Understanding Interchange

Many merchants and merchant services providers are confused by interchange and its impact on the fees that merchants pay to accept credit and debit card payments. Many have heard the term “interchange,” but are not quite sure what it is. In addition to interchange, the card associations – Visa, MasterCard and Discover – assess other fees to cover the costs of maintaining their payment networks and systems.

What is Interchange?

When a customer (cardholder) makes a purchase with a credit card, such as a $100 pair of shoes at a shoe store, the bank that issued the credit card (the issuing bank) funds $100 to the shoe store before they collect that money from the customer.

Interchange refers to fees paid by the merchant’s bank to the issuing bank for this service. Interchange covers the cost to convert a charge on an account holder’s card to a cash deposit at the merchant’s bank account, including billing services, credit risk, fraud risk, and float.

Interchange accounts for the vast majority of merchants’ costs for accepting card-based payments, regardless of how the merchant is priced.

Why is Interchange Important?

Interchange is important because it helps drive the growth of the payment system. Interchange fees earned by card-issuing banks provide financial motivation for them to promote and issue more cards to more cardholders. Interchange also helps cover the risk associated with doing so. Adding more cardholders to the system increases the benefits to merchants of accepting credit and debit cards.

Interchange also helps expand the market of accepting merchants by tailoring interchange programs to certain types of businesses. For example, smaller ticket transactions receive a lower transaction fee so that it is not too costly for merchants to accept card-based payments. The card associations attempt to maintain a delicate balance with interchange. If interchange is too high, merchants will not accept cards; if interchange is too low, then issuing banks will not issue cards.

What Determines Interchange for a Transaction? 

Interchange is determined for each transaction based on the industry of the merchant, the type of card, the way the card is accepted, the transaction size and other factors.

Here are some common examples of factors that drive interchange costs:

  • Manually entered and e-commerce transactions have higher interchange costs because, without the swipe data, there is a greater risk that the transaction may be fraudulent. (Address verification mitigates this risk.)
  • Rewards cards have higher interchange costs to fund the reward programs to the cardholders.
  • Debit cards have lower interchange than credit cards because of the lower credit risk. (Debit card transactions are deducted directly from the cardholder’s bank account.)
  • Merchants with small ticket sizes can qualify for interchange rates that have lower transaction fees to reduce their costs.
  • Commercial cards have higher interchange rates to fund corporate and purchasing card programs that include rewards, spending controls and detailed reporting.

How Can Merchants Lower Interchange Costs?

Merchants can follow best practices for card acceptance to obtain the lowest possible interchange rates for their business. For example:

  • Swipe the card whenever the card is present.
  • When it is necessary to manually enter a transaction because the terminal is having trouble reading the card, verify the cardholder’s address using the Address Verification Service.
  • Settle (batch out) your terminal or point-of-sale software every day to avoid downgrades and higher interchange rates.
  • Make sure you obtain a valid authorization for every transaction.
  • Restaurants should properly enter tip adjustments before the batch is settled.
  • Hotels should enter the check-in/check-out dates and folio numbers.
  • Enter the invoice number when prompted.
  • Enter the tax amount when prompted.

What Other Fees Do Associations Charge?

In addition to interchange, which goes directly to the card issuing banks, the card associations assess other fees for the use of their networks and systems. It can be difficult to keep up with the list of these fees because the card associations have introduced several fees in recent years. 

Association fees include:

  • Assessments
  • Network fees
  • Foreign card fees (for cards issued outside of the U.S.)
  • MasterCard Network Access and Brand Usage Fee (NABU)
  • Visa Acquirer Processing Fee (APF)
  • Visa Fixed Acquirer Network Fee (FANF)
  • Visa Transaction Integrity Fee (TIF)
  • Visa Authorization Misuse Fee
  • Visa Zero Floor Limit Fee

How Often Do Interchange Rates Change?

The card associations regularly update their interchange programs to promote more card issuance and acceptance. They add new interchange programs and change rates and fees to do so. It is most common for the associations to implement changes in April and October each year, but changes may also occur at other times.

If you need assistance lowering your credit card transaction processing costs, please contact us.

Vista Ridge Academy Receives Matching Grant from P3

P3 was highlighted in the Rocky Mountain Conference Newsletter "News Nuggets" this week.  We honored to play a small role in helping provide funding for kids at Vista Ridge Academy.


 Imagine what it would look like if every business owner had the opportunity to contribute to a cause they care about simply by doing what they are already doing. That’s at the heart of what James Christianson and Lief Sorensen believe is possible with their company P3.

   The company’s premise is to harness the power of businesses that are already spending money on credit card processing fees and re-direct a portion of these funds by giving 50 percent of profit back to Adventist education. By maintaining long-term relationships through effective customer service and integrity, Christianson and Sorensen say they will be ensuring these revenue streams for schools continue month over month and year after year.

   “Why pay two, three or more percent to a bank to process simple credit card transactions?” Sorensen adds, “and, even more importantly, consider the impact giving back just a portion of these fees would have on Christian education.”

   Setting up a company capable of both processing credit cards and allowing businesses to contribute just made sense. As Sorensen points out, “from dentists to mechanics, doctors to retail store managers, with P3, now every type of business owner has an opportunity to participate and support their local school. We couldn’t be more excited about the possibilities.” 

   Partner, process, purpose. These are the values that define P3—and its impact can already be seen on a local level.

   Vista Ridge Academy --  www.vistaridge.org -- recently benefited from a $30,000 tuition subsidy through a matching grant campaign. According to Academy principal Sandy Hodgson, her school “has been blessed by businesses working with P3 to advance Adventist education. Because of a one-week matching grant campaign, Vista Ridge Academy benefited last August, and the funding received went directly to subsidizing tuition for families who would not be able to afford an Adventist education.”

   Shawn Nowlan, chairman of Vista Ridge Academy expressed gratitude for P3 involvement, noting that it is “helping to lower financial barriers for students, so they can experience Vista Ridge Academy’s Christian education that prepares them both for time and for eternity. What better way for us to return the funds God has entrusted to us?"

   Christianson and Sorensen recognize the impact of difficult economic times on school budgets: “Our business model provides a much-needed additional revenue stream for Adventist schools,” Christianson told NewsNuggets.

   Like Christianson, Sorensen also has a deep personal interest in helping to provide additional funding and resources for Adventist education, “I attended Adventist schools from first grade all the way through medical school. The education I received was excellent preparation for my career and the positive influence of the teachers and friends I made along the way was priceless. At P3 we want to use business partnerships and our shared passion for Adventist education to develop a funding source which will allow as many kids as possible access to these life-shaping experiences.”

   Ultimately, partnering your business with P3 will continue the chain of positive impact, allowing for more children to attend schools like Vista Ridge Academy, to strive for academic excellence in a Christian environment, and eventually, give back to the same community that fostered their education. To learn more, visit www.p3online.org.

- Rajmund Dabrowski