The way interchange rates work is based on how credit cards are processed. When a credit card is swiped, there are a few key players that make that payment possible.
First, there is the card-issuing bank. This bank is responsible for issuing credit cards and setting interchange rates. Common credit card issuers include MasterCard, American Express, and Visa. These card issuers provide credit cards to our second important player: the cardholder.
When a cardholder goes to a store and swipes a credit card to make a purchase, our third player finally comes into the picture: the credit card processor. The credit card processor is the middleman between the cardholder and every card-issuing bank.
When a card is swiped on a terminal, that terminal communicates with the processing company. The processing company is responsible for routing that transaction to the proper card-issuing bank that will enable the transaction. It’s at this moment that the interchange fee is assessed.
The card-issuing bank will charge the credit card processor an interchange fee based on certain transaction-based parameters, and that processor will then choose a way to pass that fee along to the business taking the payment from the customer.
Because credit card processors are dealing with hundreds of interchange rates, it can be tricky to decide how to pass those costs to the merchant. There are a couple of different pricing structures credit card processing companies use.
Flat-rate pricing is when you get charged the same fee for every transaction. These fees will combine a percentage of the total purchase price with a small standard charge—like 2.7% + 5¢ per transaction.
Interchange-plus pricing is exactly what it sounds like. You’re charged the interchange rate plus a little extra for the processing company. This fee will often take the form of interchange + 30¢ or interchange + 0.5% + 15¢ (though rates will vary).
In addition to this pricing structure, some processing companies charge a monthly fee. No matter how the processor approaches it, these fees and pricing structures provide a way to cover interchange costs and ensure your processor gets paid for their services.