Is your business paying twice as much in merchant account fees? If you do not understand how “Interchange” works, you could just very well be paying twice as much then someone who understands the workings of credit card processing fees called “Interchange”.
The payment processing industry has gone through some major overhauls over just the last 5 years. And while nothing else may has changed with your own business, if you do not monitor your merchant account, you could find yourself paying twice as much in fees for accepting the credit card transactions.
What is “Interchange”?
Interchange is the fee structure that Visa and MasterCard created to determine what to charge “Acquires” (a.k.a – your payment processor). Since interchange affects what the credit card processors are charged then it affects how every merchant that accepts credit cards a method of payment.
A little over 3 years ago, Visa and MasterCard made some major changes to their fees structure which had a huge impact to Canadian merchants. And while the fees increased month over month, many merchants could not grasp how or why their fees were increasing while these companies were offering no incremental value.
Here we will try to simplify things a little and arm you with the information you need to full understand how the system works and how changes they make will impact you and your business.
The credit card space is divided into two areas; Issuers and Acquirers. The Issuers are the banks that issue the Visa and the MasterCards to their clients and as such, these clients are their customers. The Acquirers are the companies that enable merchants to accept credit card payments and therefore the merchants are the customers of the Acquirers. Visa and MasterCard in the credit card companies in competition with one another. Each has their own respective goal of have the largest card issuance and ubiquitous acceptance. In order to entice issuing banks to issue their card, Visa and MasterCard offer payment in the form of an interchange to the issuing bank. Visa and MasterCard charge the Acquirers the interchange rate (which is passed down to the merchant with the markup of the Acquirer’s processing fees) and the interchange then flows through to the respective issuing bank. The higher number of transactions, the more interchange the banks make.
A couple of years ago, the competition between Visa and MasterCard got fierce. Duality Issuance was introduced into the Canadian market. Historically, issuing banks were only allowed to choose one card, either Visa or MasterCard and issue only those types of cards. For example, Bank of Montreal choose to issue MasterCard and while they offer the entire suite of MasterCards from everyday lower interest credit cards to premium cards reserved for their highspenders, they were all forms of MasterCard. However, duality issuance allows for a bank to issue both a MasterCard and a Visa card at the same time. Now, the playing field had changed and Visa and MasterCard had to revise their fees structure to make themselves appear more attractive to the Issuers… not only to potentially win new Issuers but also to keep their existing portfolio.
Unfortunately, the cost of these new fees structure fell on the backs of the merchants. Both Visa and MasterCard introduced premium cards into the market that carried a higher interchange. And while the cardholders were told that they reap the benefits of these premium cards like travel points or concierge service, the merchants were left to pay almost twice as much to accept these cards. And as such, many merchants were forced to raise their prices of goods to help cover these costs. So in the end, the card holder is truly paying for the perceived benefits they receive.
The Industry continues to change with the introduction of the Code of Conduct and the coming of new debit card products in the market. It will be some time before we can expect the dust to settle but in the meantime, knowledge of how the system works will enable you as a merchant to make wise acceptance decisions.
