Interchange For Dummies

Interchange is the wholesale price (also called discount rate, fee and variations thereof) charged by Visa U.S.A. and MasterCard Worldwide for authorization and settlement of a credit card transaction. For example, a merchant is charged 3.5% of $10.00 is 35 cents. About 80% of those 35 cents (about 28 cents) goes to the issuing bank. The remaining 20% (7cents) is divided among Visa or MasterCard, the processor and the merchant level salesperson (MLS), if there is one. American Express Co., Discover Financial Services, LLC, Diners Club, Inc. and JCB International Credit Card Co., Ltd. Is not part of interchange.

Categorization factors:

• Merchant’s industry type: fast food, colleges, warehouses, gas station, Internet merchants, catalog merchants, for instance.

• Type of card processed: traditional credit cards, corporate, rewards based purchasing or check cards.

• How a card is processed: swiped or keyed-in, present or not present.

Bundling and who it’s for:

• Bundles categories make it easier for merchants and MLSs to understand the different rate types and how they apply to different merchant Sizes. Small-volume merchants have a comparatively small number of card transactions. These merchants usually will not fall into one of the specialized categories, so bundling makes sense for them.

Bundling or rates also may mean that some or the entire transaction fee is eliminated. For a merchant with few downgrades, bundling often provides the same bottom line as if the merchant had been quoted and set up with every available category.

• Large-volume merchants: These merchants may have more to gain by having an unbundled rate or an “Interchange plus pricing” deal. Each transaction is processed at the best available category. Large-volume merchants who are trained to process their card transactions correctly and are set up properly can ensure that every transaction qualifies for the best available category.

What is downgrading?

Transactions are downgraded when they don’t meet interchange requirements, such as not capturing the correct card information at the POS, settling the transaction after a deadline as lapsed or key-entering rather than swiping a card. A downgraded transaction means higher cost for the merchant.

What is AVS?

In an effort to combat fraud that results from non-face-to-face transactions, Visa and MasterCard created the AVS, which attempts to verify the address and zip code of the credit card customer. Whenever a card is key-entered, the processing system should be set up to prompt the merchant to enter the billing ZIP code (for cardholder’s billing address) and the numerical portion of the address of the cardholder.

If this information matches the card issuing bank’s records, the system will qualify that transaction for an AVS rate category. (Visa also looks for an invoice number.)

Other factors

Transaction qualification is influenced by many factors. Merchants must not only be aware of these factors, but must also understand which factors supersede others. In many cases, the only way to truly know how merchants can minimize interchange costs is to critically examine their bankcard statements.

Going through this analysis with your merchant can be a lengthy process and will require the cooperation of the processor. However, the cost savings to the merchant can make the effort worthwhile.

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