Interchange Rates – Who Gets the Money?
There is no doubt that accepting credit cards costs money. Money that comes right off your bottom line profit. There is also no doubt that Merchant Services Providers or more simply known as Credit Card Processors want your business. It’s a very competitive market out there. When any kind of vendor competes for your business, it results in favorable pricing for you, the “consumer” of the product or service. As the competition tries to undercut the price of competitors, this results in lower pricing for you. However, not all pricing can be negotiated in credit card processing. Most notably, the Interchange Rate.
What Exactly is an Interchange Rate?
The interchange rate is the amount of money that you, the merchant pays to the bank that issued your customer their credit card. For simplicity, let’s use a Wells Fargo Visa card as an example. Let’s say that Wells Fargo charges an interchange rate of 1.51% plus a .10 fee for each transaction. If you charged your customer $100 and they used their Wells Fargo Visa to pay you, the interchange rate would result in you paying an interchange fee of $1.51 + .10 for the transaction charge for a total of $1.61 going to Wells Fargo. However, the interchange rate for that same exact Wells Fargo Visa is subject to change if it is manually keyed or used to make an online purchase from your website. Since the card is likely never seen by you, the risk of accepting the card increases. The interchange rate is then bumped up to 1.80% and the .10 transaction fee remains the same. This means, the same $100 transaction now cost you, the merchant $1.90 or .29 more. While .29 might not seem like much, a hundred manually keyed $100 transactions in a month will cost you $29 more in processing fees or $348 over the course of a year.
What Else Affects Interchange Rates?
It isn’t just the difference between a credit card that has been read by a terminal or a manually keyed transaction that can affect the interchange rate. Wells Fargo also issues other credit cards specifically for businesses. Add a rewards program to a business credit card and will see the interchange rate jump up to 1.95% on a manually keyed transaction. The same $100 transaction paid for with a Wells Fargo Business Visa will cost you $2.05. Those rewards doled out by Wells Fargo to their cardholders cost Wells Fargo money. Guess where the money comes from? In part, fees paid by you from accepting their Business Rewards Visa card. It is important to note that Wells Fargo does not set their own interchange rates. Rates are set by Visa, the card brand and it is the same for every single merchant and every single credit card processor. There is no one who can alter the interchange rates.