What are interchange fees?

By Santa Barbara Merchant Services on Dec 08, 2013 at 04:54 PM in Credit Card Payment Processing

What are interchange fees?

My web designer is a funny guy.  

I called him up to pay my hosting fee over the phone this last week.  He asked me for my card number, billing address, and the numbers on the back of my card.  Then he added; Can I get your mother's maiden name, social security number, and drivers license.

I paused and then laughed.  He responed, "Hey now, I'm just trying to get the lowest interchange rate."

Before changing over to SBMerchant.com he too was paying 2-tier and 3-tier rate models which in his case added up to an effective rate of almost 11%.  Do not fall for this nonsense!  

There should be only two sets of fees paid by retailers... and therefore two sets of costs ultimately accounted for on to the item price paid by their customers each time a card is used for a payment: the merchant service charge (MSC) and the multilateral interchange fee (MIF).

Have a look at the diagram – it illustrates how it works in practice. Start off on the bottom left as the cardholder purchasing something for $100. Follow the arrows all around to the retailer and you’ll start to get the picture.

What are interchange fees?

If you follow the arrows up to the top right, you’ll see that the retailer’s bank (known as the acquirer) levies a fee for this transaction to the retailer of $3 – which is known as the “merchant service charge” or MSC. The acquirer bank keeps $1 to cover processing costs and profit, and sends the remaining $2 to the second bank to cover its fee for the entire transaction. This second fee is known as the “multilateral interchange fee” or MIF and is decided behind the scenes, either by Visa or MasterCard or by the banks hiding behind them – all without input by retailers or shoppers, and often without their knowledge. As a result of this fee, shops actually receive less than the full price paid by the cardholder.

The card companies say they need the money from the MIF in order to cover three services:

  • the interest free period for credit and deferred debit card-holders between making the purchase and paying their card bill
  • the payment guarantee, which ensures that – subject to some significant caveats - retailers receive payment even if the card has been used fraudulently
  • transaction costs, i.e. the issuing bank’s processing costs.

Retailers dispute the legitimacy of these costs, questioning whether they are based on actual costs and believe that a host of other costs are covered by the interchange fee such as reward programmes and advertising.

And interchange fees can vary according to the kind of credit or debit card used – often without the cardholder having any idea. So cards given by businesses to their employees, known as ‘commercial cards’, can incur interchange fees up to 50% higher than normal cards – and retailers and their customers have to foot the bill!

Here at Santa Barbara Merchant Services we train our customer's to control these costs as much as possible. We use only Interchange Plus rates meaning that we don't make any additional money if your transaction is downgraded for any reason.

In other words every member of your team at SBMerchant is on your side to keep your costs low and retain you as a customer for a lifetime.

The rate for every card is posted by the card brands and updated at least twice a year.

Visa Interchange

MasterCard Interchange

Santa Barbara Merchant Services Inc