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Understanding Interchange

Blog Post created by gjsissons on Sep 6, 2017

A Primer on Card Processing Fees for Developers

For developers who have worked mostly with eCommerce gateways, coding to a payment processor can be a different experience. The interfaces can feel a little more complicated because they expose additional fields and capabilities including support for various types of card present transactions. It turns out that understanding topics like interchange fees, assessments, and discount rates are worth a developer’s time.  By keeping processing fees in mind when building payment applications, developers can code in a fashion that can potentially help merchants avoid fees or reduce chargebacks.

 

Types of credit card fees

 

Interchange and assessment rates and fees

Certain fees are usually non-negotiable, including interchange and assessments.  Interchange and assessment fees are determined by the card associations and are charged to payment processors, who then collect the fees from their merchant clients.  Interchange goes to the authorization network (the banks that issue credit cards) to pay for the verification and routing of funds, and assessments go to the card brands (Visa, MasterCard, etc.) for the privilege of using their cards. The interchange rates are based on how a transaction is conducted—whether it’s swiped, dipped, keyed, conducted online, and well as the merchant’s business type, size, and many other variables.

 

Acquirer fees

In addition to collecting interchange and assessment fees for the card brands and networks, credit card processing companies also known as “acquirers” also assess fees to cover the costs of the services they provide to merchants.  Unlike interchange and assessment fees, this type of fee can vary by processor and can sometimes be negotiated.

Fees in this category pay for services such as equipment rental, payment gateway access, PCI compliance programs, minimum processing amount, online reporting, and many other value-added services that make payment processing convenient and reliable for merchants.

Sometimes credit card processor fees are listed separately from interchange and assessment fees, but some processors bundle them into one rate.  It’s important to talk to your credit card processor about their particular fees including what they are for, how they are collected, and whether you need the particular service associated with the fee.

 

Popular pricing structures

Pricing structures can vary widely and are complex by nature.  It’s important to note that one pricing model isn’t inherently better than another. It all depends on your business and the variables noted above regarding business type, processing volume, acceptance methods and so on. Let’s take a look at some of the popular pricing strategies used by processors.

 

Flat rate pricing

Flat rate pricing consists of one monthly fee that covers all the processing services a business needs and is commonly offered by payment facilitators (PayFacs) that don’t require a merchant account.

This type of pricing is non-negotiable and doesn’t fluctuate with transaction volume.  Every transaction receives the same rate.  This appeals to businesses that value simplicity and don’t have large transaction volume or high average ticket values.

 

Bundled or tiered pricing

In a bundled or tiered pricing model, transactions are categorized into different pricing tiers—qualified, mid-qualified, and non-qualified—based on their risk factors like whether the card is present, whether it was swiped or key entered, and whether PIN or signature is captured.  Qualified transactions are the safest and therefore have the lowest rate whereas non-qualified transactions are the riskiest and have the highest rate.

This type of pricing generally requires a merchant account and can save money in the long run for larger, more complex businesses due to their processing volume and card acceptance variables.

 

How does this impact the developer?

 

How you code payment transactions matters because decisions you make can affect Interchange fees.  Following card brand rules is essential to not only minimizing fees but instances of fraud and chargebacks as well. As examples:

 

  • For card not present transactions using AVS to deter fraud, the accuracy of the address match (returned in response to an Authorization) will impact interchange rates – the better the match, the lower the rate.
  • Providing detailed metadata in payment transactions (like industry types, terminal types, electronic indicator codes and commercial card IDs) can also help merchants obtain more favorable interchange rates. If this information is not included in an Authorization request, card brands may err on the side of caution, defaulting to higher rates.
  • For B2B applications, collecting and passing data fields required for Level II or Level III transactions can help reduce interchange rates further.

 

For developers, to minimize merchant costs, it is important that their payment SDK or API provides the ability to accept and pass on as much of this supplementary metadata as possible. Vantiv’s triPOS and Express APIs for card present transactions are good examples of APIs that do this. Both allow for extensive metadata collection including things like freight, duty, taxes, ship-from and destination zip codes, and a variety of other items that can affect interchange fees.

 

To learn more about Vantiv APIs for point of sale developers including the triPOS and Express platforms described above, visit our Point of Sale Integration resources.

 

For similar resources for card not present and mobile payment integrations, visit our developer eCommerce resources.

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