Explaining Interchange and Assessments

There are essentially are two basic fees that collectively make up the bulk of merchant account costs. In the credit card processing industry, these costs are regularly referred to as “interchange” and “assessments,” and are charged by bank-card networks like MasterCard and Visa every time a merchant accepts one of their credit cards for sales transactions.

The interchange rate is a percentage that is deducted from each credit card transaction total amount. The Assessment fee is a flat transaction fee added to the cost of processing each credit card sale.

Merchants and business owners have heard these frequently used terms to describe fees that they must pay for their accounts. But it has not always been clear what they mean. Merchants have also been curious as to how merchant service providers determine merchant account pricing, and why some credit card transactions cost more than others.

To better comprehend what you will pay for as a business owner with a merchant account, you need to know exactly how merchant account pricing is established.

Interchange

Interchange pricing is more complicated than assessment pricing, as each credit card and transaction type has a specific cost that creates a grouping of almost two hundred interchange rate categories. Thus the interchange category under which any single transaction falls will depend on various factors, including the processing environment of a business (such as retail, phone order, internet, etc.); the business’ card acceptance method (swiped, keyed, online, etc.); crucial security information sent along with transaction (such as address verification, CVV2, tax amount); and the card brand and type accepted (such as debit, credit, rewards or corporate).

Visa, MasterCard and a handful of other credit card company transactions are driven by the interchange system. Interchange is a fee paid by the credit card company member institution that processes the transaction on behalf of a merchant acquirer, to the member institution that issued the card to the consumer. The major credit card companies determine the interchange but the fees are not retained by the associations. They act as intermediaries between the members on both sides of the transaction.

Ultimately, interchange expenses are deducted from the transaction volume at the time of settlement from issuers to acquirers. If a merchant requests settlement for $500 and the transaction is subject to an interchange rate of 2%, then the acquirer receives only $490 from the settled transaction.

Credit card transactions occur within either a card-present or a card-not-present sales environment. Card-present transactions are in-person transactions where the merchant has the ability to see the physical card. Interchange for card-not-present transactions are priced at a premium value compared to card-present transactions.

Card-not-present transactions require cardholders to give their card number and other crucial security information over the phone, online, by fax, mail, etc. Card-not-present transactions are always higher-risk transactions that can easily incur chargebacks because they are more likely to be fraudulent.

To make it somewhat easier on merchants, account providers typically compile all similar interchange categories and essentially bundle them into a few groupings such as qualified, mid-qualified and non-qualified. There are other ways that merchant accounts can be priced. Regardless of the pricing structure, the majority of a merchant’s credit card processing expenses derive from the combination of the interchange and assessment fees.

Interchange pricing is also based on a transaction “qualifying” for a rate. Transaction qualification is determined by how the transaction is authorized and settled. Both Visa and MasterCard have systems whereby a transaction has an optimal qualifying rate, or the best rate possible for that transaction type, and also sub-optimal or more expensive rate categories. If a transaction fails to qualify for the best rate, it is downgraded to a lower rate. Qualification criteria generally include: direct magnetic stripe read, as opposed to the card number being key-entered; one unique and matching authorization obtained per settlement transaction; whether or not a transaction settles within a certain time after authorization; and if the transaction is coded correctly including special merchant codes and other transaction descriptors.

If these criteria are not met, the transaction qualifies for a different and generally less favorable rate. The most common reasons for transaction downgrades include key-entry at the point of sale and failure to settle within one day of obtaining an authorization.

Assessment

In addition to interchange, there are other fees that major credit card companies charge acquirers and issuers as a condition of their membership. The most critical of these fees is an “assessment” fee which is charged to both acquirers and issuers based on volume of processed transactions. Unlike interchange, assessment fees are retained by the associations. Assessments are the associations’ primary source of income in order to finance their operations. Assessment fee levels for major credit card companies can be as high as 9.5 basis points and as low as 9.2 basis points on processed volume.