plus only- In contrast to confusing tiered pricing which charges different rates based on how “qualified” a credit card is, interchange plus is the most transparent form of pricing. Learn more about interchange pricing here.
6) Use TransFS- Ok, so we’re a little biased, but we know from talking to business owners how confusing finding a processor can be. Heck we’ve done it ourselves in previous businesses. TransFS is the place you can find the best deals on high quality processors who are screened to provide businesses with transparent pricing. Use our platform to ask processors straight up questions about costs and contracts, and please ask us any other questions you may have about processing. We are here to serve businesses and help you keep more of your money.
In the ongoing battle between credit card companies and merchants over increasing fees, the National Retail Federation had the opportunity to state its case last week in Congress. Here is what NRF Senior Vice President and General Counsel Mallory Duncan had to say:
“There is an arms race to create cards with higher fees and more bells and whistles. The market checks that would normally exist to curb this escalation in fees are diminished because the card companies know that every merchant is required to take these expensive new cards or lose their ability to accept any cards.”
Duncan went on to point on the public’s ignorance of inflated fees for rewards cards. “Most consumers don’t know it, but every time they swipe a rewards card with its miles and concierge services, they are driving up the price of everything they buy even higher,” Duncan said.
The testimony was delivered to the House Financial Services Committee for a hearing of H.R. 2382, also known as the Credit Card Interchange Act of 2009. The basic aim of this bill is to require credit card companies to fully disclose interchange fees and terms and conditions. The bill would also allow the Federal Trade Commission to investigate interchange in order to stop any practices hurting consumers. A benefit to merchants would be the option to give discounts for cash payment and even choosing which credit cards to accept.
Right now, merchants pay an average of 2% to Visa and Mastercard each time a customer’s credit card is swiped. However, this percentage is variable and can change according to which kind of card is swiped. The rule regarding accepting credit cards is an “Honor All Cards” rule, meaning many businesses are stuck paying higher fees in order to accept credit cards. For more information, check out this great article from WayTooHigh.com.
Enhanced Recover Reduced
In the past I have written about the various ways of charging for credit card processing, such as Tiered Pricing and Interchange Plus (the most business-owner friendly way of pricing – why you want interchange plus).
The least business-owner-friendly way of pricing is called Enhanced Recover Reduced.
Below is a copy of a selling document that a major credit card processor used to educate its partners on this method of pricing. The whole point of the document is that it will allow them to sneak through extra fees without business owners noticing.
Look on the second page for some examples of how, the same $300 transaction can cost the business owner anywhere between $1.50 (interchange plus) and anywhere between $4.79 and $8.54 using Enhanced Recover Reduced.
Check out the document, and scroll down for an explanation if you are interested.
So the issue here is that the biggest cost that your credit card processor has is Interchange Fees, which is the amount that it has to pass on to Visa and Mastercard. Interchange accounts for 80-95% of your credit card processing costs, with the remaining 5 to 20% kept by the processor.
Interchange rates vary depending on the circumstances of the transaction, for example, a transaction where the card’s magnetic stripe is read costs less than a transaction where the stripe is not read. For example, a standard visa card costs 1.54% + 0.10 for each transaction when the card is swiped and 1.80% + 0.10 when the card number is keyed in.
Therefore, if the processor quotes you a fixed rate, say 1.75%, and you end up processing many more transactions where the card is not swiped they could end up actually losing money on each transaction. They assumed they were going to make 0.21% on those transactions and they instead end up losing 0.05%.
With “Recover Reduced” pricing, the processor will still charge you the agreed upon fee 1.75% for all the swiped transactions but will charge you the difference the agreed upon rate PLUS the difference in the interchange rate for the non-swiped transactions (1.75% + 1.80% – 1.54%) = 2.01% so that it can maintain the 0.21% markup it was counting on across ALL transactions. That actually isn’t particularly unfair. It’s confusing, but the processor can very reasonably make an argument that they priced the deal with an expectation of a certain transaction mix and they shouldn’t be expected to lose money if your mix turns out different.
However, “Enhanced Recover Reduced” charges you the original rate, plus the difference in the interchange rate PLUS an extra fee. That’s why they call it “Enhanced”, because it enhances the processor’s profit.
The extra fee can easily be between 0.50% and 2.0% and often isn’t disclosed very well on the statement.
Do yourself a favor and STEER CLEAR of Enhanced Recover Reduced pricing. Instead, get an interchange-plus contract which is completely fair to all parties.
Later this week, Congress will be discussing the bipartisan Credit Card Fee Act, now in committee. Franchisees and store operators of the popular chain 7-Eleven have been collecting signatures for a petition they will present to Congress as evidence of massive discontent regarding bloated interchange fees. CEO of 7-Eleven Joe Depinto says, “Customers share our frustration over the hidden fees that American retailers and, ultimately, consumers are forced to pay. They, too, want Congress to take action to regulate these unfair fees, which are the highest in the industrialized world.”
Credit card companies’ rules state that retailers must accept cards everywhere and sometimes without a minimum amount, the case with 7-Eleven. As a result, the chain ends up losing money on some lower quantity purchases. And it’s not just the big chain that is hurting, convenience stores all across America are losing money from fees in an already tight economy. The National Association of Convenience Stores reports that credit card fees are up over 10.5% since 2007, with the industry paying $8.4 billion last year.
7-Eleven claims that its petition represents the largest quantity of signatures ever presented to Congress for a public policy issue, trumping even the 1.3 million signatures presented to Congress for healthcare reform. Representatives such as franchisee Hitesh Patel will be flying into D.C. for the hearing. Mr. Patel collected over 3,000 signatures at a store in Florida, even going door-to-door to ask for support. “People don’t know about these fees and they are shocked,” he says.
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