Interchange, are you kidding me?
A lot of Merchants ponder about what Interchange actually means and why they have to pay it! When discussing pricing, we often find merchants confused, not really understanding why some fees are subject to change and cannot be negotiated.
Let’s break it down for you.
When a fee is taken for processing a card payment, it is split between the Payment Gateway, the Acquiring Bank, the Card Scheme (Visa or MasterCard, for example), and your customer’s Issuing Bank. The Gateway and Acquiring Fees are traditionally given as a pence per transaction cost combined with a small percentage of the value of the transaction, however, Scheme and Interchange Fees are given separately as separate fixed costs (a bit like adding on VAT to a purchase you’d make at a cash and carry). Furthermore, whilst the Acquirer Fee may be dependent on a number of factors, such as the risk level of your business, Scheme and Interchange Fees are not.
So, what exactly are Interchange and Scheme Fees?
Interchange is a fee paid to the customer’s issuing bank each time a merchant takes a card payment. It is designed to cover the cost and risk involved with issuing cards, for example the cost of shipping and issuing card and pin mailers, running their host systems, creating statements, and covering the costs of fraudulent activity. Interchange Fees have a long and chequered past which has experienced multiple legal issues. Regulation has been put in place to implement caps on the cost of Interchange Fees in Europe at 20 basis points for a debit card transaction, and 30 basis points for a credit card (one basis point being 0.01% of the transaction). However, Interchange on certain card types is significantly higher than consumer rates, as well as international cards crossing Visa and Mastercard boundaries.
So, even though you’ll pay less towards Scheme Fees, they’re slightly more complicated. Scheme fees are paid to the Card Scheme that issued the customer’s card and cover the service of processing the transaction. Whilst Interchange Fees are normally static, Scheme Fees do change dependent on the region with which the transaction was processed. As most merchants are unaware of this, it can lead to confusion when looking over their settlement statements. Scheme Fees are calculated as a percentage of the transaction, plus a very small, flat-rate fee. However, the flat-rate fee is usually merged with the percentage when discussing pricing for convenience. The Schemes generally charge between 5 and 9 basis points per transaction, depending on whether the card was issued by Visa or MasterCard.
In line with regulation, rates must be presented separately (known as Interchange++ model), to ensure that we move away from giving blended rates that leave merchants unaware of the different fees that they are paying. Whilst an Interchange++ model might have more elements to understand, it ultimately facilitates open communication about pricing.
So, for a transaction of £50 from a Visa debit card, a merchant would pay 10p of Interchange and approximately 2.5p of Scheme fees, plus the Acquiring fee that you have arranged with your payment provider.
Even though they may seem daunting and incomprehensible from the outside, once they’ve been broken down, Interchange and Scheme Fees are not quite as complicated as they seem. Even though current pricing models involve having more fees to keep track of, avoiding blended rates is fundamentally beneficial for merchants due to its promotion of transparency. Hopefully this paper has cleared up confusion surrounding Interchange, Scheme Fees and pricing.
We work with all of our clients at Acquired.com to help them understand every fee for every transaction that they process – line item detail, perfect reconciliation is one of our pillars in our offering.