Interchange, Explained: Where Your 2.9% Actually Goes

A customer taps a card for 100 dollars. You receive something like 97.10. The missing 2.90 is treated by most businesses as a single fee paid to a single company, which is why most fee negotiations go nowhere: you cannot negotiate a number that is mostly not your counterparty's to give.

That 2.90 is at least three payments to at least three parties, and they behave completely differently.

The three layers

The shares move with your profile, and the point is the shape rather than the exact percentages. The large majority of what you pay leaves the payments industry and lands at a card-issuing bank you have no relationship with. The part your processor keeps is the minority of the bill and 100 percent of the conversation you can have.

Interchange: paid to the issuer, set by the network

Interchange is what the acquiring side pays the issuing bank for the transaction. Visa and Mastercard set the rates and publish them; the money goes to the issuer, and it funds, among other things, the rewards program on the card your customer chose to use.

That last clause explains most of the variance in your statement. A customer paying with a basic debit card and a customer paying with a premium travel-rewards card are two very different transactions in cost terms, and neither of them told you which one they were about to be.

Interchange is not one rate. It is a large matrix, and the cell you land in is decided by:

• Card type. Regulated debit is dramatically cheaper than consumer credit, which is cheaper than premium rewards, which is cheaper than commercial and corporate cards.
• How the card was presented. Dipped or tapped in person is cheaper than keyed or online, because the fraud risk is different.
• Your industry. Networks publish preferential categories for supermarkets, fuel, utilities, education, charities and others.
• The data you sent. This is the only lever fully under your control, and it is covered in Level 2 and Level 3 Data.

Downgrades: the silent rate increase

Every transaction is submitted with a target interchange category. If it fails to meet the requirements, it settles at a worse one. That is a downgrade, and it is the most common invisible cost on a merchant statement.

The usual causes are unglamorous and fixable:

• Batches settled late, most often over a weekend or a holiday.
• Missing address verification or security code on a keyed or online sale.
• An authorization amount that does not match the settled amount, which restaurants hit constantly through tip adjustments.
• Missing purchase-order or tax data on a commercial card.

Assessments: small, fixed, and quietly padded

Network assessments are a few basis points plus small per-transaction charges, published openly by the networks. They are genuinely not negotiable.

They are, however, one of the most reliably padded lines in the industry, precisely because everyone accepts that they are fixed and therefore nobody checks them. A published rate billed at a slightly higher published rate is the easiest finding in an audit and the least arguable, because the reference number is on the network's own website.

Markup: the part that is actually yours

Markup is what your processor charges for its service, and it arrives in one of three shapes.

Interchange-plus

Interchange and assessments passed through at cost, plus a stated markup. It is the transparent structure and the one to ask for, because it is the only one where the statement lets you see the three layers separately.

Tiered

Transactions sorted into qualified, mid-qualified and non-qualified buckets, with the processor deciding which is which. The definitions are the processor's, can change, and the gap between the bucket price and the underlying interchange is invisible. Tiered pricing is not automatically expensive, but it is automatically unauditable, which amounts to the same thing over time.

Flat rate

One published rate for everything. Simple, predictable, and priced to be profitable on your worst transaction, which means you overpay on your best ones. It is often the right answer for low volume and rarely the right answer above a few hundred thousand dollars a year.

What to do with this

Separate the three layers on your own statement. Interchange plus assessments is your floor: no processor can go below it and stay solvent. Everything above it is the negotiation. If your statement will not let you perform that separation, that is the finding, and the fix is to move to interchange-plus so that next month it will.

The line-by-line version of this exercise is How to Audit Your Merchant Services Statement.

Frequently asked questions

Can I negotiate interchange itself?

Not the published rate. You can change which rate applies, by fixing downgrades, submitting better data, and settling on time. For very large merchants the networks do run custom programs, but that is a different conversation at a different scale.

Why did my rate rise when my pricing did not change?

Almost always mix. More premium rewards cards, more keyed or online volume, more corporate cards, or more downgrades. Your price per transaction category can be identical while your blended cost climbs.

Do the networks change interchange often?

Rates are revised on a published schedule, usually twice a year. Your statement should move when the tables move, by the amount the tables moved, and not at other times or by other amounts. Anything else is worth a question.

Is interchange-plus always cheaper?

Not necessarily cheaper on day one, but always more legible, and legibility is what stops it getting worse. A tiered account cannot be audited by anyone, including you.