Interchange fees
DEFINITION
Interchange fees are the fees charged by credit card networks on a transaction, with the rate depending on the transaction data submitted, amount, card brand, merchant category, and other factors.
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RELATED TERMS
Interchange fees are the fees charged by credit card networks on a transaction. The rate charged depends in part on how much data is included with that transaction, the transaction amount, any programs a merchant is enrolled in, the card brand, the business type (merchant category code, or MCC), and other factors.
Every card transaction can be submitted with different amounts of supporting data, and that data is grouped into levels, starting at a basic Level I and going up to Level III. A transaction with only the minimum data, such as the amount, the date, and basic merchant information, is processed at a Level I rate. A transaction that includes additional information, such as tax amount, a customer code, a purchase order number, and merchant zip code, can qualify for the more favorable Level II rate. Level III adds even more granular data on top of that. Level II and Level III rates are generally available for commercial and government transactions rather than typical consumer purchases, since consumer transactions are usually processed at the Level I rate regardless of the data submitted. Some pricing models, known as interchange-plus pricing, charge a business the interchange fee set by the card network plus a separate markup on top.
Why it matters
Interchange fees are a real cost of doing business for any company processing card payments, and the rate paid on a transaction is not fixed. Submitting more qualifying data with a transaction can lower the interchange rate, and lowering the rate on high volumes of recurring transactions can meaningfully affect a subscription business's overall cost of processing payments over time. Businesses that only ever submit the minimum required data generally pay more per transaction than they would if that transaction qualified for a lower rate.
How to qualify for lower interchange rates
Confirm whether the payment gateway being used supports passing Level II or Level III card data, since support varies by gateway.
For eligible transactions, such as business-to-business or government sales, pass the additional data required to qualify for a lower rate, including tax amount and a purchase order number where applicable.
Pass address verification service (AVS) data on transactions to reduce the risk of a transaction being downgraded to a higher rate.
Review whether the business's transactions are tax-exempt, since Level II programs generally require a minimum tax percentage, and tax-exempt businesses may not qualify.
Keep an eye on card network program changes, since interchange programs and their requirements can be updated by the card networks over time.
Benefits and examples
Qualifying more transactions for a lower interchange rate can add up to real savings, especially for a business processing a high volume of business-to-business or government transactions. Including Level II data instead of only Level I data can represent a savings of between 0.05 and 0.50 percent per transaction, and adding Level III data on top of Level II can save an additional 0.25 to 2.5 percent. For a subscription business billing the same customers repeatedly, even a modest reduction in the rate paid on each transaction compounds over the life of those subscriptions.
For example, a B2B software company billing other businesses on a recurring basis can pass tax amount, a purchase order number, and other required fields with each transaction to qualify for Level II or Level III rates, rather than accepting the default Level I rate on every charge.
How Recurly supports lower interchange rates
For US merchants, Recurly supports Level II card data on most gateways, which can help qualify eligible transactions for lower interchange rates. Recurly supports passing tax information, either through a supported tax integration or by configuring taxes directly inside a Recurly site, and supports passing a purchase order number by including the po_number field when creating subscriptions and purchases. Recurly also recommends passing AVS address data on transactions to reduce the risk of a transaction downgrade to a higher rate. Level II data support is available across a range of gateways, including Adyen, Braintree, Chase Orbital, Stripe, TSYS, WorldPay, and Vantiv, and Level III data support is available specifically through Adyen, Braintree, and CommerceHub. Payment gateway and Card network cover related concepts in more detail.
Frequently asked questions
Why do some transactions have a lower interchange rate than others? The rate depends in part on how much qualifying data is submitted with the transaction. A transaction with only basic data is processed at the default Level I rate, while a transaction that includes additional data, such as tax amount and a purchase order number, can qualify for a lower Level II or Level III rate.
Can a consumer purchase qualify for a lower interchange rate? Generally, no. Level II and Level III rates are typically available for commercial and government transactions, while general consumer transactions are usually processed at the Level I rate regardless of the data submitted.
Does every payment gateway support lower interchange rates through Level II or Level III data? No. Support for Level II and Level III card data varies by gateway, so it is worth confirming which levels a specific gateway supports before assuming a transaction will qualify for a reduced rate.
Can a tax-exempt business qualify for Level II interchange rates? Generally, no. Level II programs typically require a minimum tax percentage on the transaction, so a tax-exempt business may not qualify for that program.
What is interchange-plus pricing? Interchange-plus pricing is a pricing model where a business is charged the interchange fee set by the card network, such as Visa or American Express, plus a separate markup on top of that fee.
