Published January 29, 1999

Online Credit Card Processing & Dealing With Interchange Fees

If you take credit cards, you have no doubt noticed the "discount fee" on your merchant statement. Bundled in with that fee is something called an "interchange fee" deducted from each transaction. According to the Electronic Clearing House Inc., a merchant's credit card discount rate is composed of several fees, the largest of which is the interchange fee. Typically, 70 to 89 percent of the discount rate goes to pay the interchange fee.

What's the reason for the interchange fee? Interchange compensates card issuing institutions for their risk and the expenses they incur to process transactions. The fee amount is based on the level of risk associated with funding a transaction, in hopes of encouraging small businesses to follow procedures that reduce fraud.

Think of it as the fee the acquiring bank pays to the credit card-issuing bank in order to process a credit card transaction involving a card holder's account. The conditions under which you accept credit cards and process transactions all affect how high the fee will be.

The interchange fee is determined by the nature of your business and the processing procedures you follow. Visa and MasterCard set these rates by assessing the level of risk associated with funding and expenses involved in processing a transaction.

Hence the interchange fee for a face-to-face transaction will be less -- usually -- than in a mail-order transaction, since the risk of fraud drops considerably if a merchant can swipe a card and compare signatures.

Card issuers assign merchants to certain interchange categories reflecting their processing environments. The discount rate set for each merchant assumes compliance with prescribed procedures, and failure to do so, like neglecting to obtain electronic authorization, results in higher fees.

For example, a customer makes a $200 purchase, using a Visa card, at a retail store. The interchange category for this Visa transaction is CPS Retail. The discount rate is 3.75 percent. If all procedures are followed -- if the card is swiped, electronic authorization procured and transaction settled within two days -- there are no additional charges, and the fee is $7.50 to the merchant. However, if the card is hand-keyed instead of swiped, there's a 0.09 percent penalty, plus an additional 0.5 percent "adjustment fee," making your bill $8.59 instead. It would behoove merchants, therefore, to follow procedures as outlined in the merchant guide.

A good bank partner for a small business will help secure the best interchange rates for their small business customers. Bank One Payment Services, for example, will keep small businesses aware of requirements they must meet to qualify for the lowest interchange rates for their business, and keep merchants posted on rate adjustments at least 30 days in advance of increases.

To find out more about Bank One's merchant services, please follow this link. [http://www.bankone.com/payserv/]