What is interchange? rates and risk explained

Interchange Banking Fees:
Interchange is a series of rates in different categories- there are 100’s of different rates.

– Visa and MasterCard establish the rates and standards for interchange. Interchange standards are the same for every business. *

Interchange is typically updated twice per year- Spring and Fall.

– All Acquiring Member Banks and their credit card processing service providers are subject to Interchange Banking fees.

More simply put, your merchant processor pays interchange fees on your behalf to the customer’s bank to compensate them for the underwriting, funding and billing of your customer.

Let’s say you have a Bank of America Business Check Card issued by Visa. You go shopping at your local grocery store and buy stuff. The store pays their merchant processor various fees out of the money collected. The merchant processor pays Interchange Fees to Bank of America. The merchant processor will collect these fees in one of two ways:
– The merchant processor will list interchange fees for you on your statement
– The merchant processor will include the fees within other charges on your statement.

Interchange fees are designed to compensate Visa/MC Card Issuing Member Banks for the risk associated with the transaction. Why? The merchant gets their money right within days, but the bank that issued the card has to wait 30 days or longer.
– A debit card has very little risk because the money comes out of the shoppers bank account right away.
– A standard credit card, maybe issued by your bank, has a bit more risk so the interchange is higher.
– A reward cards (about 65% of cards outstanding) has even more risk. They tend to have higher credit limits and there is the payout of the goodies due. What if a person collects on the goodies, but doesn’t pay their bill?
– A business credit card has even higher risk. The business failure rate in our country is high.

* Aside from a few special categories by business type, there are some special categories for large volume processing (>$300M/yr) but other than that, basically everyone has the opportunity to qualify for the same interchange rates.

The risk assessments above are purely opinion, not based on published data.