Interchange: The One Word Every Entrepreneur Should Learn

When you start a new business, you’re thinking blue sky, big picture—the details will sort themselves out, right? Well, not exactly. While you shouldn’t let practicalities limit the scope of your imagination, it’s the entrepreneurs who apply their drive to innovate and excel in day-to-day business operations as well as big ideas that build empires.

‘Interchange’ Is A Term Every Entrepreneur Should Learn: Here’s How It Affects Your Bottom Line

This post is from SwipeSum CEO Michael Seaman, a veteran of the credit card processing industry on a mission to give more power to merchants everywhere.When you start a new business, you’re thinking blue sky, big picture—the details will sort themselves out, right? Well, not exactly. While you shouldn’t let practicalities limit the scope of your imagination, it’s the entrepreneurs who apply their drive to innovate and excel in day-to-day business operations as well as big ideas that build empires.Decisions about payment processing are some of the most important details to spend your strategic capital researching. The payment processor you choose to work with will impact the customer experience (from the efficiency of payment to security of personal details) and the company’s net profit much more than most new business owners realize. One of the most important variables to scrutinize when deciding how your business will process payment is Interchange. Never heard of it? You’re not alone. In fact, the nuances of payment processing can feel like a closely guarded secret to anyone outside the industry. But, while there may be some sharks in the processing biz trying to capitalize on the lack of Interchange education available, it’s possible to outsmart ‘em. The most important thing is knowing the rules of the game. So, here’s what you need to know about Interchange and its impact on your business.

What does Interchange have to do with your business?

In order to process virtual money (credit cards, cyber-currency, etc.), a company has to work with a credit card processor, whose job is basically to get the money from the purchaser’s bank account into yours. Interchange is the cost of that transaction. More specifically, it’s the pre-set rate a processing company pays to the bank that issued the card being charged. If you want help finding best card acceptance practices, just drop us a line.

What determines the Interchange rate?

Say your client banks with Bank A and signed up for a credit card through them. Any time that card is used to make a purchase, the processing company that communicates with the bank — in this case, Bank A — collects a certain amount of money for Bank A. That amount is the Interchange rate.The Interchange rate is made up of two elements:

  1. a percentage fee of the volume of the sale
  2. a per-transaction fee.

So, using the example of a $100 sale with the Bank A-issued credit card, the Interchange rate would be something like 1.65% (the per-transaction fee) + $0.10 (the volume-related fee).

If Interchange is a set rate, how would a business save money on processing?

Listen up, because this is where you could save (or cost) your business major bank: while you have no control over the Interchange rate, how you accept cards and the fees charged by processing companies vary significantly. Using best-practices for accepting cards along with choosing a processor that uses tiered pricing rather than Interchange-Plus pricing can end up costing a fledgling business money it just doesn’t have.

Really, what’s the difference between tiered pricing and Interchange-Plus pricing?

Well, there are a few differences. Here are the factors you need to understand before signing up with a payment processing company:

Qualified rates:

Within the tiered pricing structure (which most merchant service providers try to use since it tends to be more profitable), the qualified rate is often what you think you’ll be getting, when, more often, it isn’t. These processors will advertise a very low processing rate for qualified cards. However, it’s entirely up to the merchant to decide which cards qualify and which don’t. There’s no industry standard. And, since it benefits the processing company to charge more per transaction, it’s likely that you won’t benefit much from the qualified rate.

Unqualified surcharges:

When a transaction doesn’t meet the criteria for the qualified rate, the service provider will add a surcharge—which, like, the criteria for qualified transactions, isn’t subject to an industry standard. Every unqualified transaction will have this surcharge added to the qualified rate. And, more often than not, that surcharge will undo any savings you might have gained from the low qualified rate—and then some.


One of the most frustrating elements of this question of payment processing can be the lack of transparency. Businesses with a tiered pricing model rarely share actual interchange rates with the merchant (you), making it impossible to know how much you’re actually paying the service provider to process the transaction. That’s another place Interchange-Plus comes out ahead.While Interchange-Plus is made up of the same two components (a percentage fee of the volume of the sale, and a per-transaction fee) as tiered prices, the fee added to the Interchange rate is static. As such, there’s no confusion about what the Interchange rate is, and how much money you’re actually paying the provider on top of that.

Overall effective rate:

If you’re wondering how to actually determine the best processing deal for your money, remember these three words: overall effective rate. The overall effective rate is the total amount you’re spending on processing fees divided by your total sales volume. Here’s where knowing the interchange rate comes in. If you know the interchange rate for the type of transaction being processed, it’s simple to figure out just how high the markup per transaction is. Comparing the projected effective rates of several different payment processing companies (before signing on the dotted line) is the best way to make sure your hard-earned money is being well spent. Dealing with the pitfalls of starting a new business can feel overwhelming, but if you take it one step at a time, learning the landscape as you go, you’ll lay the foundation of a thriving, sustainable company. And SwipeSum is here to help you every step of the way! If you want help finding the best merchant processor for you, just drop us a line.

Michael Seaman

Michael Seaman

Michael is the co-founder and CEO of Swipesum. A veteran of the payments industry, Michael and his brother Stephen have led Swipesum since its inception in 2016. In his free time, Michael enjoyes time with his three children.

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