Most people have a pretty clear understanding of how credit cards work. By putting items on a card they can have more purchasing power by paying the balance later. In essence, it’s a small loan from a bank and several other financial entities. Banks and other creditors charge fees for processing these transactions. There are fees associated with every transfer of money and credit throughout the system. Those fees are how banks and creditors make money from offering credit to cardholders. This interchange of credit and money is a system in which many lenders can make a small amount of money over a long series of transactions. In order to define interchange, it’s important to know where all this credit comes from.
Some finance experts would define interchange as the underlying cost of a credit card sale. In other words, it’s a way to describe the fees paid between banks to accept credit card charges. There are several financial entities between a customer and the product they plan to buy with their credit card. The retailer selling a sweater, for example, will need to work with a merchant provider. This is a company that connects businesses to the local financial entities in order to facilitate incoming payments from credit card providers.
The bank that issued the credit card will receive the transaction and interchange the transaction to the credit card association. MasterCard, Discover, and Visa are the three major associations used by banks to issue credit cards to customers. Each transaction requires a fee payment in order to facilitate the interchange. Each credit card association and bank will have different fees, so the total interchange rate will vary by several factors. Card holders will need to read their agreement closely for detailed information about their rates.
Interchange Rates for Vendors
Being able to complete a sale is important for business owners. Having to turn away customers because their card type is accepted could cost the business quite a bit of money. Vendors will need to pay a service provider in order to be able to process transactions for almost all card types. Interchange fees are minimal, but they still need to be paid in order for a business owner to make their sales. Vendors should have plenty of choices when it comes to merchant service providers. Some service providers may charge more, but there’s usually a good reason for higher rates. Most importantly, business owners will have protection against fraudulent charges and other issues that could cost the vendor money.
This service is what keeps the money coming in quickly for business owners. When the card is swiped the business owner sees their money right away even though the transaction isn’t actually complete. In fact, the transaction may be processing for several days until it reaches its final destination at the credit card association that holds the balance for the credit card purchase. Business owners work with a merchant service provider so they can have their money right away, rather than having to wait until the transaction is completed several days later.
Balancing Interchange Rates
Business owners have several choices for merchant service provider. If they know enough to understand interchange rates, they might end up saving quite a bit of money by choosing the right service provider. In some cases, vendors can account for roughly eighty percent of their monthly expenses with merchant service costs. By reducing this monthly expense, business owners could be saving thousands each year. There may even be a way to save money by using cards a smarter way. For example, if card transactions are sent in batches, it’s important to make the most of each batch by balancing transactions per cycle.
Interchange Charges and Fees : Card Association Fees
Along with interchange rates charged by card issuing banks, merchants also need to pay the credit card association that offers the credit card. This transaction fee isn’t much, usually a little over one percent of each purchase. Over the course of a year, though, this amount adds up. If a company makes one million dollars worth of sales charged to credit cards in one year, they are paying a minimum of ten thousand dollars in fees. These fees aren’t negotiable, but it’s a fair price to pay for transaction protection and many other services provided by MasterCard, Visa, or Discover.
Read The Fine Print
The trick to getting the most out of any merchant service contract is to understand the service completely. It’s important to read the fine print in detail to be clear on any fees and additional charges that need to be paid. More importantly, the merchant could learn how to avoid paying some fees and end up saving hundreds or even thousands of dollars throughout the year. Being able to define interchange rates throughout the life of a transaction could be the key to unlocking even more investing power.