Interchange 101

Interchange is the term used by the payments industry to describe the exchange of payment clearing records between the credit card issuer and the payment acquiring bank. Interchange fee is the term used to describe the convenience cost that merchants must pay to use the exchange service. Interchange is set by the card associations and is by far the largest component of various per transaction fees that merchants pay. Interchange fees are vary depending on a number of factors including:

  • Type of card used (consumer card, corporate card, purchasing card, signature card, ect.)
  • Merchant market vertical (Merchant Category Code [MCC])
  • Method of acceptance (present or not)

 Note: For a complete list of interchange levels visit or

In addition, there are several methodologies that processors use to price, bill and report interchange. There are pros and cons to each which are listed below.

Tiered Interchange Pricing:  Tiered pricing is the simplest to understand. Basically the processor divides the different interchange levels and associated costs into several “buckets”. Usually these buckets are titled “Qualified”, Mid-Qualified and “Non- Qualified”. Merchants are given a separate cost for each of these buckets. Transactions that fall into the “Qualified” bucket have the lowest expense. Transactions that fall into the Non-Qualified bucket carry the highest.

The down side is that many of the transactions falling into the mid and non qualified buckets carry a much lower expense that is allotted to the bucket. This translates into a higher expense to the merchant than necessary.

Pass Through Pricing:  With a pass through methodology, each transaction falls into its appropriate interchange level. The processor then adds their “mark up” or profit margin, and reports appropriately. This is by far the most transparent for the merchant, but can be confusing. The down side is that a “set it and forget it“ mentality is found at the processor level because they make their margin regardless of how the transactions qualify.

Bill Back Pricing:  Bill back methodologies assign a target interchange qualification level and expense. All transactions are billed at that target level initially. Then, usually during the following period, an adjustment is made for all the transactions that occurred with a higher expense then the target. The down side to this is that it is very confusing and therefore costly.


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