What Are Interchange Fees and How Are They Calculated?
The cost of a transaction is one of the most crucial things to know for any merchant. It may be tempting to focus only on the “positive” side of the equation and tally the money coming in, but this may offer a false image of how the firm is doing.
Instead, the merchant has to know exactly how much it costs them to execute the transaction before proceeding with it. Merchants should include the interchange charge in addition to the apparent overheads, such as the rent paid for any facilities and labour costs. An awareness of how to manage the interchange fee is critical to any merchant’s ability to increase their profit margins.
What Is the Interchange Fee?
Interchange fees are charged when customers use their credit or debit cards to pay for goods or services. A payment request will be sent from the merchant’s bank to the customer’s bank. To verify that the payment request is legitimate, the customer’s bank will conduct several checks.
There will also be a bank check to see if the account has enough money to cover the payment. Afterwards, the customer’s bank will deposit the funds into the merchant’s bank account, or decline the transaction. The ease and convenience of modern payment methods are reflected in the interchange fee that the retailer is charged, which is why these methods are so popular.
How Are Interchange Fees Calculated?
A customer’s bank account is billed the fee even if a third-party card network levies it. Interchange costs, often based on a percentage of the transaction’s value and a fixed price for each transaction, are not consistent across the board.
The interchange fee charged by each network is determined by a variety of criteria, including:
- Use of a credit or debit card.
- It doesn’t matter if the transaction was completed online or in person.
- Security protocols that are used during the transaction, such as 3DSecure or a chip and pin.
- Payout is made in a particular country.
- The area of business in which the merchant is engaged.
- The place where the card was issued. As a result of the added difficulty of dealing with financial institutions in various countries, the interchange charge may be higher in those situations.
- The entire amount of money is exchanged. This means that larger businesses with a higher volume of transactions may negotiate reduced interchange rates.
Transactional Factors Affecting Interchange
- As a result of the lower risk, debit cards with PINs have lower rates than credit cards. The rates charged by credit card companies also vary. The increased interchange rates charged by rewards cards cover the benefits given to cardholders. However, the benefits may encourage customers to make additional purchases.
- The company’s size and the type of business: Rates might vary according to the kind of business, such as a supermarket paying more than a petrol station. The “clout” those larger businesses have in dealing with banks and credit card firms allows them to negotiate lower rates.
- Because the chip can be read, a signature obtained, or a PIN entered, POS transactions are less risky than CNP transactions. The interchange rate for online orders is greater than the interchange rate for MOTO (mail-order-telephone-order) orders.
Interchange fees must be paid by any firm that accepts credit/debit card payments. While accepting credit/debit cards does come at a cost to the online shop, the total advantage far outweighs the interchange costs.