Interchange is the fee captured by card issuers from merchants for each card payment transaction. It’s a necessary expense when you offer customers the convenience of payment by card. Today's electronic payments system enables merchants to make more sales to a wider customer base with the speed and security demanded by the marketplace. Merchants can profit from a reduction in the incidence of bounced checks, counterfeit currency and theft at the cash register. But did you know that many factors affect the interchange rate you pay? Factors range from the way customers make a purchase and how your point-of-sale (POS) terminal is configured, to how quickly you send your transactions for settlement. Depending on the factors in play in your business and for any specific transaction, you can pay the best rate or face a downgrade to a higher rate for that transaction. So understanding the factors affecting interchange rates can help you manage them to minimize downgrades and gain new control over your monthly costs. As experts in the card payment business, ReliantPay can help. This guide lists many of the reasons for higher interchange rates and suggests steps that you take with your payments processor to avoid them. We’re confident you’ll find ideas that can help your business reach even more financial success. Once you’ve taken a look at the pages that follow, contact a ReliantPay representative to review your statement and identify possible actions to qualify for the best possible interchange rate.
Downgrade — Card associations will quote the lowest rate for a transaction assuming that a number of technical requirements (which vary according to the card type, the industry type of the merchant, and the transaction channel) are met. If one or more of these requirements is not met, the transaction will be categorized at another, more expensive, interchange level. This is referred to as a “downgrade.”
Card associations and issuers charge interchange because of the costs associated with the card payments network. The rate you pay can be affected by factors beyond the control of your business, such as what type of card that is presented for payment (particularly if the cardholder earns miles or rewards for using the card). But it can also be affected by your payment processing account configuration and the steps you take to complete each transaction.
If they do, read on to learn how you can work with your payment processor to correct or mitigate them to qualify for better rates than you might be paying now:
Using a keypad to enter card information rather than swiping them through a magnetic card reader is a common reason for interchange downgrades. Hand-keyed information has a higher risk of error and/or fraud because only the card number and expiration date are used for a transaction, making possible the circumvention of some physical security precautions such as capturing the cardholder's name and information only available on the magnetic stripe of the card. Hand-keying is also less convenient and more time consuming for your employees, and you should be aware that hand-keyed transactions have a higher overall decline rate.
Compare What a business might pay using card readers versus keypad entry transactions. Swiped cars can clear at rates more than 75 basis points lower than handekeyed transactions. That's an additional cost of $7.50 for every $1000 you process in hand keyed transactions.
The Durbin Amendment substantially decrease fees for debit card processing. As consumer debit usage continues to expand, the opportunity to lower your interchange rates with debit is growing. The interchange rate for a credit transaction is usually higher than the rate for a debit transaction. By ensuring your processor has you set up for debit rates when paying with debit cards you can lower your interchange costs on these transactions.
There are two types of debit transactions, each with different requirements and interchange rates
Card Not Present (CNP) transactions carry higher interchange rates because of their inherent risk of fraud. Merchants who act to manage this risk by following specific procedures can lower the interchange rate.
If your customer has easy access to your phone number on their bill, they may contact you directly rather than disputing the transaction
Settling for an amount different than authorized can result in a downgrade of 45 basis points for card not present transactions($4.50 for every $1000 processed).
Phone authorizations do not capture the information necessary for lower interchange rates and can generate downgrade costs of $4.50 per $1000.
Certain industries qualify for special incentive programs that mean better rates. For instance card association may feel these industries have noteworthy growth potential due to particular business practices and want to encourage card use. Or the special rate may be a Visa or MasterCard incentive to promote card acceptance. Some examples of these industries are:
Unfortunately, some businesses that qualify for a better interchange rate do not receive it because their accounts have not been categorized correctly by their payments processors' systems.
Interchange rates for these industries can be 10 to 3- basis points lower than standard retail rates, saving these merchants between $1.00 and $3.00 on every $1000. processed.
Talk to your payments processor to be sure that they understand:
AVS uses the billing information associated with a card to verify the cardholder's address. It is particularly important in Card Not Present environments, or where transactions are keyed by hand. Merchants in these situations who don't use AVS- or who use it incorrectly- can be subject to interchange downgrades.
To qualify for the lower interchange rate, you need to submit the billing address and zip code for card not present transactions. ReliantPay can set up your account so these items are a required step for processing your transactions.
Downgrades resulting from not using AVS can be around 75 basis points, costing merchants $7.50 for every $1000 in transactions processed.
Visa and MasterCard business, commercial, and purchasing cards are used just like personal credit and debit cards. However, these cards carry higher interchange rates because they offer companies high value (and costly) features such as enhanced reporting, consolidating billing for multiple cards and statement enhancements.
Many merchants can qualify for a lower commercial rate by collecting the more in-depth Level II and Level III data wiht each commercial card transaction. Because the procedure can be expensive to set up in some merchant environments (particularly for Level III data) and it involves greater effort from sales personnel, it's wise to verify that your sales volume from commercial cards justifies collecting this data. In other words, if the cost of higher interchange rates for commercial card transactions is greater that what you'd incur for a new system, then take action.
Work with ReliantPay to conduct a cost/benefit analysis to determine if your commercial business volume warrants an investment in a different payment processing solution and extra effort from personnel.
Be ready to handle any unexpected surge in commercial card transactions. For example, the vast majority of a chain of convenience stores business may be consumer. Opening a new outlet in a business park or urban commercial district could spark a sudden upswing in higher interchange costs for that location. Working with a partner like ReliantPay, you can have the peace of mind of knowing that we can help you accept these card types with the lowest possible impact to your interchange costs.
Capturing Level II data on Visa commercial cards can save merchants 20-50 basis points ($2 - $5 in fees for every $1,000 processed); capturing Level III data saves approximately an additional 30 basis points for a total of 50-60 basis points on every transaction. Savings for MasterCard commercial cards can even be higher.
Many merchants are unaware that they have to settle transactions within a specific amount of time after authorization to avoid downgrades. The maximum period varies for everyone and is determined by industry, transaction type, channel used, and more. For instance, merchants conducting Card Not Present (CNP) transactions involving the shipment of ggods have seven days from the date of the authorization to submit settlements before downgrades begin.
Because they are unaware that downgrades costs increase as time passes, some merchants batch transactions infrequently, often waiting until a terminal has reached capacity, sending them out for settlement only then. Typically this happens outside of their particular settlement window.
For card present transactions, the difference between settling in two days vs. one day can cost merchants over 75 basis points or $7.50 for every $1000 processed.
If the settlement time extends past two days, the total increase is over 115 basis points - that's $11.50 for every $1000 in transaction volume!
In general, any variation between authorization and settlement amounts causes a downgrade for merchants. However certain industries are allowed some authorization/settlement leeway due to the nature of their payment structures. These industries include restaurants, hotels, fuel, taxicabs and limousines, bars, beauty shops, and health and beauty spas.
Because an authorization amount won't include a figure for a tip, this amount typically differs form the settlement amount for industries where tipping is commonplace. For merchants whose accounts are setup with a suitable Merchant Catagory Code, card associations can recognize this and forgive mismatches up to a specific amount (which can vary by industry).
Talk to ReliantPay to confirm that your industry classification exempts you from mismatch downgrades, and be sure your account is properly coded to allow for this exemption. Also make sure your payments processor helps you understand any mismatch limitations for your industry.
Interchange rates are a fact of merchant life. Yet, you may be paying more than you have to. To find out, call ReliantPay today. We can help yu determine where you are overpaying unnecessarily. Then we can explain the steps you can take to get the best interchange rates available to merchants like you.
We can also help you determine whethere your transaction process and equipment are capable of handling these steps or need upgrading, and whether the cost/reward equation works in your favor. Together we'll create a custom interchange rate reduction plan for your business.
We'll also demonstrate the special tools that we offer merchants seeking to simplify the way they monitor for transaction inefficiencies.
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