Q: Can you explain credit card interchange plans and if they can save me money? I am currently being charged different rate tiers (such as Qualified, Mid-Qualified, and Non-Qualified rates) and my fees seem to keep going up each year. What is my best course of action?

A: Once upon a time, credit card processors created an innocent-sounding system called “bucketing” or tiered plans. That is what you are on currently. All credit card transactions were lumped into three or four neat little groups (buckets), and a corresponding rate was assigned to each. Today, the most common buckets are qualified (if you swipe a card), mid-qualified (if you key-in a card and perform AVS (Address Verification), and non-qualified transactions. (Downgrades for no AVS, not settling on a timely basis, or other penalties.)

So what determines the rates in these buckets? This is where you see how these plans work against you and why your fees are so high. Neither Visa nor MasterCard regulates the bucketing system—which leaves it to the processing company to decide what goes in and out of every bucket. These classifications can vary from one deal to the next, and the processors don’t even have to disclose these terms in the contract you sign. The mark-ups on these plans can be massive, yet since most retailers credit card statements read like hieroglyphics, they go undetected.

Most merchants think bucketed systems are their only option, but some, like you, have discovered the secret of the nation’s largest retailers: the interchange pass-through rate structure.

Interchange rates are the prime rates or wholesale cost that processors pay to the issuing banks (which issue the credit cards to the consumer) that work with Visa and MasterCard. To this basic cost, processors add their fees and administrative assessments to arrive at your final rate. So let’s say you swipe a standard Visa credit card in your store. With interchange pricing, your cost for that transaction is the true interchange rate, or wholesale cost, plus whatever mark-up and per-item fee the processor adds on. Unlike the bucketed system, there are no buckets with completely arbitrary pricing — just one rate schedule for all transactions based on actual Visa/MC costs.

In truth, bucketed systems also have a built-in incentive for processors to downgrade your transactions to mid-qualified and non-qualified, charge higher rates and increase margin. When a card doesn’t swipe correctly or the wrong information is entered to verify the transaction, you pay more and the processor makes more. With interchange pricing, the processor doesn’t profit when problems arise. Your processor acts like a partner, not an adversary, and is much more likely to let you know about inefficiencies in your processing system.

As you can see it’s not just the rate that matters, it is the credit card structure that matters even more. Your qualified rate may look low to you, and easy to spot on your statement, but it is the underlying markups on downgrades and other hidden fees that can cause your effective, true rates, to balloon.

There is another credit card plan called bill back that looks like interchange, (because they break out the different interchange categories) but are really a hybrid of the bucketed rates and are a major red flag for hidden fees. In these plans you are charged a targeted rate, similar to a qualified rate, and then are charged arbitrary surcharges based on different interchange categories that are processed. This plan is the most onerous in that it includes the most hidden fees, with statements that are impossible to comprehend.

There is only one true, pure interchange plan, and that is an interchange pass-through plan. As I have explained, retailers that are not on an interchange pricing structure are most likely paying much higher costs on payment processing.

At first glance, interchange can be a little confusing, but you don’t need to be an expert to benefit from it. Once you are educated on the benefits, you will understand why an interchange pass-through credit card structure is the most advantageous for your business.

If you would like a deeper education on interchange pass-through send me an email and I will send you an overview of Interchange 101.