What is Interchange?

Ever wonder what all those fees are for that are being deducted on your merchant statement? Or why they will vary from month to month? There are three entities that will typically be paid fees on a merchant statement.

• Interchange Fees – Paid to the Credit Card Issuers for all the cards processed that month by that merchant

• Association Fees – Paid to Visa, MasterCard, Discover, etc for the various cards processed that month by that merchant

• Discount Fees - Paid to the Processor for the ability to process all the credit cards.

The amounts will vary depending on what cards are processed and the various amounts transacted. When a merchant processes a credit card, a portion of that transaction is withheld by their credit card processor to be paid to the corresponding parties mentioned above. Depending on your processor, sometimes those fees are collected daily or sometimes they are collected at the end of the month in one lump sum. As NEXTEP PROCESSING is an Interchange Plus merchant services provider we collect the various fees required at the end of the month in one lump sum.

The majority of fees collected do not go to the processor. In fact, most of the fees paid are Interchange. Interchange rates are non-negotiable and all merchants pay the same rates regardless of their size or sales volumes. Interchange rates are public information and posted on the internet on Visa and MasterCard's websites. Although the Interchange rates are subject to change at anytime, they typically only update these rates twice a year (April & October).

Interchange is comprised of hundreds of categories but there are three main factors that will comprise what category a transaction will fall into.

• The Merchant's Industry• They type card processed

◦ Rewards Based, Non Rewards• How the card was processed

◦ Swiped, Keyed-In, Present, Not Present

What are Assessment Fees?

The card assessment fees are fees paid to Visa, MasterCard and Discover. They are also public information and non negotiable. The most common fees are as follows:

Visa:• Acquirer Processing Fee (APF) or Usage Fee - The Acquirer Processing Fee applies to all U.S. based credit card authorizations acquired in the U.S. regardless of where the issuer/cardholder is located.◦ $0.01950 per transaction (Credit Cards)◦ $0.01550 per transaction (Debit Cards)

• Visa Assessment Fee – The assessment fee applies to gross Visa transaction volume. ◦ 11 basis points per transaction (.11%)

• Settlement Network Access Fee (aka Visa Base II Fee) - Applies to all U.S.-based settlement transactions. If your business is based in the U.S., the settlement network access fee will apply to all Visa settlement transactions.◦ $0.0023 per transaction

Note: The Settlement Network Access Fee (Visa Base II Fee) and Acquirer Processing Fee will both apply to the vast majority of credit card transactions for U.S. based businesses bringing the total fee to $0.022 per transaction.

Additional fees are detailed in our Card Association analysis. These additional fees can be assessed by Visa depending on the circumstances of the transaction. The fees above are universal and are typically found on every Visa transaction processed by a merchant.

MasterCard• Network Access and Brand Usage Fee (NABU) - The Acquirer Processing Fee applies to all U.S.-based credit card authorizations acquired in the U.S. regardless of where the issuer/cardholder is located.◦ $0.01850 per transaction (until 6/30/13)◦ $0.01950 per transaction (after 6/30/13)

• MasterCard Assessment Fee - The assessment applies to gross MasterCard transaction volume.◦ 11 basis points per transaction (0.11%) - For transactions less than $1,000.

◦ 13 basis points per transaction (0.13%) - For transactions greater than $1,000. (Also called MC's Acquirer Brand Volume Fee)

Note: Effective January 15, 2012 MasterCard's Acquirer Brand Volume Fee increased from 0.12% to 0.13%. This assessment applies to consumer and business credit volume on transactions of $1,000 or greater. This assessment does not apply to signature debit transactions regardless of size.

Additional fees are detailed in our Card Association analysis. These additional fees can be assessed by MasterCard depending on the circumstances of the transaction. The fees above are universal and are typically found on every MasterCard transaction processed by a merchant.

Discover• Data Usage Fee – This fee applies to all U.S based authorized transactions.◦ $0.01850 per transaction

• Discover Assessment Fee – This assessment fee applies to gross Discover card transaction volume. ◦ 10.5 basis points per transaction (0.105%)

• Data Transmission Fee – A fee that applies to all sale transactions. ◦ $0.0025 per transaction

Additional fees are detailed in our Card Association analysis. These additional fees can be assessed by Discover depending on the circumstances of the transaction. The fees above are universal and are typically found on every Discover transaction processed by a merchant.

So on a $100 transaction (Visa), what would the Merchant pay in interchange and Visa assessment/usage fees? Let's assume the Interchange fees payable to the card issuer were 1.89% + $0.10.

Fees paid to the card issuer: $100 x 0.0189 = $1.89 + $0.10 = $1.99Fees paid to Visa: $100 x 0.0011 = $0.11 + $0.01950 + $0.0023 = $0.13Total Fees (Interchange & Association): $2.1218

Why is Interchange Important?

It is important to understand Interchange as it is the biggest component of a Merchant's fee structure in processing credit cards. It is also important to understand that those fees are non negotiable and every merchant pays the same amount. It's a myth that Merchants can negotiate their interchange fees. Despite this, there are processors out there that will use deceptive marketing

tactics to trick merchants into thinking otherwise. The only fees that are negotiable are the fees paid to the processor. The most affordable pricing model for any merchant is Interchange Plus pricing.

Please see our article about the differences between Bucket/Tiered and Interchange Plus pricing for more Information.

Myths about Interchange

Interchange is a tax paid by consumers.• Interchange is not a tax and it is not paid by consumers. Interchange is paid by the merchant and is part of the monthly fees they are assessed for processing credit cards.

Visa, MasterCard and Discover are paid Billions of dollars in Interchange every year.

• Interchange is not paid to the card associations. Interchange is paid to the banks that issued the credit cards processed. The card associations are paid different fees that are much lower than interchange.

Interchange rates have risen dramatically in recent years.• Interchange rates have only risen 1.90% since 1990, which is well below the rate of inflation. The revenue received by banks from Interchange has increased due to the increase in merchants accepting credit cards and less consumers writing checks to pay for goods and services.

Interchange rates are a secret and not disclosed.• Interchange rates are public information and posted on the internet. Many merchants think this information isn't available due to prevalence of Bucket/Tier model statements which typically don't disclose what interchange was for the cards processed that month. This can be rectified by having your processor move you to a Interchange Plus pricing model which discloses all this information monthly.

Interchange is negotiable.• Interchange is not negotiable. It's set by the issuing banks (of the credit cards) and the price is what it is.

Large merchants will get a discount on the Interchange fees.• All merchants regardless of size pay the same interchange rates for the respective cards processed.