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What is an Interchange Rate?

What is an Interchange Rate?

Financial jargon can be confusing at the best of times, and with new fees and pricing models, and payment methods emerging each day, it’s almost impossible to keep up! One of the most confusing terms businesses struggle to understand is Interchange Rates.

If your business processes credit or debit transactions, either through POS devices or online, knowing what Interchange Rates are and how they are charged could save your business a significant amount in fees.

By the end of this article, you will have a better understanding of what an Interchange Rate is, how it is calculated, or why it is so important to have a firm grasp of the concept so you can make changes to your business that will result in lower fees.

What is the Definition of Interchange Rates?

Interchange Rates, or Issuer’s Reimbursement Fees as it is sometimes referred to for credit card transactions, is a fee charged by the customer’s bank whenever payments are made using a credit or debit card.

How are Interchange Rates Determined?

Interchange Rates generally differ in amount per transaction and are calculated based on a number of factors, including, but not limited to:

  • The type of transaction being made
  • The type of card you use, for example, Visa, MasterCard, American Express, etc.
  • Sales channels
  • Location
  • Authorization costs
  • Losses due to fraud

It’s important to remember credit card charges are generally higher than debit card charges due to the increased risk of fraud.

With Visa and MasterCard, the rate is set on a semi-annual basis, usually in April and then in October. Other credit card companies might set their rates annually but it’s best to check with each one to ensure you have a clear understanding of how they operate.

Why is Learning About Interchange Rates So Important?

roller paymentInterchange Rates are usually the biggest expense when it comes to card processing and because they can fluctuate frequently for each market, based on the factors we discussed earlier, there is a severe lack of transparency around how fees are calculated.

If businesses had more transparency and knowledge around Interchange Rates, they would be able to make informed decisions to lower them and increase profitability for their business.

It is worth noting that smaller businesses have previously been at a disadvantage compared to larger businesses who have been able to negotiate a lower Interchange Rate due to their ability to process higher volumes of transactions.

Furthermore, markets dominated by the large international card schemes were most vulnerable because businesses could hardly refuse to accept the payment methods used by the majority of their customers.

How Can I Lower my Interchange Rates?

Thankfully, in recent years, we have seen a standardization for Interchange Rates through stricter rules, the introduction of fee caps, and an overall improvement in transparency.

Interchange Rates will always be applicable but there are ways to reduce them, including:

Local acquiring
Because transactions are generally cheaper if processed locally, it is recommended to use a local acquirer where possible to maximize the benefits of local regulations and incentivized fees.

Utilizing Interchange++
Interchange++ is a pricing model that tracks Interchange Rates and is available for payments made through Visa and MasterCard. Interchange++ is designed to offer users more transparency than other pricing types by showing a detailed breakdown of costs.

If you’re paying a fixed percentage across all of your payment processing you may be overpaying. Payment Providers, who aggregate fees, prevent customers from seeing the true cost of each transaction or their markup on each transaction.

At ROLLER, we pass through all Interchange and Acquiring Fees directly so you can transparently see your processing costs via the reporting tabs of our ROLLER Payments solution and ensure you’re not paying more than you have to.

Incentivized Rates
Interchange fees vary from market to market.
For example, in North America and Australia, Visa and Mastercard offer lower rates to certain businesses, such as charities, travel agents, streaming services, and utilities. However, this is also only applicable if you are billed using Interchange++.

It’s certainly worth doing some research into your specific region and market to see how you can maximize incentivized rates.
By understanding Interchange Rates and the different factors that can impact them, we will be better prepared to make better decisions for your business to achieve a lower Interchange Rate.

To learn more about ROLLER Payments and the transparency it offers around Interchange Rates, click here.