Why Do Interchange Costs Matter To Merchants?

It matters because interchange is your acquiring bank’s biggest cost and will be passed onto you through your transaction charges, otherwise known as your merchant service charge (“MSC”) .  It is payable by your acquiring banks to the card issuer on every card transaction processed.

How much is the interchange “mark up” ?

For a typical SME, It can be 100% – 200% or even higher.  Think of it this way, on a common chip and pin transaction your acquiring bank’s interchange costs are broadly 8p on debit or 0.8% on credit.  What transaction rate do they charge you?  As high as 20p on debit or 2% on credit and sometimes even higher!  Of course they have other costs, but these are a fraction of the interchange costs so profit margins are healthy and your scope to “negotiate” may be higher than y

Who sets the Interchange rate ?

It is set by the card schemes, albeit the income is received by the card issuer.

How much is Interchange ?

It depends!  There are lots of different rates depending on the country, the card type and the capture method (see below).  Interchange is calculated as a percentage of the transaction value for credit cards and as a fixed amount per transaction for debit cards.  The higher the risk of the transaction, the higher the interchange.  For example an online transaction has a higher risk of fraud than a face to face transaction so the interchange cost is higher :

  • Card acceptance method – online and phone transactions are more expensive than face to face and swiping the card or      pan-key entry are also more expensive
  • Type of card – corporate cards and purchasing cards are more expensive than personal credit and debit cards
  • Country of origin of the card – tourist carry cards issued by overseas banks; these are more expensive than cards issued by UK banks.

When switching, suppliers rarely quote all of the permutations of MSC rates unless you specifically ask – you usually are given one debit rate and one credit rate.  Often the first time you will be aware of any differential is in your first statement and by then it is too late.  The different rates will be noted on your contract but often these are difficult to spot as terminology such as “qualifying rate” and “non-qualifying rate” is used.

Detailed UK interchange rates

Visa and Mastercard interchange tables are published publicly (see below at February 2012).  Mastercard and Visa Interchange rates are broadly the same (some minor differences) but for the purposes of illustration, the rates discussed below are Visa Interchange rates.

Broadly, the interchange on a UK issued personal card processed using a chip and pin terminal is 8p per transaction for debit and 0.77% of transaction value for credit cards (refer “EMV chip” below).

Interchange on online transactions and phone transactions is more expensive because these are cardholder not present (“CNP”) transactions and the risk of fraud or chargeback is higher.  For example, a CNP transaction is 1.3% credit / 18p debit, which reduces to 1.1% credit / 10.5p debit if the CVV2 is used and reduces further to 0.87% credit / 10p debit if the secure electronic commerce system “Verified by Visa” (Mastercard equivalent is SecureCode) is used.

Commercial Cards (or Premium Cards) also carry much higher interchange levels from 1.4% – 1.7% credit / 11p debit because the businesses to whom these cards are issued are considered a higher risk than individuals who carry personal cards.

The Standard rate (Visa) or Base rate (Mastercard) is the default rate charged if the transaction does not qualify for any other rate – sometimes called the non-qualifying rate.  It is the most expensive rate because it is the riskiest form of transaction.  Your transactions might incur this rate if for example, your terminal was broken and you were using an old foil swipe machine to take a paper imprint of the card or if you failed to upload / poll your transactions overnight for several days.  If you find you are paying an MSC premium for standard transactions, speak with your supplier immediately.  They will often be able to immediately rectify the problem, saving you a considerable cost of standard rated transactions.

Visa and Mastercard Interchange rates (at Feb 2012)





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