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

    Virtual Card acceptance made easy.

    Do suppliers resist or refuse to accept your Virtual Card payments? If so, you are not alone. There are also suppliers who initially agree to Virtual Card acceptance, but later change their mind. A big underlying problem is a manual acceptance process. In addition, a growing list of Virtual Card-using customers can mean dozens of different systems for a supplier to access. The good news is you can expand your playbook for on-boarding suppliers by introducing them to a solution. Keep reading to learn more about supplier challenges and an available remedy.

    Supplier Challenges

    I recently spoke with Nick Babinsky, Director, Business Development, with Billtrust, a provider of accounts receivable (AR) technology. He elaborated on the manual acceptance process that causes pain for many suppliers. A typical scenario starts with the supplier receiving an email notification about the Virtual Card payment. In some cases, a supplier’s AR staff has to click multiple URLs before reaching the applicable card account number. Then, to process the charge, AR manually keys the card account information. It does not end there, as AR needs to close the related invoices in their ERP system, which can also involve manual keying of remittance data. This type of process does not help a supplier in terms of card acceptance fees either.

    Nick summed it up by relaying three common supplier objections to Virtual Card acceptance:

    • We don’t have staff available to key any more Virtual Cards or P-Cards that come by email.
    • We’re concerned about the security of manually handling credit card numbers.
    • The cost of accepting card payments is too high.

    A Solution

    Billtrust’s Virtual Card Capture solution addresses the pain points noted above. Nick conveyed that it:

    • eliminates the need to enter a card number into a terminal
    • can automatically apply remittance information in the supplier’s ERP system (the solution also supports remittance pertaining to straight-through payments/push payments)
    • helps a supplier qualify for Level 3 and Large Ticket interchange rates

    Of course, my immediate question was, “How does it work with the emails a supplier receives (pertaining to Virtual Card payments)?” The answer: Through the utilization of robotic process automation (RPA). The emails are re-routed to the Billtrust solution and RPA takes over.

    According to the Institute for Robotic Process Automation and Artificial Intelligence (IRPA AI), “Robotic process automation (RPA) is the application of technology that allows employees in a company to configure computer software or a ‘robot’ to capture and interpret existing applications for processing a transaction, manipulating data, triggering responses and communicating with other digital systems.”

    Overall, between the technology and a Billtrust team who handles exceptions, a supplier’s pain is alleviated.

    Case Study

    Download a two-page case study that offers additional insight and/or access more information from the Billtrust website.

    Offering suppliers a potential solution to address their pain points can motivate them to accept card payments.

    Offering suppliers a potential solution to address their pain points can motivate them to accept card payments.

    How the Solution Affects You

    As an end-user/buying organization, you can feel confident that your Virtual Card payments to suppliers who use the Billtrust solution will be processed in a timely manner (specifically, on the same business day they are sent). No more calls or emails about the Virtual Card not working because the supplier waited too long.

    Final Thoughts: What You Can Do

    To strengthen your partnership with suppliers:

    • Talk with them about their challenges related to Virtual Card acceptance.
    • Consider sharing the Billtrust case study.
    • Contact your provider for any suggestions they have about easing supplier challenges.
    • Ensure that, at a minimum, you are initiating payments to suppliers quickly, ideally less than 30 days (e.g, within 10 days of invoice receipt).

    See more content related to ePayables and Virtual Cards.

    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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    One supplier's card acceptance journey.

    In the life of a card program manager, it is common to approach suppliers about accepting card payments. You initiate a call and are prepared to address the “why accept” question. What if a supplier surprises you by already being convinced? Instead of asking why, they want to know how. Smaller suppliers in particular might not know how to get started. Your ability to offer advice beyond “talk to your bank” could prove to be the pivotal action. For insider experience, I spoke with Rick Swartwood, CPCP, who went from card professional to restaurant entrepreneur (and card acceptor). Read on for his insights that could help you assist your suppliers.

    Following his 16 years of Commercial Card experience—most of which were with the Lockheed Martin Corporation—and prominent industry participation, Rick pursued a lifelong ambition of opening his own restaurant in 2014. He is now seeking a return to the corporate world, whether working within a payments arena, procure-to-pay operation or shared services. His restaurant experience has given him a whole new perspective of what it means to be a card-accepting supplier. Email Rick or get in touch through LinkedIn.

    Finding Merchant Services

    While a supplier’s current bank is certainly one route to explore for merchant services, there are many other options. Finding them is probably the easiest part. Rick shared how, as a restaurant owner, approximately 20 different merchant services organizations “came out of the woodwork” to sell him on their card acceptance solution. If a supplier has not received any such communications, they could find options though a simple Internet search. Two popular search phrases are credit card processing and merchant services. However, in the business-to-business (B2B) payments world, it is critical to find an acquirer who specializes in this space.

    Evaluating the Options

    Like any vendor search, when selecting a merchant services partner, a supplier should be wary of any verbal promises by salespeople such as “no extra fees.” The written proposals always include various types of fees, such as: monthly service fees, add-on or pass-through fees, PCI compliance fees and contract opt-out charges.

    Because each merchant services company had a unique proposal format, Rick’s biggest challenge was finding the fees within each proposal to make apples-to-apples comparisons. To make his process easier, Rick developed a standard list of questions and required each company to answer in the same order. Questions included:

    • Is your service based on a monthly statement processing fee or are the processing charges deducted on a batch by batch basis? 
    • Is your service based on a fixed rate per transaction? If so, does the rate vary by card type? 
    • Is your service based on a cost plus pass through charge? If so, what is the charge? Does it vary by card type?
    • When are the receipt funds available in my bank account? Does it vary by card type? 
    • Is there a single receipt for all card types or multiple individual receipts based on card type? 
    • Is there a cost to opt out of the contract? 

    This approach could help other suppliers who are new to card acceptance. When a supplier specifically needs B2B credit card processing, I recommend they also ask merchant services companies about their B2B capabilities and experience.

    Having Buyer’s Remorse

    Rick’s original merchant services choice was not his last for a couple reasons. For example, the availability of funds for one type of card became problematic. While the funds were supposed to be available within 48 hours, the reality was that it sometimes took 72–96 hours. In addition, another merchant services company proposed some financing of restaurant equipment if they could become the processor, so it made sense for Rick to change. See also my previous blog post about why some card acceptance relationships fail.

    Suppliers should not be afraid to make a switch, but they also need to consider the financial repercussions of doing so.

    Suppliers who are new to card acceptance and seeking a merchant services partner need to be wary of any offers that sound too good to be true.

    Suppliers who are new to card acceptance and seeking a merchant services partner need to be wary of any offers that sound too good to be true.

    Final Thoughts

    Every supplier has different needs when it comes to card acceptance. For Rick’s restaurant business, 85% of payments, including server tips, were via cards. For these reasons, his priorities were low fees and quick availability of funds. Because he was paying servers’ tips in cash on a daily basis, a two-day lag for card payments was not ideal. For a non-retail/non-restaurant business like mine, I sought simplicity above all else.  

    The next time one of your suppliers seeks guidance concerning card acceptance, encourage them to:

    • identify their needs
    • understand the fees they could encounter and payment timing/availability of funds 
    • shop around for a merchant services provider, especially one with experience in business-to-business (B2B) credit card processing 

    Access additional resources related to card acceptance.

    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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