The process by which an acquiring bank or acquirer will submit card transactions that have been approved on behalf of the merchant. There are several parties in a credit card transaction including the issuer, the processor, and the acquirer.
The processes involved in a credit card transaction include the assessment as well as the collection and or the distribution of fees between the different parties. A credit card interchange is also commonly known as an Interchange and all the processes involved in a transaction are put in place to ensure that the transaction is safe and secure and that the necessary funds are available for the purchase to be completed.
Interchange originally came about as a way for banks to recover the lost interest that results from credit card grace periods for repaying debt. In fact, Visa still refers to interchange fees as “interchange reimbursement fees” to this day. Visa does go on to say that “the primary role of interchange is to create an equitable balance of incentives between the cardholder’s financial institution – which issues Visa cards to consumers – and a retailer’s financial institution that enrolls retailers and processes Visa transactions for them.”
Interchange fees are not static, and interchange fees for Visa and Mastercard, the two largest credit card brands, can be changed twice a year in April and October.
Each transaction is categorized as dictated by the card brand (Visa, Mastercard), and the interchange fee is dependent on this categorization. This categorization of each transaction is known as interchange qualification, and there are several factors that go into determining where a transaction will qualify at interchange. Some factors are controllable by the merchant, while others cannot be controlled.
The factors that are controllable by merchants include whether the transaction is card present or card not present, with card present transactions having smaller fees. The data supplied with the transaction also has an impact on the interchange fees, and transactions with complete data will see smaller fees. The merchant category code (MCC) also impacts the fees, as certain merchant codes automatically pay higher fees.
The factors which are out of the merchants control include the card type (credit vs debit), the card brand (cards with some type of reward usually have higher fees), and the card owner (individual, business, corporate or government).
Because the interchange fees are the majority of credit card processing expense for merchants, it is crucial that a merchant ensures each transaction qualifies for the lowest categories possible to minimize the fees being charged. The process of lowering processing costs is known as interchange optimization.