You may have noticed on your monthly credit card processing statement a breakdown of interchange fees you were charged in addition to the ‘qualified’ or ‘cost-plus’ rates that were originally promised by your sales rep. If you’ve ever wondered why the majority of your fees are identified as interchange fees you’re not alone. You run your credit card transactions the same way every time, so why do some transactions incur additional costs over others?
What determines the whether a transaction is “qualified”?
For each credit and debit card transaction, funds are transferred from your customer’s bank to your credit card processor’s acquiring bank to cover the transaction amount plus the applicable interchange fee or wholesale rate. There are actually over 300 different interchange rates, and the card brands (V/MC/Disc/AMEX) determine the exact interchange rate for each individual transaction. A number of complicated factors determine the interchange, primarily:
- the type of card used for the transaction
- how the transaction is processed (swiped on a terminal in person with signature or processed through a gateway for card-not present transactions)
- the retailer’s size and industry
- what data is submitted with the transaction
Good for the card brands but not good for you
In an attempt to simplify things, credit card processors grouped the 300+ different interchange rates into 3 tiers: qualified, mid-qualified and non-qualified. Not surprisingly, more and more transactions seem to be falling into the non-qualified highest pricing tier.
Debit cards with PINs, for example, have significantly lower interchange rates than benefit-rich rewards and business or government purchase cards. Cards with robust rewards programs that include airline miles, cash back or other rewards will almost always be anon-qualified transaction. Merchants pay more in fees and essentially fund all those perks. Short of encouraging more debit card/cash sales use by implementing a surcharge program to pass along the fees to your customer, there’s not much you can do about these transactions.
However, business and government credit cards also are considered non-qualified transactions if you process them the same way you would a consumer card. Even if your business is primarily direct to consumer, business owners and government employees routinely use their business/government credit card to purchase meals, gas, office supplies, travel related items, software, corporate gifts, etc. Does your business allow invoices to be paid via credit card from your suppliers or vendors? If you answered yes and you run those transactions the same way you run consumer credit cards, you’re paying non-qualified higher rates.
You may be processing more business or government cards than you think
If you’re on an interchange plus pricing plan (also referred to as “cost plus”) you can look at your monthly statement and see the breakdown of exactly how many transactions you have at all the different interchange levels. If you are on a tiered pricing plan you may need to request this level of detail from your credit card processor, as it’s usually not provided on your statement. It’s one of the ways processors “hide” the true interchange rates because your transactions will only show up as qualified, mid-qual or non-qual without exact detail on the true interchange.
The good news is there are ways to reduce those fees
In order to help lower fees for business to business transactions, the card brands created three different processing tiers – Level I, Level 2 and Level 3, which play into how a transaction is grouped for interchange rates. The difference lies in the specific data that is passed to the processor through your terminal or gateway, with Level 1 data for basic consumer transactions and Level 2 and 3 supporting business or government payment cards. By submitting additional data it results in a more secure transaction and as such qualifies for lower fees.
| Fee Type | Interchange Rate |
| Visa – CPS Retail (swiped) | 1.51% & $0.10 |
| Visa – US Corporate Level II | 2.50% & $0.10 |
| Visa – US Corporate Level III | 1.90% & $0.10 |
| Savings from Level III Qualification: | 0.60% |
Level 1 data is what you would expect to transmit for a typical consumer transaction, including total purchase amount, data, retailer name and merchant category code. Level 2 includes those items from Level I plus an itemized sales tax amount, customer’s accounting code, merchant’s tax ID number. Level 3 takes that a step further by also including quantities, product codes, product descriptions, ship to zip code, duty amount, order number, applicable discount, tax rate, and other information typically found on an itemized invoice.
Most POS equipment and gateways are set up to process all transactions the same way (Level 1), regardless of the type of card. If your POS equipment or gateway is set up correctly, it should detect whether the card is a business or government card and prompt you enter the additional data to qualify for Level II interchange rates and save you money. There are virtual terminal solutions available that are designed to automatically populate those additional data fields for you, keeping your checkout process quick and efficient.
If you don’t have enough non-qualified transactions to justify investing in a new POS system or that just seems too daunting, separating your larger business transactions from your consumer transactions is also a practical solution. Use your regular swipe terminal at the checkout for consumer retail sales and use a web-based gateway that is enabled for Level II and Level III data to process business transactions.
Lastly, since tiered pricing lumps all 300+ interchange rates into three categories you’re not getting the benefit of true interchange rates. Talk to your processor about switching to interchange plus pricing, which passes through the exact interchange rate on each transaction plus a flat mark up from your processor.