Interchange fees: who takes what out of a card sale

You sell a coffee. The customer taps, the sale is approved, and yet the amount that lands in your bank account is smaller than the amount on the receipt. That difference is not one deduction. It is split between three different parties, and only one of the three is your processing provider.

The largest piece, almost always, is called interchange. It is the term that comes up in every conversation about payment costs, and it is also the one most often misunderstood.

Interchange, in one sentence

Interchange is the amount your business's bank pays to the bank that issued your customer's card. Your business's bank is called the acquirer: it is the institution that processes your sales. So the money leaves your transaction and goes to the card issuer.

That amount is not set by your provider. It is set by the card networks themselves, and it is the same for everyone within a given category. Nobody in the chain can negotiate it down for you. It is a published rate, not a commercial arrangement.

What interchange pays for, from the network's point of view: fraud prevention, the interest-free period the cardholder enjoys, and the infrastructure that authorizes your sale in a couple of seconds.

Three deductions, not one

A card transaction carries three distinct cost components. Confusing them is the source of most misunderstandings with a provider.

• Interchange, which goes to the bank that issued the customer's card.
• Network fees, also called assessment fees, which go to the card network itself.
• The acquirer's or provider's margin, the only one of the three that is genuinely negotiable.

So when a merchant says they are paying too much, the useful question is: too much on which of the three? The first two are identical for everyone. The third is the real conversation.

Why two identical sales don't cost the same

There is no single interchange rate. There are dozens, and which one applies depends mostly on the card type, on how the card is presented, and on what kind of business you run.

Card type comes first. A debit card, a plain credit card, a premium rewards card and a corporate commercial card do not fall into the same bucket. Cards that give the cardholder the most perks generally carry the highest interchange, because those perks are funded out of the transaction.

How the card is presented matters just as much. A card inserted or tapped in front of you, with the chip read by the terminal, falls into a better category than a number typed in by hand or an online sale. The reason is simple: the fraud risk is not the same.

Then there is your line of business. Networks classify merchants by activity code, and some categories have rates of their own.

If your customers start paying more often with rewards cards, your average cost rises without anything changing in your agreement. That is not a price increase, it is a change in card mix.

Flat-rate or interchange-plus

A provider can bill you in two main ways. Under flat-rate pricing, sometimes called blended pricing, one rate applies to all your transactions regardless of the card. It is predictable and easy to read, but the gap between what the transaction actually costs and what you pay stays invisible.

Under interchange-plus pricing, interchange and network fees are passed through as they are, and the provider's margin appears separately. It is bumpier month to month, but you can see exactly what goes where.

Neither model is better in the abstract. What matters is knowing which one applies to you, because comparing two offers is meaningless until that is clear.

What you can check this week

In Canada, the Code of Conduct for the Payment Card Industry in Canada, overseen by the Financial Consumer Agency of Canada, provides that merchants receive a monthly statement setting out clearly what they are being charged, including the effective merchant discount rate by card type. The information already exists. It is on your statement, even if it is badly signposted.

Pull out your latest monthly statement and put these questions to your provider, in writing:

• Am I on flat-rate pricing or interchange-plus?
• On this statement, which lines are interchange and network fees, and which lines are your margin?
• What share of my sales is processed card-present, and what share is keyed in by hand?

That last question is often the most useful. Keyed-in transactions cost more to process, and in many shops they are avoidable: a badly placed terminal, a staff member who takes numbers over the phone out of habit, a temperamental chip reader nobody has reported. Those are habits, not rates. Habits can be fixed.