by Ben Dwyer If you’re reading this article, you’re looking for more information on interchange, the largest component of credit card processing costs. You may be trying to determine if you can lower your interchange rates.
As with many things in credit card processing, it’s complicated. Interchange, as set by Visa and Mastercard, is non-negotiable. It isn’t possible to get lower rates or fees than what Visa and Mastercard publish.
But that’s not the full story. Two factors – one malicious, one not – play a role in whether you can lower your interchange.
Downgrades and Enhanced Data Categories: The Non-Malicious Problem
You could be paying more than necessary for your transactions if 1) they downgrade to a more expensive category or 2) they fail to meet criteria for a lower cost enhanced data category. These situations are not malicious, as they are often the result of overlooked factors by a business. For 1, correcting the process can eliminate (most) downgrades. For example, not settling transactions in the required timeframe can cause transactions to downgrade to a more expensive interchange category. Fixing the process so that transactions settle in the correct timeframe will fix it.
For 2, providing enhanced data on corporate card transactions can qualify those transactions for lower-cost “enhanced data” interchange categories. These two situations can be corrected by the business and aren’t the focus of this article, but you can read more in the links above.
Padded Interchange: The Malicious Problem
Processors don’t have the ability to lower interchange from the published rates. But that doesn’t mean you’re paying the published rates. Processors can – and often unfortunately do – add cost to the published interchange rates, or “pad” them.
Unfortunately, there are no regulations or restrictions on processors when it comes to padding interchange. In an ideal world, the processor would pass interchange to you at cost and keep their markup separate. Indeed, that’s one of the requirements CardFellow enforces in our credit card processing marketplace. Any processor offering a certified quote through CardFellow is required to pass interchange to you at true cost.
In reality, some processors choose to pad interchange and also charge a separate markup. This has the effect of making their actual profit higher than what it appears if you only take their markup into account. There’s no way to say this is anything other than a processor’s attempt to obscure their true total markup from you. Let’s dig into this a little more.
Costs of Processing
Interchange is one of three components of total processing costs. The other two are assessments, which can also be padded, and markup. The markup is the only portion that is totally in the processor’s control. They can set markup at whatever they want. Of course, they need to be competitive with other processors or you won’t select them for your processing.
Interchange and assessments are completely out of the processor’s control. Those are set by Visa and Mastercard, and the processor doesn’t receive that money as part of their profit. Interchange and assessments are non-negotiable. Your processor can’t lower them, and Visa and Mastercard don’t make exceptions or special rates for individual businesses.
Credit card experts, including CardFellow, point out that since interchange is non-negotiable, it can be thought of as the “wholesale” cost of credit card processing. With honest processors and a pricing model that separates markup from interchange, you can effectively ignore interchange when comparing quotes. The processor with the lowest markup will be the lowest total cost.
However, this is only true if your interchange costs are actually the same among the processors you’re comparing. It should be – interchange and assessments are the same for everyone – but this is where padding interchange comes in.
Appearing Competitive
If you’re a processor that wants a business to choose you, you want to be (or at least appear) the most competitive. One underhanded way to appear more competitive is to charge more for interchange without disclosing it, and hope that the business owner doesn’t notice.
And most business owners don’t notice. After all, with dozens of interchange categories and regularly changing category names and rates, it would require diligent review of processing statements every month. Additionally, processors that pad interchange often don’t do so on every category, making it even harder to check. You would need to look at each individual category and its rate.
So what happens is that the processor charges you the markup that you know about, and a hidden markup that comes from overcharging you for interchange. The processor pays the actual interchange fee as published by Visa / Mastercard to the issuing bank, but keeps the difference between what it charges you and the actual interchange rate.
They make more money at your expense, and you’re not even aware of it.
Is padded interchange the same as tiered pricing?
No. With tiered pricing, your processor will group many interchange categories into buckets, or tiers, and assign a rate to each tier. It’s common to see 3 tiers: non-qualified, qualified, and mid-qualified. Qualified rates will be the lowest, followed by mid-qualified, and non-qualified will be the highest. Your processor has complete control over determining which tier to use for your transactions, and it can change at any time. A lot of the time, the processor will simply determine that most of your transactions qualify for the more expensive mid-qualified or non-qualified tiers. Regardless of how much a transaction costs at interchange, the processor will charge a higher rate and pocket the difference as profit. If the difference between the processor’s rate and interchange is high, they make more profit. If the difference is low, they make less profit. However, it’s not padded interchange, because the processor is not adding to the interchange cost. They are simply creating a category where they set their own cost and group many different interchange rates in that category.
How common is padded interchange?
It has fluctuated over the years, but it’s common enough that CardFellow included it in our legal agreement with processing companies offering certified quotes in our marketplace. They are not able to pad interchange and instead must pass it through to you at true cost. (That is, the costs set by Visa and Mastercard and available online.)
I have personally seen examples of both padded interchange and padded assessments while reviewing statements from possible clients. Previously, I wrote about Worldpay overcharging on interchange and have talked about examples of companies being sued for padding assessment fees. But one thing about the processing industry is that it’s hard to pin down. There are examples of a company padding interchange for one client and not another. New processors enter the industry and start off legitimate but slowly add underhanded tactics like interchange padding over time. The unfortunate reality for business owners is that you’ll need to stay vigilant when it comes to your processing solution.
Avoiding Padded Interchange
Your best bet? Get locked in with a good processing solution. CardFellow makes that easy with our credit card processing marketplace. We have a legal agreement with processors to pass interchange to you at true cost, and then we stick around to monitor your statements and ensure that happens. If you have questions, you can always ask. If we see something weird, we follow up with the processor on your behalf to get it corrected. Best of all, the processor’s markup is locked for the life of your account, so you’ll be sure you’re paying as little as possible for as long as possible.
Give it a try (it’s free!) at www.cardfellow.com
Otherwise, you’ll need to get comfortable with Visa and Mastercard’s published interchange tables and be ready to go over your monthly statement with a fine toothed comb. Be sure to check our blog for interchange categories if you need help understanding which categories are which and the current rates and fees associated.
