An Interchange Plus Pricing Structure Can Greatly Reduce Your Credit Card Processing And Merchant Account Fees.

Traditionally small to mid sized merchants have been set up with what is called multi-tier pricing for their credit card processing. This system is usually set up with three tiers (qualified, mid-qualified, and non-qualifed.) Occassionally, if the business owner has negotiated well, there will be a fourth tier for qualified offline debit cards. In this case offline debit actually means debit cards without a pin number used. While this system has worked well for many years, the increasing number of rewards and corporate cards being issued has made this type of pricing obsolete for some merchants.

Visa, Discover and Mastercard have over 450 different interchange categories for the multiple card types that are issued. Tier pricing takes a large number of these categories and lumps them into one of the three tier buckets available to the merchant. If the merchant only takes standard credit cards then this system will work well for them. Once they start to see more debit, rewards, and corporate cards being used they will notice that their merchant services bill may have increased dramatically. This is because many of these transactions are falling in to the mid or non qualified transaction categories.

Some of these cards are actually not that much more to process than a standard credit card, but the processing company for the merchant account needs to make sure that they are profiting on every transaction. They can ensure profit if they charge a large mark up for any transactions that are not qualified. So you may pay an additional 3.0% for a mid qualified transaction and 3.5% for a non qualified transaction (These numbers can range much higher and lower.) Some processors will charge 3.0% for non qualified fees plus their markup then advertise that their rate is only .50% or whatev they offer you.

What interchange plus pricing does is pass the true cost of running the card right through to the merchant. So the fees associated with that individual transaction will be put through at the lowest possible cost plus the processor’s profit. A merchant typically pays .25-.50% plus $.10-$.15 per trnasaction) on top of the interchange fees.

There are some red flags a merchant needs to watch out for because they are not inchange actual interchange fees such as:

Address mismatch
No CVV/CVV2 Match
Daily Batch Fee
PCI fees
Annual Fees

An interchange plus set up can save some merchants quite a bit on their processing as long as the cards they are taking qualifies and the processor doesn’t add a bunch of “other” fees.

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Address Verification Service (AVS)

The Address Verification Service (AVS) is a system designed by credit card and bankcard processors to aid in the detection of suspicious credit card transaction activity. AVS matches billing address information provided by the cardholder with the cardholder’s billing address on file at the credit card issuing bank. The processing network then sends an AVS response code indicating the results of the match to the payment gateway. The AVS response code can be found in the payment gateway transaction response as well as on the Transaction Detail page. Based on your AVS rejection settings, the transaction is accepted or rejected. Transactions that are rejected will display a transaction status of Declined (AVS Mismatch) on the Transaction Detail page.

The following chart explains all the different response codes a processing Bank may return:

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Most merchants in the U.S. are about to repay some of the savings they realized from the Durbin amendment that became effective October 2011. Starting April 2012, Visa  and MasterCard are implementing new fees and increasing some interchange rates that will cost most merchants from a few dollars to a few hundred thousand dollars per month. It is important for merchants to understand their liability for these fees and seek out ways to manage the increased cost.

The most significant of all the new fees and rates changes is the introduction of Visa’s Fixed Acquirer Network Fee (FANF). Effective for activity beginning April 1, 2012, this fee will apply to the acceptance of all Visa-branded products. This fee is charged to a merchant’s acquirer or credit card processor based on a merchant’s size and number of locations. Most processors have announced that they intend to pass this fee on to their merchants. The calculation of this fee is extremely complex as it is based on a number of variables, including:

• Number of taxpayer IDs
• Card present vs. card not present
• Merchant Category Codes (MCCs)
• Number of locations
• Visa gross monthly sales volume

Large merchants with many locations, multiple MCCs and mix of card present and card not present sales are having a difficult time calculating the impact of this fee to their organization.

Visa is lowering the NAP fee (Network Acquirer Processing) on Signature debit and Prepaid transactions, eliminating the RIS (Risk Identification Service) Fee, reducing the Interlink switch fee, and making incentive payments to large merchants under the Visa Partner Program.  Merchants with very small average tickets and high debit card usage will see a net benefit with the reduction of the NAP fee and addition of the FAN fee.

Additional Visa changes announced include:

• Visa will implement a new Transaction Integrity Fee of $0.10 on Visa Debit card and Visa prepaid card purchase transactions that either fail or do not request CPS qualification. As we read this it will be implemented like other Visa assessments (not Interchange fee related) and the most common impact will be on debit and prepaid transactions that are key entered without address verification.
• Visa will make changes to corporate card transactions including increasing Corp Card Level 3 rates by 15 basis point and Corporate Card Electronic with Data rates by 10 basis points.
• Visa will change Corporate Card and Purchasing Card Interchange Fee Programs for Travel Service merchants.
• Visa will implement new Purchasing Card Product and Interchange Fee programs that will be available to commercial card issuers in the U.S. region and will support purchase and credit voucher transactions. We are awaiting further details on this new P-card product. A guess is that these new p-cards will focus on large ticket transactions.
• Visa is making lots of changes to existing Interchange rates in their business, corporate, commercial and purchasing card categories as well. Some rates will go up slightly and others will go down; some changes are TBA; and some are all together new. Purchasing Card Large Ticket is the exception as it will increase 0.50% (yet this will only impact those few merchants that paid the Visa registration fee to qualify at this Interchange category). The analysis for merchants considering registration for Purchasing Large Ticket will change as a result. We would expect few merchants will register going forward.
• Visa is making changes to non regulated debit and prepaid Interchange across industries. Again, some rates will go up slightly while others will go down fairly significantly.
• Visa will delete debit performance thresholds for retail and supermarket.
• Visa will edit Passenger Transport Interchange with new programs for card not present, credit and debit and prepaid.
• Visa will edit qualifications for hotel, car rental and passenger transport so that they will no longer be eligible for retail debit and prepaid programs.
• Visa will edit its non-regulated Business debit card with new programs that distinguish it from credit transactions. Some rates will stay the same, while others will increase or decrease depending on card present or not.
• Visa will implement new non-regulated Interlink Interchange fee programs that will cover Business debit, Consumer debit and consumer prepaid transactions for Travel Service merchants.
• Visa will delete Interlink supermarket and retail performance thresholds.
• Visa will change its Interlink Switch Fee to $0.0225 + 0.08% assessed on the amount of the transaction and caped at $0.035 per transaction (for all transactions above $15.62).

MasterCard

MasterCard will introduce a new Annual License and Registration Fee. MasterCard has announced a new annual Acquirer Licensing Fee as well as a new annual Type III Third Party Processor (TPP) Registration Fee to be collected beginning in July 2012. The 2012 fees will be calculated based on full year 2011 volume. For 2012 only, each of the new fees will be 50% of the total fee calculated because it covers only half of 2012 (July 1, 2012 – December 31, 2012). These fees will be passed through on a pro-rata basis. All acquired MasterCard credit and signature debit volume will be utilized to determine annual volume for both programs. PIN debit volume is excluded.

In addition, MasterCard will introduce new Regulated debit small ticket debit and credit Interchange programs in April 2012, however the same Regulated debit rates will apply. This change will allow for MasterCard to better track small ticket transaction volume.

MasterCard will also make changes to existing commercial Interchange rates. MasterCard Corporate and Purchase Card transaction volume will shift to new charge types. Business Debit transaction posting remains unchanged. MasterCard will change the Interchange rates for Corporate and Purchasing T&E 1, 2 and 3, Commercial Large Ticket 1, 2 and 3, Corporate Level 2, Commercial Level 3, and Corporate and Purchasing Face-to-Face. Fleet T&E 1, 2 and 3 will be split out under a unique card/charge type combinations with no changes to the rates.

Discover

• Discover will introduce a US Commercial Large Ticket Interchange Program
• Discover will increase its assessment fee by .005%
• Discover is changing existing card present Interchange rates for transactions less than $15 for Express Service merchants (Local Commuter, Bus Lines, Toll & Bridge Fees, Restaurants, Fast Food Restaurants, News/Dealer Stands, Laundries-Family Community, Dry Cleaners, Quick Copy & Reproductions, Parking Lots/Garages, Car Washes, Motion Picture Theaters and Video Entertainment Rentals) and less than $25 for Taxi/Limos. The new Interchange will be percentage based and carry a $0.00 per transaction.
• Discover will increase its International Electronic Interchange rates for non regulated Debit, Core, Rewards, Premium and Premium Plus

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What is Credit Card Interchange Fee

Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card based transactions. Usually it is a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) however there are instances where the interchange fee is paid from the issuer to acquirer, often called reverse interchange.

In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO, which is often referred to as a discount rate, an add-on rate, or passthru.

For cash withdrawal transactions at ATMs, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).

These fees are set by the credit card networks, and are the largest component of the various fees that most merchants pay for the privilege of accepting credit cards, representing 75% to 85% of these fees by some estimates, although larger merchants typically pay less as a percentage. Interchange fees have a complex pricing structure, which is based on the card brand, regions or jurisdictions, 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, whether the card is present for the transaction, etc.). Further complicating the rate schedules, interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.

Credit Card Interchange on Rewards Cards

As much as consumers love their reward credit cards, many merchants hate them.

Whenever you swipe a credit card, merchants get dinged for a interchange fee. And guess what? Those interchange fees go, in part, toward your credit cards rewards.

Credit card rewards contribute to the costs associated with card processing. And because merchants can’t typically add a credit card surcharge, many charge higher prices than would otherwise be necessary.

Yes, merchants can mitigate these expenses by refusing credit cards entirely, or by choosing which cards they’ll accept. Indeed, the fact that American Express isn’t as widely accepted as other card types is primarily due to their higher costs.