Guide to Interchange Rates
It is important for every small business to take the time to understand what Interchange rates are and how to best negotiate these rates with your merchant. What industry you are in, what methods of cards you accept and the type of card that you accept determine interchange rates. Interchange fees are paid to the card issuing bank with the fees set by MasterCard and Visa. These fees are passed on to the merchants from their issuing merchant account provider.
We want to give you a few basic tips on understanding the basics of Interchange rates. One thing that is important to keep in mind is that MasterCard and Visa are competing companies, their Interchange rates will be different. Although, both companies are separate you will never negotiate with MasterCard or Visa, you will need the Interchange rate negotiated directly with your merchant account provider. The Interchange rate is the largest portion of your fees accessed with credit card acceptance. Many times you will have different Interchange rates for different transaction sizes, so to see your Interchange rates vary through out the day per transaction would not be unusual.
Interchange rate fees are designed to optimize all sides of the credit card network, as it allows them to balance both sides of the network. The “two-sided” network means that more buyers equal more sellers. The more cardholders a Visa or MasterCard Network has the more valuable it becomes to Merchants. The reverse is also true, the more cardholders a merchant has the more positive value it would have to the cardholders themselves.
There are four main determining factors when a Interchange rate is provided which include, the type of card, the industry category, the merchant size and the way transaction is processed. Both MasterCard and Visa offer different exchange rates for their different types of cards including personal, business and Debit. The reason is because the risk involved with each card is different and the revenue that can be made with each card also varies a great deal. Interchange rate is also used to reflect insurance for merchants acceptance of cards with more of an incentive such as a reward card or cash back.
The category your small business falls under will also affect the Interchange rate considerably. The reason this is done as the profit margins can vary so significantly in different industries it is important to keep the fees fair. A few examples would be a market would have a lower Interchange rates, as their profit margins are much lower then an electronics store. This is also true of hotel since they have to authorize a card twice in most case their Interchange rate would be lower to offset this. The Interchange rate is set in a manner that it would encourage merchants to offer cards in their location.
The Interchange rate will also vary on how large the merchant is. If you conducted below a minimum set number of transactions you would automatically qualify for a lower exchange rate. The way you accept the payment is also important in determining an Interchange rate as certain types of transactions hold a much high chance of fraud. If you are taking an Internet transaction the chances of fraud would be much greater than if you were swiping the physical card at a terminal. The Internet transaction would hold a higher exchange rate as a type of Insurance for the transaction.
It is important to keep these things in mind when considering interchange rates. With that in mind small business still need to insist on the lowest Interchange rate possible for their business to get their cost as low as possible. It is important to educate yourself as much as possible on Interchange rates to be sure you are getting the best possible rate available to you. For a small business just setting out a quick search of the Internet can show the typical exchange rates for your specific industry. Always take the time to read your merchant agreement fine print as fees and early termination can amount to hundreds of dollars. Month to month agreements are available so it is important to not to get into a contract when starting out. It is not only important to read the fine print but it is even more crucial you understand the small print.
Typically as a small business you will not actually be told the Interchange rate most likely a “discount rate” will be provided which is a rate that includes not only the Interchange rate but also additional fees. Because these rates are not always disclosed the small business owner seldom realizes what they are. It is always important to ask a lot of questions to be sure you are getting the absolute lowest rates possible. It is recommended you call a few different times speaking to a few different representatives to be sure you get the same information. The bottom line is do not choose a credit card payment processor until you have received a written Interchange rate quote. Be sure to print the proposal and your merchant application as well as all terms and conditions to file should you need them for future use.
A few additional things to keep in mind when attempting to get the lowest Interchange rate possible is insisting that the Interchange pass through pricing. Accept debit and encourage your customers to pay in that form as it is a more secure transaction. Take the time to ensure your Merchant Category Code is correct. Use the most recent payment technology and bundle transactions whenever possible. Also if you move to a net billing the Interchange rate may be returned in cardholder credits. Take the time to calculate what your real rate is so you know whether or not you will actually save funds by switching to a different card acceptance provider. Many new rules, pricing and terms are always coming out so it is very crucial always to stay educated so you are able to negotiate a better deal when the time comes.
With all these tips in mind it should help many small businesses out there navigate through the confusing world of Interchange rates. By knowing what determines these rates will help you accurately get the correct and lowest rate for your small business.
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