Understanding Interchange Rates and Other Fees – Know The Basics Before Negotiating Pricing

understanding interchangeMany merchants think card processing is pretty simple, not realizing how interchange rates (issuer and card association fees, dues and assessments) drastically  affect their bottom line. They think the customer’s card information, obtained during an on-line purchase, is sent to one of the card associations — Visa, MasterCard, Discover, American Express. They think the card association then authorizes the transaction, puts money in the merchant’s bank account, and takes a percentage out of the merchant’s account to pay for the processing fees. All of this is wrong, however.

Know the Key Players

In reality, the card associations/companies have very little to do with the actual transaction processing and funding of the merchant’s account. Further, the card associations/companies are not the ones to blame if you are paying a higher processing rate than your competitor. Card processing is a complex industry with several layers of middlemen each performing a function and each charging a fee for their service. Here are the key players to know for now.

Issuing banks and the Card association/company set “Interchange rates” and “pass-through” fees for each type of card.  Think of interchange rates and pass-through fees as the wholesale price for processing a specific card type. The card associations/companies have many card types — debit cards, basic credit cards, reward cards, business cards, purchasing cards, and more — each with their own interchange rate. Every merchant account provider pays the same wholesale price.

There are even more layers of middlemen involved with your processing. However, these are the players I want you to understand for now.

Merchants are charged more than just Interchange Rates and Fees

You may see a monthly — or yearly — “PCI Fee” on your statement. Some merchant account providers have not started charging a PCI fee, yet. Those that do typically charge $5 to $10 per month — or up to $99 per year. This fee covers the cost of conducting certain functions to help them ensure you are compliant. Merchants should ask their merchant account provider specifically what it is doing for the amount it charges you.


Merchants should understand the following points.

  1. Every Merchant Account Provider pays the same Interchange Rates and pass-through fees. Don’t let a salesperson tell you his company pays less.
  2. Fee income is important to providers. Merchant account providers can make higher profits on the monthly and annual fees than on the actual card processing. Therefore, you should view these fees as negotiable.
  3. Watch for excessive fees. Overuse and overcharging of these fees should be a red flag to the merchant regarding how the merchant account provider views its relationship with your company.
  4. Fees can change anytime. A merchant account provider’s “terms and conditions” allow the provider to change existing fees or impose new ones.
  5. Interchange Rates and Pass-through Fees make up- the wholesale cost for the Merchant Account Provider.

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