What are interchange fees and how are they calculated?
Interchange fees are essentially the credit card processor's cost to approve a transaction, and they make up the lion's share of the transactional fees that the merchant must pay whenever a customer uses a credit/debit card to make a purchase from their store. While these fees are collected by your credit card processor as part of the monthly fees a merchant pays, Interchange fees are then paid directly to the Card Brand (Visa or MasterCard etc.) to cover the costs of using their network, and do not include the fees that the credit card processor will charge for performing their service.
How are interchange fees charged to businesses?
There are actually several hundred individual Interchange categories and the Interchange charges your business will see depends on a number of factors. Primarily, it is the industry a merchant participates in and their annual volume that determines the Interchange rates that will apply to them. So, for example, Visa and MasterCard have different pricing categories for Supermarkets and Petroleum which differ from the Retail category. Additionally, both Visa and MasterCard have Interchange categories for merchants that have a high processing volume. Visa's Tier 2 Interchange pricing requires a merchant to have at least $750 million in annual processing volume in order to receive this pricing structure. Most merchants in Canada will fall into the Retail Interchange category.
Interchange fees are not static
Visa and MasterCard set and regularly adjust their interchange rates. They review their Interchange pricing structures twice a year, in April and October, to account for new card types or changes in price. While there are other fees that merchants pay to their processors, interchange fees are by far the largest, typically representing 70% to 90% of the total fees paid to the processor by merchants.
Transactional factors affecting interchange within a category
Card type: Debit cards with PINs have lower rates than credit cards due to lower risk, and each processing company will charge a different rate. Rewards cards pay for the perks given to card holders by charging higher interchange rates to businesses. The perks may, however, induce consumers to purchase more. Business and Corporate cards also have a higher Interchange rate associated with them.
Transaction type: POS (point-of-sale) transactions are less risky than CNP (card-not-present) since the chip can be scanned, a signature taken or a PIN entered. Both MOTO (mail-order-telephone-order) and online orders are classed as CNP and charged a higher interchange rate.
Interchange fees are a part of doing business
Any business that allows customers to make purchases with credit/debit cards will have to pay interchange fees. While no online retailer likes to see potential profits deducted from a sale, the net gain from accepting credit/debit cards far outweighs the cost of interchange fees.
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