Interchange Pass Through: What it is & why you need to know

I've written a few articles on the important subject of interchange and it's slow but steady rise in popularity as the preferred merchant account pricing structure. The demand for interchange pass through pricing has been fueled by the rapid spread of information online that has led to increased merchant awareness. Interchange is a complex topic, but simply understanding the basics of how it affects the credit card processing fees that merchants pay is vital knowledge for any business owner or manager.

Interchange pass through is a term used in the bankcard industry to describe a certain type of pricing applied to a merchant account. The term sounds a lot more intimidating than it actually is once you understand the fundamentals behind.

Everything in the credit card processing world revolves around something called interchange. Basically, interchange represents a percentage of a credit card transaction that an acquiring bank pays to an issuing bank when a cardholder makes a purchase from a merchant. That's all well and good if you know what an acquiring bank, issuing bank and the like are, and truth be told, most merchants don't. To understand interchange, you need to know how a basic credit card transaction happens and the players involved – so here goes.

When you're approved for a credit card an issuing bank gives you a line of credit that you can access by using the card. Think of the issuing bank as the cardholder's bank.

When a business applies for a merchant account, they're also asking for a line of credit but in a slightly different way. When businesses apply for a merchant account they're essentially asking a bank to take on the risk associated with their acceptance of credit cards. This bank is called an acquiring bank. Think of an acquiring bank as the merchant's bank.

A helpful way to differentiate the two types of banks is to think of them for what they are. An issuing bank issues credit cards to cardholders so they can make purchases. Merchants use an acquiring bank to open a merchant account so they can accept or acquire credit card transactions.

The common element between an issuing and acquiring bank is the cardholder, and that's also where interchange pass through enters the mix. Interchange is a laundry list of different percentage and transaction fees that an issuing bank charges an acquiring bank to process one of their cardholder's credit cards. A common misconception is that Visa and MasterCard profit from interchange, which is not the case.

There are hundreds of different interchange fees, but that's not vital knowledge for the average merchant. What is important is to understand that interchange is essentially the wholesale rate that banks charge each other in order to process a credit card transaction. In order to pay the lowest fees when processing credit cards, a merchant's goal is to pay as close to interchange as possible.

A merchant account that uses an interchange pass through pricing structure applies processing fees by adding a small percentage to the actual interchange (wholesale) rate for every transaction. This method is referred to as interchange plus pricing. This ensures that a merchant only pays the wholesale rate in addition to a small mark-up that goes to their merchant service provider.

While interchange pass through is the least expensive type of merchant account pricing, it's also the hardest to get. Many providers are still holding out and offering only tiered pricing while others are only offering interchange pass through pricing to established merchants that can prove a certain processing volume. Online comparisons sites like CardFellow are a good resource for merchants looking for interchange pricing but aren't currently processing.