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What Does The Future Hold For Interchange?

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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.

Why Do We Need Interchange?

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?

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.

interchange definition

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.

The ERR Pricing Trap

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In recent weeks I have personally spoken with numerous merchants who want to try and understand their monthly statement better. It seems like some providers of credit card processing have come up with a game: “confuse the merchant”. Different combinations of low rates and high fees or vice versa. One pricing structure that I have seen quite often lately is referred to as bill back or ERR (Enhanced Recover Reduced).

ERR is presented as a simple and clear pricing system for merchants. This couldn’t be further from the truth. While on the surface the one flat rate for every transaction seems easy to understand. While the (usually) low rate will seem enticing from the merchants point of view because it is only one rate as opposed to the hundreds that exist in the current interchange chart, the processor isn’t telling the whole story. Whoever said “if it sounds too good to be true, it probably is” was a very wise person. The secret behind ERR pricing is the second charge for mid or non-qualified cards. This is the difference between the flat rate and the actual interchange rate for the mid or non-qualified cards with an additional surcharge tacked on.

baitandswitchIn essence the one, low flat rate that these processors will reel merchant s in on and then slap them with high, additional surcharges is a classic case of “bait and switch”. Often seen in “big box” retail stores, bait and switch is when a business will advertise a low priced product that is not available. Then will substitute a higher priced product for the customer to fill the void of a missed opportunity. The legality and fine print often associated with this tactic exploits some loopholes and seems shady to the average consumer. Whether legal or not, at the end of the day the consumer is often left feeling taken advantage of.

The “trap” part of this pricing usually comes in the form of a term on the contract a merchant is asked to sign. These usually are around 36-months but can be any length of time. Processors will often convince decision makers that there is a need to sign for a term to get the best rates. Yet this is simply not true. And if the merchant decides he would like to get out of the contract before the full term has expired there are more often than not hefty early termination fees.

On the flip side to questionable business tactics and non-transparent pricing is interchange plus pricing. Here at HMS we believe that the customer should never walk away feeling like they lost and that a business relationship can be a win-win situation for both the merchant and Host.

man_holding_head_on_side_of_bedEvery business that takes credit cards, bar none, has to pay interchange rates. Bottom line. Full stop. What differentiates each processor is what they choose to charge on top of this. Those that don’t mind if they can sleep at night tend to markup interchange with exorbitant rates and/or backdoor fees. We prefer a more upfront and fair approach.

So let’s quickly recap. Enhance Recover Reduced makes it difficult for merchants to accurately calculate their effective rate as the “bill back” amount is often reflected on the next month’s statement. This roundabout and confusing pricing structure is not clear and easy to understand upfront. That in and of itself is reason enough to switch to a processor that provides the clearest pricing available. Take a look at this Statement Breakdown that outlines how to read and understand our statement vs. the rest.

Industry Terms: Interchange

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Interchange

Interchange is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card based transactions. Usually it is a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”).

In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO, which is often referred to as a discount rate, an add-on rate, or passthru.

For cash withdrawal transactions at ATMs, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).

These fees are set by the credit card networks, and are the largest component of the various fees that most merchants pay for the privilege of accepting credit cards. Visa, Mastercard, and Discover are each known as card associations. And each card association has their own rate sheets known as Interchange Reimbursement Fees. These fees make up the majority of what you pay to your processor and they vary greatly depending on the card type accepted.

Download Visa’s Interchange Fees Here

Merchant Services Document Download Graphic

Download MasterCard’s Interchange Fees Here

Merchant Services Document Download Graphic

 

Interchange Plus Pricing

Interchange Plus pricing means that the acquirer charges you a variable MSC consisting of the cost price plus a fixed markup. Interchange Plus Pricing  is exclusively how we quote at Host Merchant Services. Interchange Plus, also known as Cost Plus, pricing gives the customer a fixed rate over published Interchange Fees. This pricing format is normally quoted as a discount rate (percentage fee) along with a per item or authorization fee. The great thing about Interchange Plus pricing is that you always know exactly what you are paying to your processor to services your account. Think of Interchange, and all the associated fees, as an unavoidable cost. No matter who you process with, you have to pay these fees. They may be labeled differently, or wrapped up in a confusing pricing tier, but one way or the other, you are paying Interchange fees. By understanding the markup you pay over Interchange, you know exactly what you pay to your processor and exactly what is going to the card associations. That allows you to make a decision on whether or not the markup seems reasonable for the service you get and choose your processing partner accordingly.

Here’s a small graphic explaining the basics of how Interchange Plus works:

Host Merchant Services infographic on Interchange Plus pricing

Finding Quality Merchant Services [2023 Update]

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Today The Official Merchant Services Blog is playing a bit of catch up. The story we’re going to highlight and discuss is almost three weeks old. It was intended to run earlier, but technical difficulties with the blog’s production kept it from appearing until now. However, we feel the story is still worth some attention due to the issue it highlights about the payment processing industry.

The story comes to us from a Chicago, IL section of the Better Business Bureau (BBB). This article from the BBB says that the organization has seen a 42% rise in complaints against credit card processing services. The article, which originally was posted by the BBB on December 15 found that complaints were up for the 12 month period in 2011 compared to the previous 12 months. The breakdown was specifically 110 complaints in the recent 12 month period versus  77 complaints in the period prior.

Not Just In Chicago

The complaints aren’t just lodged in Chicago. This article from Fox40.com details similar complaints in Sacramento, CA. The article states: “The Better Business Bureau is warning businesses to beware of sales pitches by credit card processors that don’t reveal key details that could end up costing business owners more than they bargained for.”

And it quotes Caitlin Peterson of the Better Business Bureau of Northern California as saying “We’ve had over 1,700 complaints this year against the merchant processing business.”

What the Problem Is ?

From reading through the two articles — as well as an older BBB article about issues in the St. Louis, MO area — the problems that merchants are encountering are really straightforward. Business owners are being approached by salespeople offering big savings on their payment processing. And then once the merchant signs a contract with that person, they are saddled with hidden fees for services they were not told about. In short, the business owner is led to believe they are getting a great deal but end up having to pay out more because of all the things not mentioned in the deal. So complaints against payment processors rise in select areas.

Pricing and Transparency

This type of behavior is the exact reason Host Merchant Services utilizes its philosophy of Interchange Plus pricing and no hidden fees. These types of issues are why CEO Lou Honick says “Host Merchant Services is about bringing trust to the payment industry.”

“Payment processing is confusing,” says Honick, noting the ease in which merchants can get saddled with the types of issues that have cropped up with the BBB complaints. “The big guys make it difficult to understand exactly what your rate is and what fees are associated with accepting credit cards. We deliver personal service and clarity. Our people care about customer service and will take the time to explain how everything works.”

Honick also cites the process that Host Merchant Services uses to directly counter the problems that business owners encounter with other processors: “We believe that when you get your statement every month, you should understand every item, and it should match what you were promised in the sales process. If you have a question, there is a live person at Host Merchant Services ready to assist you.”

The Details

One of the primary ways Host Merchant Services combats the practices that lead to these complaints is with their pricing structure. Host Merchant Services uses Interchange Plus pricing instead of the more standard tiered pricing format. Interchange Plus makes statements easier to read, customer service easier to provide to merchants, and savings much easier to guarantee. Here’s a small graphic explaining the basics of how Interchange Plus works:

You can review a comparison between Host Merchant Services Interchange Plus pricing — which is simple and transparent — and the tiered pricing plans that other processors use in a two-part blog series that The Official Merchant Services Blog ran in October, 2023.

  • Part One
  • Part Two
  • Follow Up

What the BBB Advises ?

The BBB advises merchants take these steps to avoid getting stuck with the issues that their complainants have encountered:

Ask around.

The BBB suggests getting at least three estimates from different Payment Network Providers and to checkout he BBB Business Review of the merchant processing service. They also suggest asking fellow business leaders for referrals.

Know where to turn.

The BBB advises you check up on the support team that a potential Merchant Services Provider offers you. Can you contact them 24 hours a day? What is their response like outside of typical business hours? And the BBB advises you make sure their technical support can handle your needs as that kind of support is vital to your business’ success.

Try them out.

The BBB says that you should not settle without a trial period. You should make sure that the payment processor you choose has a 100 percent money-back guarantee before selecting them. Make sure their service works for you, and make sure they keep their promises to you.

Don’t get locked in to a long term contract.

The BBB is very clear on this. Never commit to a long term agreement that locks you in. Make the merchant services provider earn your business each and every month.

Get references.

The BBB advises that you get the payment processor to provide you with references. And then suggests you spend some time checking up on those references.

Make sure you know what you’re being charged for.

The BBB says that if you have a question regarding a fee that you were charged, ask the merchant services provider. Don’t let them hide fees on you. Make sure you understand your statement.

How Host Merchant Services Stacks Up 

Host Merchant Services falls in line with what the BBB advises merchants to do. The company places a big emphasis on transparency. Their salespeople will explain a merchant’s statement in detail. One of strengths of the offering from Host Merchant Service is their guarantee to save a merchant money. They achieve this by a statement analysis. Not only will Host Merchant Services explain the details of what your statement and fees are, completely transparent, while you process with them, they’ll also explain where the hidden fees are with your current statement.

Host Merchant Services will provide references. They do not lock you in to a contract. They do not charge you a termination fee. They provide free equipment and free paper for your terminals. And they offer 24-7-365 customer service where they guarantee you will talk to a real person that will help you out with your issues. You can even initiate a live chat with HMS Support right from any page on their web site.

As Host Merchant Services COO Dan Honick says, “You stay with us because you’re happy.”