Interchange

The True Cost of Cross-Border Credit Card Processing

At Reach, we often speak with large, US-based retailers who are interested in optimizing their international payment processing. One thing that stands out is that "Interchange Plus" pricing is very confusing. The way that Interchange Plus works is that interchange charges and assessment fees from the card schemes (i.e., Visa, MC) are simply passed through the payment processor to the retailer. Don’t forget the processor fee, though – that’s the ‘plus’ in ‘Interchange Plus.’

Long story short - Interchange Plus means hidden and hard-to-find fees.

The interchange and assessments charged by Visa & Mastercard are very complex and can differ drastically from one transaction to the next. There can be hundreds of variables that go into what interchange and assessment fees apply for a particular transaction. The interchange pass-through fees vary widely based on card type, how the credit card is processed, what information is included in the transaction, and from where the credit card is issued. There are so many variables, and specifics are often buried in a long, 20-page monthly report along with a list of domestic fees.

This makes it nearly impossible for a retailer to distinguish what they are paying on international sales and what they are paying on domestic sales.

Some Real Global Processing Numbers

There’s even more bad news - Visa and MasterCard have drastically increased the fees on international transactions. It is now more important than ever for retailers to understand the fees they are paying.

This is a sample of fees on a credit card issued outside of the USA and processed through a US acquiring bank.

Visa

Assessment fee: 0.13%
Qualification rate: varies, but can be from 1.60% to 3.00%
International assessment fee: 0.80%
International acquire fee: 0.40%
Total: 2.93%

MasterCard

Assessment fee: 0.12%
Digital enabling fee: 0.01%
Qualification rate: varies, but can be from 1.60% to 3.00%
Cross-border assessment fee: 0.60%
Cross-border assessment fee: 0.60%
Acquire program support fees: 0.85%
Total: 3.18%

In real terms, this means that any retailer is going to be paying at least 2.93% on cross-border sales. Based on a handful of other factors, these fees can go up as high as 4.73%!
Remember, too, that these are just the pass-through fees, and don’t even include the markup charged by the processor.

Understanding the high cost of international processing is the first step. Once any smart retailer sees the steady erosion of profits in their international payment processing, they need to now how to fix the problem. At Reach, we think the best way is to process locally – not cross-border. The best way to avoid high global processing fees is by dynamically routing international transactions through a corresponding local acquiring bank, and that's what we do best.

Contact Reach today to see how we can save you up to 50% on your international processing fees and realize the benefits of how leading retailers process transactions. Email us at [email protected].

Are you interested in even more information on interchange? Have at it!

Understanding US Interchange Fees

The rate a merchant pays to process a credit card transaction is a combination of base costs and markups called merchant discount. Merchant discount is the retail price of credit card processing, with base costs being raw material expenses and the markup being production costs.

Base costs should account for the largest portion of a merchant’s expense (about 75% - 80%), followed by the markup (about 20% - 25%).

Base Credit Card Processing Fees

Base credit card processing fees are made up of interchange and assessments, and they're the same for all processors. No processor can give you a lower rate or a better deal on base costs. For example, First Data (the largest credit card processor) pays the same interchange fees and assessments as a small local bank.

Interchange

Interchange accounts for the largest portion of credit card processing expense and it's paid to card-issuing banks. Believe it or not, your processor and the card brands (Visa, MasterCard, and Discover) don't see any revenue from interchange.

Here's how interchange works:

The stakeholders of Visa, MasterCard, and Discover (the banks) get together and decide how much they want to charge when you accept their credit cards.

The banks consider things like processing method (if the card is swiped, keyed, or entered manually in an ecommerce transaction), card type (rewards, business, consumer, etc.), the merchant business type (merchant category code), and a host of other variables to create a very, very long list of interchange fees.

Interchange fees are assessed as the net amount of refunds and chargebacks, and most comprise two parts. These two parts of interchange are a percentage fee and a transaction fee. For example, 1.80% plus $0.10 is the current Visa interchange fee for a consumer credit card processed online.

It's important to note that even though interchange rates don't vary among processors, it is possible to optimize interchange charges and achieve lower costs by processing the transactions locally (as opposed to cross–border).

Assessments

Visa, MasterCard, and Discover make money by charging assessments on every transaction involving one of their credit cards. Like interchange, assessments are exactly the same for all credit card processors. No processor can give you a lower rate or a better deal on assessments.

However, assessments may be applied differently if the transactions are dynamically processed through a local acquirer.

The assessments for each card brand are listed below along with the details about when they apply. Assessments are changed periodically by the card brands, and this list is updated as changes are announced.

Visa

Debit Assessment - .11%*
This assessment applies to gross Visa debit transaction volume.

Credit Assessment - .13%*
This assessment applies to gross Visa credit transaction volume.

Update: In January 2015, Visa raised its assessment on credit volume from 0.11% to 0.13%. The debit volume assessment did not change from 0.11%.

Acquirer Processing Fee (APF) - Credit - $0.0195
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. If your business is based in the U.S., the acquirer processing fee will apply to all Visa credit card authorizations.

Acquirer Processing Fee (APF) – Debit - $0.0155
On April 1, 2012, Visa began charging a separate lower APF of $0.0155 for transactions involving a debit card.

Transaction Integrity Fee (TIF)
Effective April 13, 2012, Visa will begin charging a Transaction Integrity Fee (TIF) of $0.10 on transactions involving Visa debit and prepaid cards that do not meet CPS requirements.

Fixed Acquirer Network Fee (FANF) - Variable
Effective April 1, 2012, the FANF is a monthly fee that varies based on processing method, number of locations and volume.

Settlement Network Access Fee - $0.0025 - Also called a 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.

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

Kilobyte (KB) Access Fee - $0.0047
Visa's kilobyte fee is charged on each authorization transaction submitted to Visa's network for settlement.

Qualification Rate - Variable
The rate charged based on the type of card you are using.

Misuse of Authorization Fee - $0.045
The Misuse of Authorization Fee applies to Visa authorizations that are not followed by a matching clearing transaction (or in the case of a cancelled or timed out authorization, not properly reversed).

Zero Floor Limit Fee - $0.10
Visa's Zero Floor Limit applies to cleared transactions that can't be matched to a previously approved or partially-approved authorization. In short, it applies to settlement transactions submitted without a proper authorization.

Zero Dollar Verification Fee - $0.025
The Zero Dollar Verification fee applies to Zero Dollar Verification messages (approved and declined). Zero Dollar Verification messages include the verification of the card account number, address verification (through AVS), Card Verification Value 2 (CVV2) and Single Message System (SMS) acquired Account Verification authorizations. The Visa Misuse of Authorization Fee does not apply to these requests. The fee applies when you want to verify a cardholder's information without actually authorizing an amount of their card.

International Service Assessment Fee - .80%
The International Service Assessment Fee applies to U.S. acquired transactions paid for with a card issued outside of the U.S.
Update: On April 18, 2015, Visa raised the International Service Assessment from 0.40% to 0.80% on transactions settled in U.S. dollars, and to 1.20% on transactions settled in currencies other than U.S. dollars.

International Acquirer Fee - .45%
The International Acquirer Fee applies under the same circumstances as the International Service Assessment Fee noted

Note: The International Service Assessment Fee and International Acquirer Fee often both apply to the same transaction, bringing the total charge to 1.25% -

MasterCard

Assessment - .12% - (Transactions less than $1,000)
The assessment applies to gross MasterCard transaction volume.

Update: In January 2015, MasterCard increased its assessment by 0.01% on all signature debit and credit transactions with an amount of $1,000 or less from 0.11% t0 0.12%.

Acquirer Brand Volume Fee - .13% - (Transactions greater than $1,000)

Update: 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.

Digital Enablement Fee – .01%
Effective January 2015, MasterCard will begin charging a Digital Enablement Fee. This fee will be assessed on MasterCard card-not-present sales volume involving signature debit, consumer credit and commercial credit transactions.

Network Access and Brand Usage Fee (NABU) - $0.0195

Update: Effective January 8, 2012 the NABU fee will apply to U.S.-based authorization transactions regardless of whether the transaction is settled. Prior to January 8, 2012 the Network Access and Brand Usage Fee applies to all U.S.-based settled transactions.
Update: Effective June 30, 2013 the NABU fee will be increased to $0.0195, and it will apply to both authorization and refund transactions.

Kilobyte (KB) Access Fee - $0.0044
MasterCard's kilobyte fee is charged on each authorization transaction submitted to MasterCard's network for settlement.

Acquirer License Fee (ALF) - .0045%
Effective April 2012, MasterCard will begin charging 0.0045% as an Acquirer License Fee assessed on gross MasterCard processing volume. This fee is also referred to by several processors as a License Volume Fee.

Cross Border Assessment Fee (Domestic) - .60%
The domestic Cross-Border Assessment Fee applies to U.S. acquired transactions paid for with a card issued outside of the U.S. and settled in USD.

Update: On April 18, 2015, MasterCard raised the Cross-Border fee from 0.40% to 0.60%.

Cross-Border Assessment Fee (Foreign) - 1.00%
The foreign Cross-Border Assessment Fee applies to international transactions settled by U.S.-based merchants in a currency other than USD.

Acquirer Program Support Fees - .85%
The Acquirer Program Support Fee applies under the same circumstances as the Cross-Border Assessment Fee (Domestic) noted above.

Update: On April 1, 2013, this fee increased to 0.85% from 0.55%. On April 18, 2015, MasterCard raised the Cross-Border fee on non-US currency transactions from 0.80% to 1.00%.
Note: The Cross-Border Assessment Fee and the Acquirer Program Support Fee often both apply to the same transaction bringing the total charge to 1.45% - 2%.

AVS Fee (Card-Not-Present) - $0.0075
MasterCard charges a fee each time a merchant access the address verification service when processing a transaction. MasterCard's AVS fee is a little higher for card-not-present merchants than it is for card-present merchants.

AVS Fee (Card-Present) - $0.005
MasterCard charges a fee each time a merchant access the address verification service when processing a transaction. MasterCard's AVS fee is a little higher for card-not-present merchants than it is for card-present merchants.

Card Validation Code Fee - $0.0025
Effective October 21, 2013, MasterCard will implement a Card Validation Code 2 (CVC2) transaction fee of $0.0025. This fee will be charged on transactions acquired in the United States with the CVC2 (three digit code on the back of the customer's card) included in the transaction for authorization and the CVC2 response value equals ’M’ (Match) or ’N’ (Invalid/did not match). The fee will not apply to Account Status Inquiry (ASI) requests.

Qualification Rate - Variable
The rate charged based on the type of card you are using.

Account Status Inquiry Fee - $0.025
The account status inquiry fee is charged for transactions where a merchant does not actually authorize an amount on a cardholder's account, but instead, validates aspects of her account. Account status inquiry transactions may include requests for address verification service (AVS), card validation code (CVC2), or both. MasterCard implemented the account status inquiry service on June, 14 2011 in place of support for AVS-only transactions.

Processing Integrity Fee - $0.055
(Card-Present, Card-Not-Present, No reversal)
Effective June 14, 2011 MasterCard began charging acquirers a Processing Integrity Fee of $0.045 to encourage merchants to abide by proper transaction authorization standards. MasterCard increased the Processing Integrity Fee by $0.01 to $0.055 on November 1, 2011. The Processing Integrity Fee will apply in the following instances:

Card-present: Transactions are not settled, cleared, or reversed within 24 hours of the original authorization transaction/request
Card-not-present: Transactions are not settled, cleared, or reversed within 72 hours of the original authorization transaction/request
No reversal: An authorization transaction cannot be matched to a corresponding settlement record after a period of 120 days
Exempt merchants: Travel and entertainment merchants classified as MCC 3351-3441, 3501-3999, 4411, 7011 and 7512 are exempt from the Processing Integrity Fee

Assessments are listed above, and interchange fees (or at least a portion of them) are published by Visa and MasterCard.

Discount Rate

The discount rate is the markup over interchange and assessments charged by the payment processor.

Markups differ significantly from one processor to the next both by amount, pricing model, and the types of fees charged. These inconsistencies are why it's difficult to accurately compare credit card processing on the open market.

With ‘interchange plus’ pricing, the processor's markup isn't dependent on interchange qualification. This separation of costs keeps the processor's markup the same regardless of the type of card the merchant accepts, or how the merchant processes it.

The processor earns a fixed percentage regardless of the underlying interchange. For example, 0.25% is an example of an ‘interchange plus’ rate quote. No fancy tiers and no qualification at the processor level – just one simple rate that gets added to actual cost (interchange).