Tag Archives: credit card interchange

What Does The Future Hold For Interchange?

Now that card payments are a major force in the economy, a system had to be set up to move this “virtual” currency from customer to business. This system is the basis of interchange.

The evolution of how customers pay businesses has changed dramatically over the past half-century or so. Cash was king during the infancy of American Express, MasterCard, and Visa. But as their networks expanded and more and more consumers began to expect to be able to pay with plastic in stores, merchants felt the pressure of lost sales if they turned away customers with credit cards.

What Exactly Are Interchange Fees?

Interchange fees are payments for handling the transaction between a business bank account and the cardholder’s bank account. They cover the costs of converting the electronic transaction through a credit or debit card into funds in the merchant’s account. These fees also cover administrative services and fraud risk.

The card networks (Visa, MasterCard, Discover, and American Express) have developed intricate pricing models based off of criteria like brand, geography, card type, business type, and even transaction type. With all these variables it is easy to understand why there are hundreds of different interchange rates.

Why Do We Need Interchange?

The original intent behind charging merchants interchange was to offset the risk that issuing banks took for any losses occurring from debt default by the cardholder. According to Visa “the primary role of interchange is to create the right balance of incentives between a cardholders’ financial institutions – which promote and issue Visa cards to consumers – and a merchants’ financial institutions – which enroll and process Visa transactions for merchants.” Or basically that it is a balance between what the businesses are willing to pay for the ability to accept cards and what the banks are willing to accept as far as risk of profit and loss.

Interchange In The Past

In the early 1970s interchange was just one rate. As more merchants in different industries began to accept credit cards and new card types and rewards were introduced new rates began to appear in the interchange charts. The goal of the card networks when determining what rates to establish has always been a balancing act between covering any losses banks may realize and keeping the cost to merchants low enough so that it is attractive from a financial standpoint to the business.

So What Is Next For Interchange?

As interchange fees are set by individual card companies there is an ever-present need to adjust rates. These pressures include other card brands and new and emerging technology. Since banks have the freedom to choose what card type they issue to their customers, they will usually favor the choice that gives them the most profit, which keeps rates overall pretty competitive.

Legislation and legal costs can also factor into where rates are headed. Late in 2012, a judge ruled against Visa and MasterCard in a class action lawsuit brought against the card companies by retailers and other business associations. The retail merchants accused Visa and MasterCard of increasing swipe rates while there was no legislation to protect the businesses from high fees.

Previous to this litigation, the Federal government passed the Durbin Amendment that set a ceiling on what card brands could charge for certain debit transactions. This bill was designed to greatly lower the cost to merchants, and therefore consumers, when paying with a debit card. Lawmakers argued that the risk to banks was very low with this type of card and thus did not justify the high rate that businesses were paying.

While it seems that only banks and card companies love interchange rates, it is hard to envision the complex systems we have without some sort of cost associated. The truth of the matter is that if your business is going to accept credit cards, you are going to pay interchange rates no matter what merchant services company you decide to go with. The advantage that Host Merchant Services offers over others is the transparent, easy-to-understand pricing model that is interchange plus. Quite simply you just pay a small markup over published interchange rates for any given card. No tricks like tiered pricing or overpaying with a flat rate for every card.

If you aren’t currently accepting credit cards at your business contact one of our payment experts today at 877-517-4678 or simply fill out our quick sign-up form. They will guide you through the process of setting up a merchant account and explain the benefits of taking this form of payment. And if you are already taking card payments let us provide a free, no strings attached statement analysis to see if you truly are getting as good of a deal as you think.

All About Interchange

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Interchange fees make up a bulk of the credit card processing fees that a business will have to pay. This is why it is fairly important for managers or business owners to do everything possible to understand all about interchange fees. Interchange describes the money that is transmitted to the issuing bank from the acquiring bank. These fees are a part of each transaction that involves a bankcard. These fees are a large part of the amount of money that it takes for a business to feature credit card processing. Interchange fees are created by the various card brands that use open loop processing systems. For example, brands like Discover, MasterCard and Visa charge interchange fees.

Why Interchange Fees Exist

Interchange fees are charged to merchants in order to compensate the banks that issue debit cards or credit cards for any interest that may have been lost. The issuing banks normally lose interest due to the grace period that is issued to the cardholders before they repay the debt on the card. However, the main role of an interchange fee is to establish a reasonable balance of profit between the retailer’s financial institution and the financial institution of the cardholder.

How Interchange Fees are a Part of Credit Card Processing

When a transaction takes place, the cardholder’s bank will pay the company’s bank for the purchases made by the cardholder. The interchange fee for this transaction is subtracted from this amount. Once this has been done, the acquiring bank will pay the merchant for the leftover balance. However, a markup is subtracted from this amount in order to pay for processing the transaction.

The business that is selling a product or service to the cardholder will ultimately receive a gross amount of money for any sales that were made. However, various markups and base costs are subtracted from the amount of money that the business receives for selling different products or services. These costs often include the provider’s markup, assessments, various dues and interchange fees.

Different Factors that Influence Credit Card Processing Interchange Fees

It is important for a business to know all about interchange fees in order to make sure that credit card processing services benefit the company as much as possible. This means that one will have to do the best that they can in order to learn more about the different factors that can change the interchange fees are charged. Companies should also learn more about which factors could be controlled. Various factors that can influence interchange fees include the merchant category code, the transaction data and the processing method that is used. The merchant category code is used to describe the various types of business categories. The company will fall under a specific merchant category code designation and this can influence the interchange fees that are owed.

There are some interchange factors that a business will not be able to control. This includes the owner of the credit card or the debit card, the brand of the card and the type of card that is being used for the transaction. Interchange fees can change based on if the cardholder is a municipal, a corporation, a business or an individual.

It is equally important to try to make sure that the transactions that are processed could qualify for the lowest interchange categories possible. The process of changing a company’s credit card processing options in order to perform this act is known as interchange optimization.

Interchange Settlement Update: Challengers Awaiting Final Approval

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Today the Official Merchant Services Blog brings you another update on the ongoing Interchange lawsuit settlement. We began talking about the possibility of ‘The Big Cash Comeback’ back when the settlement was first announced in July, and later we discussed the opposition to the settlement. Last week a federal appellate court denied a retailer’s appeal to review part of the controversial settlement in the massive credit card interchange case, clearing the way for the trial court to move toward final approval. At the same, the process of notifying the millions of merchants affected is getting under way.

Judge John Gleeson of the U.S. District Court in Brooklyn, N.Y., gave preliminary approval of the settlement on Nov. 9 and has set a hearing for next Sept. 13 to consider final approval.

Lawyers representing seven merchant trade groups as well as some individual merchants asked the Second Circuit Court to consider a narrow part of Gleeson’s preliminary approval, the provision of the settlement that releases defendants Visa Inc., MasterCard Inc., and some major banks from liability for interchange pricing policies. The provision is shaping up to be the key objection of the 1,200 retailers and trade associations since it would affect current and even future card-accepting merchants. This case, now seven years in the making, began when merchant plaintiffs accused the networks and banks of using anti-competitive practices in setting interchange rates.

Under the settlement announced in July by lawyers for both sides, the defendants will pay class merchants about $6 billion in damages, and Visa and MasterCard will provide another $1.2 billion in temporarily reduced interchange rates and ease up on certain rules, especially ones restricting merchants’ ability to add a surcharge for card transactions. In return, the networks want to be released from future court challenges by merchants regarding Interchange and network rules. The defendants also are paying about $550 million to a handful of large merchant plaintiffs that have now dropped their claims.

Judge Gleeson indicated that the standard for final approval is much higher than the one for preliminary approval, which means that the objecting plaintiffs still have some hope even though parts of the settlement already are going into effect or will be soon. For example, the networks have 60 days from Nov. 27, when the court entered Gleeson’s order implementing preliminary approval, to conform their rules to terms of the proposed settlement.

The district court meanwhile, is setting up the machinery to administer the settlement process. Gleeson appointed Kansas City, Kan.-based Epiq Systems Inc., a specialist in legal-systems administration and technology, to oversee notifications and related matters. That is no small task: the class settlement covers any merchant that has accepted Visa and MasterCard cards between Jan. 1, 2004, and late 2012. Experts estimate 6 million to 8 million affected merchants that must be notified. The settlement agreement also calls for merchant acquirers to assist in the notification process.

While we have discussed this settlement from different aspects previously, noting the advantages it would seem to give the Issuing Banks over merchants, the settlement seems to be proceeding along without much further adjustment or negotiation. Although it is not finalized yet, the dissenter’s cries seem to be going unheard, as they believe that the settlement protects the status quo more than anything, and will not change the way the networks set interchange. Host Merchant Services will keep you informed of all the latest news involving this landmark litigation.

Merchants Appeal Key Part Of Interchange Settlement

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Today the Official Merchant Services Blog brings you the most recent developments in the ongoing credit card interchange settlement lawsuit.

Merchants opposing the pending credit card interchange case filed an appeal last week challenging the court’s preliminary approval of a key part of the settlement. The appeal, filed by four merchants and seven merchant trade groups, asks the Second U.S. Circuit Court of Appeals to nullify the lower court’s preliminary approval. The merchants are collectively challenging a provision of the settlement that releases defendants Visa Inc., MasterCard Inc., and a handful of major banks from liability for interchange pricing policies. Meaning that merchants could no longer sue Visa or MasterCard for interchange policies they deem unfair.

“This settlement has fatal legal defects and should not get preliminary approval. We look forward to presenting the problems we see in this proposal to the Second Circuit Court of Appeals,” said Jeffrey Shinder, the merchant group’s attorney and managing partner at Constantine Cannon LLC, New York, N.Y.

About 1,200 merchants and trade groups have raised objections to the agreement since it was reached in July. In the deal, the card networks and banks agreed to temporary credit card interchange relief valued at $1.2 billion and $6 billion in damage payments for merchants along with relaxation of certain network rules, including ones that restricted surcharging. The pact received preliminary approval from the Brooklyn, N.Y.-based district court’s Judge John Gleeson on Nov. 9.

Besides the liability release, merchants have objected that the settlement does nothing to reform the networks’ interchange processes and cements in place a number of anti-competitive practices. “The merchant community is deeply committed to reforms that bring transparency and competition to the broken electronic payments market. The volume and diversity of those objecting to this flawed proposal is remarkable and continues to grow,” Shinder said in his statement.

The 11 merchants and merchant groups filing the appeal are: Coborn’s Inc., D’Agostino Supermarkets Inc., Jetro Holdings Inc., Jetro Cash & Carry Enterprises LLC, Affiliated Foods Midwest Cooperative Inc., National Association of Convenience Stores, National Association of Truck Stop Operators, National Community Pharmacists Association, National Cooperative Grocers Association, National Grocers Association, and the National Restaurant Association.

Opponents said the plan would protect what they view as anti-competitive interchange practices from further challenges by merchants, even from merchants that don’t yet exist. Opponents also questioned the value of the new surcharging freedoms, noting that 10 states prohibit the practice. This settlement attempts to force a one-size-fits-all solution onto a wildly diverse group of merchants, which may be extremely unsuccessful.

We have discussed this settlement from different aspects previously, noting the advantages it would seem to give the Issuing Banks over merchants. Although it is not finalized yet, the dissenter’s cries seem to be going relatively unheard, as they believe that the settlement protects the status quo more than anything, and will not change the way the networks set interchange. Host Merchant Services will keep you informed of all the latest news involving this legal battle between the merchants and the card-issuing giants.

Tag Archives: credit card interchange

What Does The Future Hold For Interchange?

What Exactly Are Interchange Fees?

Why Do We Need Interchange?

Interchange In The Past

So What Is Next For Interchange?

All About Interchange

Interchange Settlement Update: Challengers Awaiting Final Approval

Merchants Appeal Key Part Of Interchange Settlement

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