Interchange has long been a mystery for most business owners. There's vague talk about its opacity, all-around secrecy and its possible connection with global conspiracy theories. The only sure notion everyone knows for sure is that it's a bad thing. Let's try and expose it to the light of truth, shall we?
Is Interchange a new sales tax?
While we are definitely on the side of science and hard evidence here, let’s admit nobody is happy to lose money. So that’s what Interchange is: a kind of global tax on every sale of goods or services when a customer pays with a debit or credit card. For there are just a few major card brands in the world, namely Visa, Mastercard, American Express, Discover and UnionPay, and they process almost 100% of global card payments, while charging a fraction of purchase amount as their commission in the process.
While the commission is relatively small, ranging between today 0.5% and 2.8% of the amount plus a few cents per transaction, on the global scale it’s billions and billions of dollars. It is the reason the corporations which own the card brands are so insanely powerful in today’s world.
On the other hand, considering that most of the US states charge about 10% of sales tax on every purchase, we can honestly say that the Interchange fees can well be considered another tax on purchases. In theory, you can avoid it by paying cash, but it would not be wise for any business out there to turn their back on the majority of consumers who used to pay with credit or debit card. Also, when it comes to e-commerce, there’s no way around it at all.
To be fair to the card corporations or card networks as they also called, a lot of the Interchange money goes to the bank which issued a customer’s card, a bank-issuer and the other bank who carries the seller’s merchant account. It generates income for a huge financial industry and the millions of people employed by it around the world.
Can you avoid Interchange?
Now, it’s worth saying that many startups, as well as larger financial companies and banks, has tried to introduce so-called ‘alternative payment methods’ in the hopes to break the economy free from the clutches of the card corporations. At least to low the fees to some extent. Unfortunately, any payment schemes they introduced so far had to change the customer experience, like asking to connect a bank account during the checkout process or the need to pre-fund the mobile wallet account beforehand. So admittedly, all of that has been a non-starter so far in the developed countries.
It’s a different story in the emerging markets like China though, where most of the people use a mobile wallet attached to their bank account. However, the reason is simple – there’s been nothing on the market before, and consumers didn’t get any other habits in the decades before the mobile wallets came, as it’s been the case in the US and Europe.
Just the opposite, even Apple Pay, the most successful mobile wallet scheme in the US is just a wrap-around of the consumer’s debit or credit card and thus still a subject to all the Interchange fees as any other card transaction.
So let’s make peace with the necessity of card payments for now and examine more closely how the Interchange fees are determined and how they impact your business.
There are many factors which come into play every time a consumer swipes her card in-store or enters it on a website.
In a fraction of seconds, the powerful computers owned by the card network capture the transaction data and determine how much it would cost to process.
Interchange – key factors.
What are the transaction parameters they consider? There are plenty, but this is the most significant ones:
Card Network. Is it Visa, Mastercard, Amex or Discover?
The type of card. Debit, regulated Debit, Credit, Prepaid and so forth.
Is it a premium card? Are there reward points or cash back? Because those rewards are paid for by you as a merchant inside of your Interchange fees.
Is it a domestic card or foreign? Which country does it come from?
Is the customer business or a private person? Business credit card transactions always carry much higher fees.
The customer is present in-store or shops online, or maybe he makes an order over the phone?
If in-store, was the card swiped in the terminal, was the PIN entered or was it keyed-in manually via Virtual Terminal?
If online, did the enter the Secret Code, or a one-time 3D-Secure password, or a billing address?
For a business transaction, was there a Tax ID entered or a list of goods and services?
I don’t know about you, but I am tired even to type all those decision factors. It may be easy for a computer, but not for a human being. Moreover, we just barely scratched the surface here.
For each of those pieces of transaction information listed above, there’s an algorithm as to which line in the vast Interchange pricing schedules a computer should choose. That’s why the Interchange is so opaque and almost impossible to predict.
How to estimate my payment fees?
The main take away here is that every business would likely have it’s own and unique average Interchange rate across. So when our customers ask us what is their Interchange rate is likely to be, we honestly say that we don’t know.
However, what we do know is how much our merchants are paying in Interchange fees across the board, and we are happy to share this information with you. Just use our Savings Calculator and see how much you are likely to pay in payment fees when you switch to Ruby and take advantage of our Interchange-plus rates.
Thanks for reading and more coming soon in our blog – about Interchange, our breakthrough Interchange plus rates and how you can use this knowledge to save money on payment fees and make your business more profitable.