Minimize Costs: Card Acceptance Basics > Interchange
What is Interchange?
Interchange is the system where transactions are submitted for payment from the acquirer or merchant processor to the card issuer or debit network. When you settle your transactions each day, Elavon's network routes them to the respective Card Associations (Visa, MasterCard, American Express, Discover Network, Diner’s Club International, UnionPay and JCB) and Debit Networks through interchange. The Card Associations and Debit Networks establish the rules and manage the interchange of all transactions. Every transaction is assigned an Interchange category based on card type (credit, debit, rewards, gift cards, etc.) industry type (retail, e-commerce, etc) and qualification elements (swiped card, key entered, etc).
Interchange also represents the fees paid by the merchant acquirer to the card issuer. Fees depend upon the interchange qualification that is assigned to each transaction by the Card Associations for processing transactions. These fees are paid at the time the transaction is exchanged and vary based on processing method utilized. For example, it is significantly more expensive to process a manually-keyed transaction than a card-swiped transaction.
What factors affect my interchange rates?
The cost of accepting card payments is driven primarily by interchange, which is set by card associations like Visa®, MasterCard®, Discover® Network and UnionPay. They charge interchange fees to offset the costs associated with the card payments network. Interchange fees are evaluated quarterly based on an analysis of industry costs and economic conditions. Although interchange fees are applied to all credit card processors equally, they fluctuate in amount based on a variety of factors.
The interchange rate you pay can be affected by factors you can control as well as those outside of your control. For example, you can’t control the type of card presented or whether the cardholder earns miles or rewards for using the card, but you can control the way your account is configured, how the transaction data is entered into the terminal, and the time of settlement versus time of authorization.
You must make sure your payment operations are set up to help your transactions qualify at favorable rates. Card Associations quote the lowest rate for a transaction, assuming that a number of requirements (which vary according to the card type, the type of business accepting the card payment, and the transaction channel) are met. If one or more of these requirements are not met, the transaction is categorized at a more expensive interchange level. This is referred to as a “downgrade.”
What are some common situations that cause downgrades?
- You make transactions by keypad entry rather than swiping cards through a card reader.
- Your business model changed since setting up your merchant account, and now you offer different products and services, or provide your customers more ways to place and pay for orders.
- You request transaction authorizations over the telephone (“voice authorization”).
- You routinely settle transactions more than 24 hours after they are authorized.
- Transaction authorization and settlement amounts frequently differ.
- A significant portion of your customers pay with business, commercial or gift cards (cards issued in their business’ name), but you don’t capture Levels II and III data (detailed payment information) for these transactions.
- You have card-not-present transactions, such as payments taken over the Internet or by phone or mail.
How can I minimize my interchange costs?
- Swipe customer cards whenever possible - Swiped cards clear at lower rates than manually-keyed transactions.
- Beware of voice authorization costs - Voice authorizations do not capture the information necessary for lower interchange rates and can generate downgrades.
- Send settlements on time - For transactions where the card is present, settling in two days versus one day can cost you money. If the settlement time extends past two days, this can cost you even more.
- Avoid authorization and settlement amount mismatches - Variations between authorization and settlement amounts are another common cause of downgrades. There are specific industries where limited tolerance for variations between authorization and settlement amounts are permitted, such as businesses where tipping is commonplace or at hotels or car rental establishments when authorization occurs before the customer’s final invoice is paid
- Distinguish card-not-present (CNP) transactions from hand-keyed transactions where the card is present – Card-Not-Present (CNP) transactions that appear to come from card present channels may be subject to interchange downgrades. In certain types of sales, the card is not physically present for payment. Internet sales and mail or phone orders are the primary examples. CNP transactions carry higher interchange rates because of the inherent risk of fraud. To qualify for more favorable CNP rates, you should make sure that these transactions are easily distinguishable from hand-keyed transactions where the card is present. Usually the best way to do this is to keep these payment operations separate and to use a specific account configuration for each one.
- Ensure your business phone number and a unique order number are passed to us, your card processor, for each transaction - If your customer has easy access to your phone number and the order number on their bill, they may contact you directly rather than disputing a transaction, which may help you avoid costly chargeback fees.
- Capture additional security information - To reduce card fraud in CNP transactions, the Card Associations encourage merchants to capture additional security information in order to qualify for the best interchange rates. To qualify for the lower interchange rate, you need to submit the cardholder’s billing address and zip code for CNP transactions. Capturing this information and passing it via the Address Verification Service (AVS) is an important way for you to control the cost of accepting payments over the phone or on the Internet.
- Capture Levels II and III data when accepting commercial cards - Business, commercial, and gift cards are used just like personal credit and debit cards. However, these cards carry higher interchange rates because they offer employers high value (and costly) features such as enhanced reporting and statements. Many merchants can qualify for lower commercial rates (especially in card not present environments) by collecting the more in depth Level II and Level III data with each commercial card transaction. Capturing this information requires greater effort and some cost. It’s wise to verify that your sales volume from commercial cards justifies collecting this data. For more information see the Interchange Qualification Guide.