An Interchange Rate, also known as an Interchange Fee, is a term used in the payment card industry to describe a fee that bank card networks such as Visa and MasterCard require merchants to pay card-issuing banks when merchants accept their credit and debit cards for purchases.
This rate compensates card-issuing banks for the risk and expenses they incur to process credit and debit card transactions. The fee amount is based on the level of risk associated with funding a transaction to encourage businesses to follow procedures that reduce fraud.
How is an Interchange Rate determined?
Interchange Rates have a complex pricing structure, which is based on the card brand, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, phone order). Further complicating the rates schedules, interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, for example, the fee averages approximately 2% of transaction value but can vary from much less to much more. Merchants should understand the specific qualification criteria of the Interchange Rates that affect them.
Interchange fees paid by merchant-acquiring banks to cardholder-issuing banks are in place to cover the cost to convert a charge on a cardholder’s card to a cash deposit at the merchant business checking account, including cost factors such as billing services, credit and fraud risk, profit, etc.
Why do Level-3 payments receive lower Interchange Rates?
Visa and MasterCard business, commercial and purchasing cards are used just like personal credit and debit cards. However, Level-3 transactions carry lower interchange rates because these cards are used in a B2B or B2G situations and fraud, chargebacks, etc are less and the costs are lower. In addition, the merchant is incented to provide the increased data to support the industrial buyer and improve their card accounting.
Many merchants can qualify for a lower Interchange Rate by processing more in-depth Level-3 data (or line-item detail) with each transaction.
What Information is reported when using Level-3?
Level-3 line-item detail is provided electronically by the merchant and contains the same type of information found on an itemized invoice and would typically contain specific purchase information such as:
• Item description
• Item ID
• Quantity
• Unit of measure
• Commodity code
• Price
• Invoice number
• Order number
• Purchase card customer code
• And more…
Are there factors that can negatively affect Interchange Rates?
The rules for interchange qualification can be quite specific and given the wide variety of card brands and catagories, too numerous to define here. However, the top reasons merchants often fail to achieve correct interchange qualification include:
• Not providing the level-3 information (for purchase card transactions)
• Incorrect setup / profile information such as having an incorrect merchant category code assigned
• Not using the AVS (Address Verification System) for card-not-present transactions
• Having the authorization and settlement amounts differ
• Settling a transaction too long after an authorization was received
Do all card products use Interchange?
All card products carry some form of merchant fee. The term “Interchange” describes the interbank transactions related to the member banks of Visa and Mastercard.
For a merchant I represent, how much can be saved using Level-3?
It could be a great deal. Consider, for example, a merchant who processes more than $1 million per month in purchase transactions and receives a statement reflecting low “Data Rate 1” rates. For the merchant, this low level of data qualification could equate to nearly 3.5% in processing costs on every commercial card transaction (interchange + downgrade charges + surcharges). By having the merchant capture Level-3 data on every purchase card transsaction, however, the provider could reduce the merchant’s rate to 2.20% while reducing the merchant cost by 130 basis points.
As of October, 2007:
Visa:
Purchase Card, Standard: 2.70% + $0.10
Purchase Card, Electronic: 2.45% + $0.10
Purchase Card, Level-2*: 2.00% + $0.10
Purchase Card, Level-3: 1.80% + $0.10
Mastercard
B2B – Corporate Cards Interchange Category
Corp Standard: 2.95% + $0.10
Data Rate I: 2.65% + $0.10
Data Rate II: 2.33% + $0.10
Data Rate III (P-Card Level-3): 1.75%
Because the rates do change, a merchant should discuss their specific situation with an acquirer who is knowledgeable about the processing of commercial / purchase card transactions and the requirements to qualify for Level-3 interchange rates. Revolution Payments uses 3 Delta’s gateway for any merchant needing level 3 processing.