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

    Two Supreme Court decisions this week.

    The U.S. Supreme Court made two key decisions this week. One pertains to litigation involving merchants, card networks and banks. The other pertains to New York’s state law prohibiting merchants from adding a surcharge to credit card payments. 

    First, on March 27, 2017, the Court declined to hear a bid by merchants to essentially resurrect the lawsuit settlement, finalized in 2013, involving Mastercard, Visa, and some banks. The settlement was later negated (in June 2016) by the U.S. Second Circuit Court of Appeals, based on their perspective that merchants were not properly represented.

    To summarize this saga:

    • Initial settlement of interchange lawsuit in 2012; as one result, Mastercard and Visa began to allow surcharging in the United States in January 2013 (as long as merchants adhered to specific rules)

    • Final approval of the settlement at the end of 2013

    • Merchants appealed; the appeal ruling in 2016 favored merchants, negating the settlement

    • In 2017, U.S. Supreme Court declines to get involved

    Back to square one. We can expect ongoing litigation between merchants and card networks related to card acceptance fees. 

    Next, on March 29, 2017, the U.S. Supreme Court concluded New York’s no surcharge law regulates speech because it regulates the communication of prices. They remanded the Court of Appeals to analyze NY’s law as a speech regulation and determine whether it is unconstitutional, violating the First Amendment.

    For more information, visit the Surcharge News webpage.

    About the Author

    Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With more than 15 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more

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    Where does card acceptance litigation take us?

    Industry litigation is like a roundabout that we cannot exit. Rulings followed by appeals, followed by more of the same. Last month, U.S. District Judge Nicholas Garaufis ruled that American Express violated antitrust laws by prohibiting merchants from steering customers toward other payment methods, including other card brands. American Express vowed to appeal. I tried to visualize a merchant steering me for any purpose. Imagine…

    Merchant: Ma’am, don’t buy television X. We don’t make much money on that one. We get better margins on television Y.
    Me: But I like the features of television X and have been satisfied with this brand in the past.
    Merchant: But your choice does not make me happy! 

    The lawsuit involving American Express is, of course, much more complicated and serious, but, overall, I do not think the industry gains much from litigation or government intervention. It seems attorneys are the only beneficiary. Instead of pouring millions of dollars (and time) into litigation, everyone could benefit from more education about card acceptance. Perhaps this would open the door to compromises by all parties or maybe I am just dreaming. As one business person remarked to me, there is a trend of people wanting to socialize the losses, but privatize the gains.  

    A Bloomberg article about the American Express case reported that, according to the government, card acceptance fees total about $50 billion a year in the United States. Okay, so this is one cost (among hundreds) of doing business; merchants do have some choices. 

    Maybe brick-and-mortar retailers should consider a surcharge on cash payments since this requires keeping a cash drawer, making change for customers, counting nightly, protecting from theft, and making deposits. Or how about a surcharge on check payments? Risks with consumer checks include insufficient funds and forgeries. In the business-to-business (B2B) realm, checks represent the highest process cost and increased days sales outstanding (DSO) for merchants. 

    What We Can Do

    I know litigation will never end and my opinions will not influence giant corporations or politicians who have initiated, or plan to initiate, a lawsuit or government bill. However, I do hope that those who read this will ensure they are doing their part to maximize the value of card payments, not only for themselves, but also for their business partners in the card process. 

    As a merchant myself, I declared my love of card acceptance last month and offered advice to suppliers. We cannot forget that card payments have streamlined the store checkout process and created a booming eCommerce industry. In the B2B payments world, cards have also driven efficiency. Review the benefits of cards for end-users and suppliers, including some best practices for both. For worse or for better, we all need each other—buyers, suppliers, and providers of types—to make the card industry work.

    Which road are we going down? Who benefits from all the litigation? We might find ourselves at a dead end.

    Which road are we going down? Who benefits from all the litigation? We might find ourselves at a dead end.

    I was never ruined but twice—once when I lost a lawsuit, once when I won one.
    — Voltaire

    Case Involving American Express

    Reportedly, the government’s goal in this case (U.S. v. American Express Co., 1:10-cv-04496, U.S. District Court, Eastern District of New York) is to force American Express to eliminate restrictive rules. 

    American Express has said that merchants encouraging the use other cards would harm competition and not benefit customers. Some experts do not disagree, but say that most merchants will not steer customers even if allowed to do so. They will not take the time to train sales staff/cashiers on this issue. Nor do they want to slow the checkout process and potentially lose customers. Such thinking is supposed to make American Express feel better?

    As PaymentsSource reported, Judge Garaufis designated March 21 as the date by which American Express must reach an agreement with Justice officials to avoid Garaufis imposing his own solution. We are waiting to see what happens now that the deadline has passed. 

    About the Author

    Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With more than 15 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more

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