You own a business, and you hear merchant processors talk to you about interchange, but you may not have a full grasp of it, and that’s ok.  The difficulty in understanding interchange starts with understanding how it effects your business.  You know that you pay credit card processing fees, but you may not know that interchange is the basis of those fees.  So, we venture to simplify the understanding as follows.

What is interchange?

Interchange is the wholesale cost for a credit card transaction to be processed.  Much of the actual interchange fee is paid to the bank that issued the credit card to your customer.  (That’s how banks can offer the rewards and rebates.)  If you own a restaurant you can think of interchange as the cost of purchasing directly from the farm.  However, as you may know you often can’t go to the farm directly.  None the less a large portion of your total costs come from the interchange expense.

Why does it matter?

You very well might have known that already, but what you might not know is that interchange depends on a variety of factors.  The type of credit card, the type of business you are in, the time the transaction sits before it is batched, they way you transacted such as moto versus chip.  In understanding interchange, it is vital to know that no situation is ever the same.  However, if your merchant process offers you interchange plus pricing then you are being passed on the wholesale pricing with a small mark up.

I have been offered below interchange:

Let’s reference back to going directly to the farmer.  If a distributor came to you and said I can get you the meat and produce from the farm at less than the farmer’s cost from here on out, what would you think?  Probably that there was something wrong with it right?  Well if you believe that you are paying less than interchange perhaps you should consider if there might be something wrong with the situation.

I’m on a cash discount program:

Merchants on today’s cash discount programs often don’t think that they are affected by interchange and in some ways they aren’t but in some ways, they are.  Every credit card transaction is subject to interchange, but with a cash discount program it just looks differently.  If you happen to be processing payments in a specific way that leads to increased interchange costs without realizing it, your customers may be paying more than they need to.  Your set price has the cost of credit card fees built in while your cash discount provides just that.  However, if you could lower your processing costs the prices you charge can potentially be lowered.  Or you profit margin can be increased.  It’s something to think about.


In coming months, we will be examining other subjects directly and indirectly related to understanding interchange, but we hope that this provided some insight you may not have been aware of.  If this isn’t anything new, then we would love your feedback on what you would like to hear.