Billions of dollars are spent on fees by merchants in America and this is an established fact.
These fees are associated with credit card use by customers as products/services are purchased. Merchants are constantly aiming to understand what is interchange and how to manage these fees appropriately. A world-class credit card processor such as this one can help remedy some of these expenses and provide assistance in understanding the source of these fees.
Here is more on credit card interchange and why it is paid.
Interchange is an established fee paid by a merchant via its bank account for each completed credit/debit card transaction. The fees are associated with the use of this service and are paid to a card-issuing bank as a means to manage handling costs.
Additional costs protected under the interchange fee would be potential bad debt or fraud since it is a risk acquired through the credit card processing fees.
Let’s dig deeper into details such as Mastercard interchange rates as listed by a merchant service provider.
Visa Debit CPS (0.8% + 15 cents)
2) Visa Debit Prepaid (1.15% + 15 cents)
3) Visa Debit CPS Regulated (0.05% + 22 cents)
4) Visa Debit Business Regulated (0.05% + 22 cents)
5) Visa Debit Business (1.70% + 15 cents)
6) Visa CPS Retail (1.51% + 10 cents)
7) Visa Rewards Signature (2.3% + 10 cents)
8) Visa Corporate (2.5% + 10 cents)
9) Visa Purchasing (2.5% + 10 cents)
10) Visa Rewards Signature Preferred (2.1% + 10 cents)
This is relevant information on the current rates (which are not static) and how they impact a merchant.
The EDI is useful in processing this information and relaying it forward.
In general, there are tiers to an interchange rate and that determines what is paid and how much is paid.
The three tiers are non-qualified, mid-qualified, and qualified.
To achieve the “qualified” state, non-reward credit cards and debit cards are necessary for a transaction. This will lead to a reduced rate being paid. All transactions are pushed through these tiers based on the EDI. This is where the EDI can help process information and make it useful.
The qualifications are stringent and vary based on the processor too.
To maximize the qualification process using an EDI, it starts by analyzing what can be optimized.
By instilling positive habits via the EDI, it’s possible to ensure everything is reduced and the fees being paid are apt for the business.
1) Complete POS Prompts
2) Card Acceptance
3) Settlement of Transactions Within 24 Hours
These are the three requirements when it comes to the interchange rate and EDI. Being able to maximize the rate and get a good deal is going to come by understanding all of these needs. A good processor can help achieve all of these requirements automatically.
3 Components of Final Rate
While analyzing the EDI and taking a look at what is being processed, it’s important to understand the “3 Components of Final Rate” and how they add up through a merchant acquirer.
1) Interchange Fee
2) Card Scheme Fee
3) Processing Fee
The interchange fee is the base fee paid for all transactions by an acquirer.
The card scheme fee refers to the use of a network (i.e. VISA, Mastercard) and is also established beforehand.
The processing fee is what is paid for the service of completing a transaction from start to finish and is a part of the EDI.
By understanding how all of it comes together and what the EDI does, it is easier to manage the rate and understand how it functions.
Let’s move onto another concept that comes via the EDI and that is “price-fixing.”
This is a concept that refers to an idea of maintaining a set price by agreement. It is applicable here as it is used to manage the fee that is being charged to the merchant at a set level. For example, the top rate might keep changing but it is going to be maintained at a specific rate for as long as possible.
If the agreement is maintained, it will be held to that level via the EDI. This is why the EDI has a tangible role in all of this.
This is a concept that refers to an idea of benefit achieved or derived from a specific good/service.
It is the base advantage of going out and doing something or buying something. For example, if your business goes out and sells milk on a daily basis then there is an established benefit for the consumer. He/she will value milk as a part of their life and this is not going to change.
However, what will change is how much they’re willing to pay for it. There is a balancing act and the fees can eat into their willingness to foot the bill. This is why paying attention to the EDI is important.
Payment Card Interchange Fee and Merchant Discount Antitrust Litigation
In 2005, there was a class-action lawsuit pushed against VISA and Mastercard because of the interchange fees. They stated price-fixing was going on between these companies and they were willing to keep the rate at a specific price to make sure it didn’t drop for competitive purposes.
So, if VISA set it would be at a specific rate then Mastercard would use that as their base level too.
It meant merchants were getting the raw end of the deal via the EDI. In the end, it resulted in a $7.25 billion (USD) settlement as stated by the judge.
In general, the EDI or being able to process information/transactions is essential but there has to be an incentive there.
What is the incentive for hosting such payments for merchants? What is the company getting out of it for doing this? This is where the fees come into action and the EDI plays a role. Interchange is a means to an end and is a way to put a price on the work being done behind the scenes.
It also increases the incentive for these companies to reduce fraud and make it a tangible payment option. Otherwise, they would do the bare minimum and not retain value from it. By recognizing the EDI and knowing how the EDI works, it simplifies the equation and illustrates where the value is for these entities.
Let’s take a look at how interchange works for those who are still wrapping their heads around this.
The idea is to have a card holder come in and ask to pay via their credit card or debit card. The merchant will hold up the terminal and let the transaction go through. Once the transaction goes through, it is going to have a set fee applied to it which is what the interchange is all about.
For example, the Mastercard interchange is going to have a set fee that is a bare minimum on each transaction. It will be applied to the merchant’s bank at a set date. This is the interchange cost and all merchants under the system have to pay this interchange cost.
This is just like a roundabout interchange or a trumpet interchange as it’s used to facilitate a specific movement or in this case a transaction.
Misleading, Confusing and Frustrating Part of Interchange
The CPS or “cost per sale” is often a confusing part of this fee.
How much is it going to cost when it comes to the CPS retail setup? The merchant account provider will have to focus on this and that can also lead to issues with the check-in check-out process. Most merchants get confused with sales over the phone as they key in the information.
There is a surcharge in such cases and that is because a card was not swiped at the terminal.
Don’t ignore this as it is going to add up over time if a lot of sales are being made over the phone by a merchant. The fee can be related to a trailer interchange insurance or service-connected disability, where there is added protection in place for fraud or the risk of such a process.
In general, a surcharge is going to be paid for when the bank puts through an additional cost on the processing of a transaction.
This is often seen when a phone transaction is paid for and a debit card is used over the phone. This is when the surcharge is going to be put through with the debit card or due to credit card processing. This is going to vary with each situation and is a part of the credit card processing.
A surcharge is going to depend on the legalities of a state but it doesn’t have to be applied to cash transactions.
The surcharge is a fee paid on top of the processing fee and it’s important to recognize the nuances of how it works. Going with a good processor such as this one can help rectify concerns and remain on top of things.
The idea of Inter-change Plus pricing is to have a set markup that is put on all credit card transactions.
This is a fee that is going to be established beforehand and can help create a simplified tier-based system that illustrates how the fees are paid for. This often reduces the costs and makes it easier for a merchant to manage all credit card transactions.
Next time a credit card is used, it is pushed through this markup and that fee is paid immediately through the purchase itself.
The reason Interchange-Plus pricing can be a game-changer has to do with how transparent it is.
The markup is fixed and that means it is not going to keep revolving. It is not going to lead to unnecessary confusion about how the money is going or what is being spent through the merchant’s bank. If a credit card purchase is made, this markup takes care of the fees.
It’s simple and to the point for the merchant.
In general, this feel is used to apply on top of a credit card purchase and is paid by the merchant.
The merchant is paying for the service of offering customers an opportunity to pay with something other than cash such as a credit card. Each time the credit card is used, the fee is also processed by the card-issuing bank.
The card-issuing bank is responsible for setting up the fees based on what it assumes is the cost of service. This is agreed upon by the merchant (can rotate) and will have a tiered structure as soon as the credit card purchase goes through.
The fees are based on what the card-issuing bank believes is fair and is then put on the merchant. This can often sit in the 1-2% mark based on how much was spent.
The credit card interchange fees are going to vary based on what Visa or Mastercard determined is fair.
This is why having a good processing company such as this one on your side is key. It can help get a fair look at how to handle these fees. Most of the times, these credit card interchange fees are going to sit in the 1-2% range.
Based on recent numbers, Discover has interchange fees set at around 1% and also puts in an additional processing cost of a few cents based on the type of card being used. For example, credit options are going to have a different fee to debit options.
American Express has one of the higher interchange rates on the market for those who accept credit options.
It is set up to around 2-4% depending on where it is used and the type of merchant that is taking it.
This processing company is a world-class fit for those merchants looking to optimize their expenses and take control immediately.
Don’t let these fees get the better of you and know GAM Payments offers a solution that is long-lasting and meaningful.
Use this form to reach out and we’re happy to start a discussion.