Do you know what interchange fees are? Do you understand the basic definition and interchange fees, meaning? Basically, interchange fees are the transaction fees that you need to pay via your bank account when you use a debit and credit card for purchasing a product from a store. It is the fees that a merchant pays. If you have an Store or online business and you sell your products or services, you will have to pay a fee for each transaction you are processing. It is a processing fee that is paid to the issuing bank to cover handling charges. It covers the fraud and lousy debt costs and other risk factors involved in the approval of payments.
How are interchange fees charged to businesses?
You have to pay a percentage passed interchange fees via each transaction. It may be charged by card-issuing banks, payment processors, whether they are issuing banks, or it may charge interchange fees. Other payment networks like Visa and MasterCard, payment terminals, and your bank may charge these fees. Usually, the charging bank frequently sends you as the single bundled amount on your bills. The payment processor hands you the bill. The payment processors simplify it for you as you pay actually 300 individual interchange fees, which are composed in a single interchange fee. In this way, you actually pay a combination of different charges in a single bill.
Interchange fees are not static.
There are regular changes and adjustments in interchange rates. It is based on the cost of moving money and the time value. A lot of factors determine these fees in terms of current interest rates and different risk factors involved in the process. For these reasons, credit card companies regularly modify the interchange rate from time to time. For example, Visa and MasterCard set their standards twice a year. They change the prices in April and October. There are a lot of other fees that the merchants need to pay for the facilitation and privileges. They make sales via credit and debit cards. But interchange fees are the largest one. These rates cover to 80% of total costs that they pay to banks and credit card companies for giving them the facilitation of payment processing.
How to calculate interchange rates
There are a lot of variables involved in calculating the interchange fees. These complex variables determine the interchange rates. Different credit card companies have different calculation criteria. The companies compute the complicated interchange into flat rates. It also includes the percentage of sales, including various taxes. In the US and Canada, the merchant has to pay billions of dollars to cover fees every year. The average is 2% of the purchase amount. As different companies and banks charge different fees, there for each credit card company has its interchange rate calculation threshold.
Factors that affect the interchange rates
Different transactional factors affect interchange rates. Each element plays a role in setting the fees for a specific card company.
Debit card pins
You should keep in mind that debit card with pins offers you lower interest rates than a credit card due to smaller risk factors. Lower risk means the company will not face many complications due to payment processing. Each credit card company charges different rates. Visa, credit card rates are different from that of MasterCard. So card type plays a vital role in determining the rates. There are Reward Cards that pay for perks and facilities given to cardholders by charging higher interchange rates to merchants and businesses. In this way, these perks may motivate and induce consumers to purchase more.
Business size and industry are other essential factors for determining the rates. Each business has varied rates that are distinct from their store. Similarly, your business size and volume is also an important determining factor. If your business is a smaller setup, you will be imposed different rates than that of a big corporation. Similarly, supermarkets pay more than gas stations due to some reasons. Larger business setups pay lower rates due to the fact that they have enough clout. They can quickly negotiate with banks/ credit and debit card companies and acquire subsidized rates. In the same manner, all eCommerce stores are not able to get discount rates.
Your transaction type is also an essential factor for determining the exchange rated. It is an act that point of sales transactions poses lesser risks than CNP (card not present) payments. The reason is that chip can be scanned. You can take a signature or enter a pin. It these way exchange rates for transaction types that are lesser risky rates are also more minor. The MOTO or mail order telephone order and CNP are classified as a card, not present payment categories. The credit card and payment processing companies charge higher interchange rates for such types of transactions.
Businesses and interchange rates
Interchange fees are part of doing business. You have a business that allows the customer to purchase products or services with credit or debit cards; you will have to pay interchange fees. In return, the payment processing system offers you a facility of secure payment processing without any complications. As more and more businesses are replacing their land-based stores to online stores, the need for online payment is more prominent. The credit and debit card companies make you the process much more comfortable and charge you a few pennies for this facility.
here you can read more about interchange plus pricing in Canada
As a business, no retailer wants to see potential profits deducted from his sales, but the net gain outweighs what he pays as the cost of interchange fees. The credit debit cards and payment terminals boost their businesses.