Processing Credit Cards at Interchange

Everyone processing credit cards should understand that interchange is a fee that Visa and MasterCard (the Associations) impose on the retailers and is then collected by the card issuing banks. This fee compensates the issuers for the expenses resulting from immediately crediting the merchant payment account for the amount of the original sale. This payment is facilitated during the settlement of a deposited sale and is usually structured as a percentage component plus a flat per-item fee.

How Processing Credit Cards Began

The beginning of the interchange can be traced to the beginning of the payment card industry. The first bank card was introduced in 1960 by Bank of America by the name BankAmericard. BofA signed agreements with other regional banks giving them the right to "resell" this card in their geographic locations. Over time these banks formed the Card Association of Visa. Shortly afterwards, other banks looking to compete with Visa formed their own alternative association and offered a similar competing product known as MasterCharge, which later became MasterCard. Visa and MasterCard performing the following services:

• Set out rules and regulations governing their payment cards, including data security compliance.
• Processing credit cards through their networks (e.g. authorizations, sales, credits, etc.).
• Create marketing programs to support their payment brands.

When customers started using their credit cards to buy products for which the issuer would immediately compensate the retailer for the merchandise or services. However, there is a period of time (grace period) from the time the card issuer will receive payment for that transaction from the customer. Initially, interchange was designed to compensate the issuer for the interest lost through the grace period associated with bank cards.

Initially there was only one interchange rate for MasterCard and one for Visa. Over time the associations saw that the cost of doing business with different merchant types varied enormously due to chargebacks, fraud and processing of returns. As a result they began a segmentation process which eventually led both associations to begin offering different rates varying by business category.

Quite separately from the various interchange rates collected by the card issuers, the two Associations also established a "Dues and Assessment" fee that is passed through from the acquirers processing credit cards to the merchants. This fee helped to cover costs linked to the processing of transactions through the Visa and MasterCard payment networks and is charged as a small percentage of the sale's amount.