Get a Clearer View of Interchange

Most Commercial Card program managers/administrators can talk comfortably about the benefits of using cards as part of a good payment strategy. Then there is the other piece of the puzzle: educating suppliers/merchants about card acceptance. This can be a daunting task, but it is often necessary when implementing or growing a card program. How can you obtain a clearer understanding? Recharged Education is proud to add to its resources on this topic, thanks to CardConnect. The following article addresses the interchange portion of card acceptance fees, providing key information that could help in your next discussion with a supplier. See also additional resources about card acceptance.  

 If the topic of interchange is a bit fuzzy to you, seek available resources to obtain a clearer view.

If the topic of interchange is a bit fuzzy to you, seek available resources to obtain a clearer view.

Simplifying Interchange Optimization

by Angelo Grecco, Chief Business Development Officer, CardConnect

Whether you’re a payments veteran or new to the industry, you probably have come across a few buzzwords that are now part of your everyday vocabulary. Some of these terms are relatively easy to grasp—PCI compliance, point-to-point encryption and tokenization, for instance, but others are a bit more complex, such as “interchange” and “interchange optimization.”

We’ve all heard different payment providers claim to offer the lowest rate possible with guaranteed savings thanks to interchange optimization, but few understand how a merchant realizes these savings.


    June eWorkshop Includes Card Acceptance Topic

    Seeking more content about supplier perspectives? Check out the online workshop offered by AP Now on June 13. It will be delivered by Lynn Larson of Recharged Education.

    P-Card Program Expansion: Assessing Your Opportunity and Devising a Plan

    The Basics

    Interchange is composed of fees, rates and guidelines that are established and governed by the card associations and card-issuing banks. Merchants must pay interchange fees in order to accept credit cards. These rates are across the board (they don’t vary by processor) and merchants cannot be exempt from them. While interchange fees cover the costs and risks associated with processing payments (e.g. chargebacks and fraud), it is important to note that processors do not derive revenue from these fees—they are paid directly to the card-issuing banks.

    There are hundreds of interchange cost structures based on merchant industry, card type, payment acceptance environment (card-present, card-not-present) and transaction size. Every time a transaction is processed, it is assigned an interchange “category” that has an associated rate. A variety of factors determine a transaction’s interchange category, but sometimes a transaction will not qualify for its appropriate category, resulting in a more expensive rate. The good news is, there are certain steps merchants can take to ensure they receive the most favorable rate.

    Here are a few tried and true tips for qualifying for the most advantageous interchange rate:

    • Follow all POS Prompts. For CNP transactions that are key-entered manually into a POS, a merchant should ensure she or he is completing all of the POS prompts to capture and verify the necessary information, such as AVS (Address Verification Service), to seek the lowest interchange rate. Skipping any of these prompts could result in a higher rate.
    • Don’t settle for late batches. Merchants should settle their batches within 24 hours to obtain the lowest possible rate. Settling batches after 24 or 48 hours will produce higher rates

    Getting Down to Business

    At the end of the day, every merchant would like to receive optimal rates, and that’s where interchange optimization comes in. Interchange optimization is the implementation of “best processing practices” to qualify a merchant for low-cost interchange rates. These best practices primarily refer to the inclusion of line-item details for every processed transaction and correspond to industry-specific program requirements created by the major card brands.

    While many merchants benefit from optimized rates, merchants that specialize in business-to-business and business-to-government services realize the most savings. This is because these businesses typically accept purchasing cards (P-cards), which capture Level II and Level III data. P-cards are designed to streamline accounting processes and enhance reporting by collecting additional data at the point of sale. The average merchant collects Level I data when processing a payment (i.e., basic billing information), but Level II and III data present a more complete picture of the transaction, such as customer codes, PO numbers and Tax IDs. Providing Level II and Level III data helps diminish the threat of fraudulent activity, while also significantly optimizing a merchant’s interchange rates, as card associations incentivize merchants for providing in-depth data.

    Show Me the Savings

    To benefit from interchange optimization, merchants must process transactions via a gateway that supports Level II/Level III processing. But that’s not all. The merchant must be on a pricing model that actually passes interchange savings to them—otherwise, the savings will effectively be useless. It is recommended that merchants use “interchange-plus” pricing (also known as interchange pass-through).

    Interchange-plus pricing offers a transparent pricing structure based on the three main costs associated with credit card acceptance: assessments (fees implemented by the card brands), interchange and processing services. With this type of pricing structure, the processor charges the merchant the actual cost of the interchange and assessment for each transaction (rates are not changed for the benefit of the processor’s pocket!), plus a fixed markup fee. A markup covers the processor’s costs, but that’s not to say a merchant doesn’t benefit from a markup in some capacity. Markups remain the same, regardless of the type of card a merchant accepts or how it is processed. In other words, there are no qualified, mid-qualified or non-qualified rates, which are common in “bundled” (or “tiered”) pricing. With a bundled pricing structure, the processor creates transactional tiers with assigned rates, making it difficult to achieve optimal interchange rates.

    Because interchange-plus pricing separates the costs of interchange and assessment fees from the processor’s markup, the pricing is:

    • Transparent. Statements include the assessment, interchange and processing services fees, so merchants know exactly what they’re paying for.
    • Less expensive. Due to its inherent transparency, it is significantly more difficult for processors to include (and subsequently hide) hidden fees and surcharges.

    It’s important to realize that interchange optimization has no impact for merchants with “flat-rate” pricing. In recent years, this pricing structure has become increasingly popular, mostly because it is incredibly easy to understand the associated fees. This is because flat-rate pricing applies one rate to all of a merchant’s transactions (and in some cases, an additional per-transaction fee). The only problem with this is that the fixed rate covers the interchange costs and processor’s profit and does not fluctuate (meaning the rate is fixed and do not allow for savings). Additionally, interchange details are not usually provided in a flat rate processing statement, so merchants do not have visibility into the potential savings they could take advantage of.

    To review: Interchange optimization is the implementation of best processing habits to qualify a merchant for the lowest rate possible for every transaction. One way this is accomplished is through the passing of Level II and Level III data. To ensure your business has the most beneficial rate, it is important to understand the fees you’re being charged, and if interchange savings are passed directly to you.

    About the Author

    Angelo Grecco is the Chief Business Development Officer at CardConnect and brings with him more than 15 years of industry experience. Prior to founding Allied Bankcard, he worked as vice president of Operations at Allied Merchant Services, controlling the day-to-day needs of the company’s agents and merchants. Angelo is a graduate of Indiana University with a degree in Business Management.

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    About CardConnect

    CardConnect's mission is to make payments simple and secure.
    CardConnect, a First Data family, is an innovative provider of payment processing and technology solutions, helping more than 150,000 organizations – from independent coffee shops to iconic global brands – accept billions of dollars in card transactions each year. Since our inception in 2006, CardConnect has developed advanced payment solutions backed by patented, PCI-certified point-to-point encryption (P2PE) and tokenization. Our small-to-midsize business offering, CardPointe, is a comprehensive platform that includes a powerful reporting and transaction management portal which extends to a native mobile app. CoPilot is a centralized business management tool to help distribution partners manage their business. For enterprise-level organizations, CardSecure integrates omni-channel payment acceptance into several ERP systems – such as Oracle, SAP, JD Edwards and Infor M3 – in a way that minimizes PCI compliance requirements and lowers transaction costs. Learn more at

    Herding Cats, uh, Cardholders

    Every Commercial Card program has at least one challenging cardholder. I’m willing to bet, though, that this statement is conservative. What can make cardholder management so difficult at times? For one, it is an interesting dynamic when you need people to follow policies and procedures, but you are not their manager. Several years ago, I heard Julie Miguel, CPCP, Purchasing Card administrator, Tension Corporation, use the phrase “herding cats” in relation to cardholders. Her good insight is shared below, in addition to tips from Jennifer Hart Barb, program administrator, James Madison University. The advice is grouped into four broad recommendations, including: 1) review your program structure for best practices, 2) consider the cardholders, 3) utilize effective communication, and 4) determine what you can control.   

    Review Your Program Structure

    Are aspects of your program helping or hurting your cardholder management efforts? For example:

    Jennifer Hart Barb stresses, “Management needs to agree, in advance, that they are willing to apply consequences even if a cardholder is good at their ‘real’ job.”

    Consider the Cardholders 

    Jennifer provides a good reminder that most cardholders are not “fiscal people” and their minds may not work like yours. Try to understand cardholders’ core jobs and anticipate potential challenges. One example is a Facilities Maintenance team whose focus is on the building. Because they are not typically sitting at computers, reconciling transactions can be challenging. One possible solution is assigning a proxy to do the task for them. She has also had success in:

    • conducting a separate, in-person training session for one department to increase their comfort level
    • doing weekly audits to give cardholders timely feedback and help prevent the same mistake multiple times within a cycle

    Julie Miguel has found it beneficial to identify the recurring situations that generate the most headaches and the characteristics of the cardholders who typically cause these situations. From there, she developed different approaches, including vigilance and clear communication (e.g., reports to managers, emails to cardholders), which leads to the next point.

    Utilize Effective Communication

    Your communication efforts can go a long way toward working with cardholders. Jennifer recommends being consistent in your answers and says, “If you encounter an argumentative cardholder, avoid engaging in a back-and-forth debate. Ensure there are documented policies and procedures to support your stance.” She acknowledges that it’s easy to jump to conclusions when dealing with a “problematic” cardholder, which is why consistency is so important. Using template emails is one solution.

     If managing cardholders feels a bit like herding cats, then examine your program more closely to identify any contributing factors.

    If managing cardholders feels a bit like herding cats, then examine your program more closely to identify any contributing factors.

    Adding to what Jennifer and Julie suggest, I formed good relationships with cardholders by doing the following.

    • Be accessible. Per a previous blog post on adding a human touch to program management, take advantage of opportunities to simply say hello to cardholders and ask how things are going.  
    • Be an ally. Acknowledge you are both in the same boat in having to uphold organization rules. Neither of you might agree with some rules, so take the approach that you are trying to help them comply. 

    Determine What You Can Control

    Should some rules be changed? If so, are you authorized to do so? Julie described to me how one cardholder’s tardiness with reconciling used to hold up the entire accounting process. This drove them to adopt default accounting codes that allow the process to occur on time, forcing the cardholder and their department to correct any coding mistakes.

    However, some things might be rooted in corporate culture that executives are unwilling to change. Julie concedes, “My program is not perfect, but it is not within my power to make it perfect.” She also admits, “Since I have managed the program from the beginning and have an emotional attachment to it, I would take cardholder misbehavior as a personal affront. I’ve had to work at moderating my responses. It also helps to maintain a sense of humor.” I agree! 

    See more about P-Card program management.

    About the Author

    Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With 20 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more

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    8 Questions to Help You Rate Your Card Provider

    How would you describe your organization’s relationship with its Commercial Card provider? I have asked this question of end-users in the past and received diverse responses ranging from frustrated venting to glowing reports. Wherever you are at, a stellar relationship with the card provider is an important part of achieving and maintaining program success, while a poor relationship can drag it down. If you already have a service level agreement (SLA) with your provider, ensure you are using it regularly to evaluate their performance. Either way, following are questions to help you identify what is working well and what needs improvement.

    Evaluation Questions 

    Does your card provider:

    1. Express interest and a willingness to be an active part of your program? For example, are they willing to come onsite to meet with management, demonstrate technology, etc.?
    2. Return/acknowledge calls and emails in a timely manner (e.g., within a day or two)?
    3. Take appropriate action to resolve issues and get answers?
    4. Listen to what you say? For instance, listening attentively to learn more about your unique needs.
    5. Proactively communicate about upcoming changes that affect you, current issues, industry trends, etc.?
    6. Inform you about technology features and reports that could benefit your program?
    7. Suggest ways to make your program and payment strategy stronger?
    8. Offer program reviews and supplier on-boarding services?

    What are your biggest frustrations? Schedule time with them to discuss your evaluation. They cannot fix something if they don’t know it is broken. Any such meetings should result in a clear action plan to which both parties agree.

     To increase your chances of getting a high level of service from your card provider, begin by being a good customer.

    To increase your chances of getting a high level of service from your card provider, begin by being a good customer.

    Are You a Good Customer?

    Even if your card provider has room for improvement in the customer service category, the other piece of the equation is your organization. Consider the following questions to determine how you rate as a customer.

    Does your organization:

    • Have realistic expectations of the provider?
    • Clearly communicate any concerns?
    • Return calls and emails in a timely manner?
    • Take advantage of the offered technology, including self-service features?
    • Ask the provider how you can be a better customer?

    A good provider/end-user relationship pays off. In the end, though, sometimes an organization just does not mesh well with a particular provider representative. You might need to try to a new/different relationship manager before you give up on the provider entirely. 

    See also information about the request for proposal (RFP) process. If you plan to attend the NAPCP Commercial Card and Payment Conference next month (unfortunately, I will miss it this year), maximize your experience by meeting different providers.  

    About the Author

    Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With 20 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more

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