Interchange Pass Through 101

I have had some conflicts about what I am about to do because I know it is not going to make me very popular with some of the other vendors on this forum, but I have decided to push forward because of some of the recent posts about credit card processing and the fee structure associated with acceptance. Let me start by saying IMO, many of you are asking the wrong question, instead of asking how much you are going to pay, you should really be asking your provider “How much are they going to make?”. Over the next few weeks I will be taking interchange categories that are relevant to the food/beverage industry and explain exactly what the category is, it’s cost and what it means to you.

What is included in Visa/MasterCard Interchange:

Interchange is the rate charged to any processor that sells to a business owner (and we all pay the same rate). The following is included in interchange:

300 different categories of card types and transaction types (I will be going in depth on these categories over time)

Transaction fee associated with each rate category ( ranges from 0-.25cents)

Dues and Assessments (fees paid directly to Visa/Mastercard to pay for network operations, fraud prevention, technology development. Currently Visa Dues and Assessments is .0925% and Mastercard is .0950%)

Visa/Mastercard access fee is $0.0195 for Visa and $0.0185 for Mastercard

So if your provider gave you straight pass through, these are the fees that you would see on your statement, however, if they did give you straight pass through, you would need to start looking for another provider because no one stays in business for long if they are making ZERO profit.

Let’s say your restaurant has pass through plus .20 basis point and $0.08 per transaction (assumption is that $0.01 is actually profit, may be more or less depending on the provider ) and you have monthly volume of $35,000 and you run 1750 transaction during the month. Here is the profit that your provider is getting:

$35,000 X .20% = $70.00 profit
1750 X$0.01 = $17.50

So the total profit for your processing company is $87.50 per month. You have to ask yourself, are they worth the profit you are paying them. Only you can make that decision, but at least you know where your negotiation figure begins. As you can see the bulk of the fees that you pay go to the interchange that Visa/Mastercard collect.

Let’s say your restaurant has pass through plus .20 basis point and $0.08 per transaction (assumption is that $0.01 is actually profit, may be more or less depending on the provider )

Huh? I really don’t understand what you are trying to say here? What happened to the other 7 cents? Are they to cover fixed costs or something?

The remaining transaction fee that is not associated with profit goes to cover the networks built internally that connect with Visa/Mastercard.

So if my company charges me cost plus 8 cents, there is likely only a penny or two per transaction left to pay their payroll, rent ect?

Key players

Every Visa card transaction involves multiple parties. The following definitions will give you a good understanding of who’s who in the transaction process.

	Cardholder: an authorized Visa user.

	Issuer: a financial institution that issues Visa cards and maintains a contract with cardholders for repayment.

	Merchant: an authorized acceptor of Visa cards for the payment of goods and services.

	Acquirer: The acquirer (financial institution or merchant bank) that contracts with the merchant for Visa acceptance and enables Visa card payments from customers. (Profit)

	Visa: the consumer payment system, whose members are the financial institutions that issue Visa cards and/or sign merchants to accept Visa.  (Cost)

	VisaNet: an advanced network that acts as an Authorization service for Visa card transactions, as well as a Clearing and Settlement service to transfer payment information between parties. (Cost)

If you truly have cost ( with no markup) and 8 cents then yes that is the profit. Keep in mind that a processor has hundreds of thousands of merchants, it is cumulative and residual based. Some providers won’t even offer pass through as an option for merchants, so more profit is gleaned with the 3 or 4 tier pricing plans.