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Interchange Optimization Will Save Your Business Money

Interchange optimization is making sure that the interchange rates and fees that your business is paying as part of your overall credit card processing fees, is optimal for your type of business, and that you're avoiding downgrades and additional surcharges.

The problem that most businesses incur with ensuring optimal interchange is that it can be confusing without the proper assistance from your merchant services provider, and unfortunately, most merchant services providers have no incentive to assist you.

Who Needs Interchange Optimization?

All businesses can benefit from interchange optimization, but some industries are more likely to see downgrades or have more significant opportunities to reap the benefits of lower interchange rates. Business to business (B2B) companies, businesses that primarily sell to other businesses or government agencies, are more likely to suffer transaction downgrades that can be corrected which in turn will significantly lower their overall processing costs.

Learn more about a B2B merchant account.

Waste management and utility companies are another prime example of types of businesses that can significantly benefit from interchange optimization. They're eligible for the Utility interchange rates, which are flat per-transaction fees that are charged in place of the standard percentage interchange rates. This special pricing can reduce monthly processing costs by up to 70% and result in thousands of dollars in savings each year.

Learn more about a Utilities merchant account.

Interchange and Downgrades

Interchange is the part of your credit card processing fees that go directly back to the banks that issue the credit cards. The interchange fees make up roughly 80% of your overall monthly credit card processing costs. That is why interchange optimization is so crucial and can offer your business substantial savings each month.

Every time a credit card transaction is processed, it’s routed to an interchange “category” that has a rate and fee assigned. There are six hundred different interchange categories. Here is a link to the most interchange rate chart from Visa, MasterCard, and Discover.

Every transaction has what we call a “target” interchange category – the category that a transaction will be routed to unless something was done wrong. If everything goes correctly, the transaction will “qualify” for the target category and be charged the rate and fee associated with that target category. However, not every transaction qualifies for its target category. When that happens, the transaction “downgrades” to a more expensive category, costing your business a lot more money.

Interchange optimization is the process of limiting these downgrades to ensure that as many of your transactions as possible are hitting their “target” category, which in turn saves your business from paying additional expensive fees each month.

View the most current Interchange Rate chart from Visa, MasterCard and Discover.

Pricing Models and Interchange Optimization

Interchange optimization can save you money, but only if 1) you’re on a pricing model that allows the savings to be passed to you instead of your processor and 2) you’re able to see transaction-level interchange detail on your statement.

Your business can ONLY reap the savings from interchange optimization if you’re setup on a Cost-Plus pricing model, aka, interchange plus pricing. You WILL NOT receive any savings if you're setup on a Tiered Pricing or Bill-Back pricing model.

Cost-Plus Pricing

Cost-Plus Pricing, also commonly referred to as interchange plus or interchange pass-through pricing, is the most transparent pricing model and the one that offers the most benefit from interchange optimization. It’s the only pricing model that your merchant account should ever be setup on.

When using Cost-Plus Pricing, the processor charges you the actual cost of interchange and applies a separate minimal markup fee. This means that when your interchange costs are lower, you pay less. Interchange optimization helps correct downgrades that significantly raise your interchange costs, a crucial component when you’re on interchange plus pricing.

Learn more about Cost-Plus Pricing

Tiered Pricing

Tiered Pricing, also referred to as Bundled pricing, is a pricing model in which the processor makes up its own pricing tiers or categories, and then routes your transactions to those tiers. Typically, the processor will create three pricing tiers: “Qualified,” “Mid-Qualified,” and “Non-Qualified.” The processor will assign a percentage discount rate to each tier, and then route your transactions to those tiers at its discretion.

On most Tiered pricing statements, you will see little to no interchange detail. The nature of Tiered pricing makes it very difficult to optimize interchange. However, in this case, interchange optimization is putting the cart before the horse. It’s most important to first secure a competitive processing solution with transparent markups, which is not possible with Tiered pricing.

Learn more about Tiered Pricing

Bill-Back Pricing

With Bill-Back pricing, not only will you NOT see the savings from interchange optimization, you won’t even know if your transactions are downgrading. That is because the Bill-Back pricing model does not provide any interchange detail.

Bill-Back pricing works by applying one flat rate to all of your transactions. Sometimes there may be one rate for debit card transactions and a second rate for credit card transactions. However, for all transactions that do not "qualify" or meet the processors pricing guidelines, a bill-back surcharge fee is applied to those transactions. These bill-back surcharge fees can add 1-4% on top of the "qualified" discount rate.

The card types that will most commonly receive these additonal surcharge fees are Rewards cards, World cards, Signature cards, Business cards, Corporate cards, and all transactions that are not swiped.

Even if you could see which of your transactions are downgrading on a Bill-Back pricing model, correcting them would only result in a lower base cost that will not be passed to you, but instead kept by your processor as greater profit.

Learn more about Bill-Back Pricing

How Much Can I Save?

Downgrade categories like EIRF and STD can have rates as high as 2.95% for interchange alone before the card company, or your processor adds any other fees. Depending on the type of card being used and how many downgrades you have, the savings can be very significant.

For instance, B2B businesses can save up to 1.5% on their commercial card interchange fees with Level 2 and Level 3 Processing. That kind of rate reduction can easily translate into multiple thousands of dollars in savings annually

Interchange optimization can help ensure your business is paying as little as possible for credit card processing. To find out how much your business could be saving, please contact us today for a no-obligation FREE rate quote. We will complete and return your free quote within 24 hours.

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