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Understanding Interchange and How It Affects Your Business

In order to really assess if you are considering a merchant account service with low fees, you have to understand the associated interchange fees. A failure to grasp the impact of these fees would be like taking out a loan without investigating the interest rate. Interchange fees are, essentially, the very basis for the expenses associated with processing credit cards.

Two banks are involved in the processing procedure: the issuing bank, which supplies card cards to consumers, and the acquiring banks where merchant accounts are held. Often called “merchant banks,” these are the institutions that deposit the funds from a credit card sale into the merchant’s account.

When a cardholder makes a purchase of goods or services, the acquiring bank pays the issuing bank a percentage of the gross amount of the sale. Each card has a different schedule of reimbursement fees. Simply put then, an interchange fee is the amount an acquiring bank pays to the issuing bank for a credit card transaction.

The actual level of this reimbursement fee is set by the card companies themselves, and there are many interchange fee categories. Risk is a factor in assessing fee levels. For instance, the interchange fee on a CPS/retail signature transaction would carry a lower interchange fee than that on a CPS/Card Not Present transaction because the first transaction has the lower risk profile.

Both the type and the size of the business involved, and the processing behavior also affect interchange rates. A number of interchange categories also arise from marketing strategies on the part of card companies, for instance rewards credit cards, a scenario in which there is no benefit to the merchants who are actually absorbing the cost of the reward program.

The real benefit in these programs goes to the banks, who acquire new cardholders who use their cards to make more purchases out of the sense of security they derive from knowing a “reward” is attached. While these cards do stimulate consumer buying, accepting rewards cards is more expensive for merchants in terms of higher processing charges.

In order to determine if you are considering a merchant account service with low fees, it’s necessary to evaluate the full schedule of interchange fees as they relate to your business. The fees schedules are generated twice a year, usually in the spring and fall, and should be examined regularly. If you just accept your merchant account service agreement and forget
about the interchange fee structure, you’re just throwing money away.

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