%20(1)%20(1).jpg)
Virtual cards explained: Benefits & use cases for businesses
Interchange is a crucial part of the global card payments system. It allows everyone involved in the card transaction process to have a fair slice of the pie, and provides a stable and predictable source of revenue for card networks and issuing banks.
But there is no one interchange rate, and it can vary significantly depending on everything from what sector you operate in to where your business is based. But what do you actually need to know?
In this article, we’ll give you the interchange revenue definition, explain how it enables businesses to unlock new revenue, as well as what factors affect interchange fees, and tell you how you can maximize your interchange revenue.
Interchange enables businesses to accept credit card payments by connecting them with the credit card networks and the issuing banks. When a customer uses their credit card to purchase goods or services, you’re charged an interchange fee by your credit card network. This fee - roughly between 1% and 3% of the transaction value - compensates the card network, the issuing bank, and any other party involved in the transaction for the costs associated with processing and settling the payment.
Essentially, the interchange fee helps to ensure that everybody involved in a credit card transaction is fairly remunerated for their services. So, for example, if the interchange rate is 1.5%, on a $50 purchase, the customer might spend $48.50 on the product, as well as 75 cents on processing fees, and another 75 cents that’s distributed between the network (bank and other parties).
In 2011, the Durbin Amendment was enacted in the US, which capped the interchange fees charged to merchants who accept debit card payments using debit cards issued by any bank with more than $10 billion in assets. The aim was to reduce what were deemed to be disproportionate and unfair fees passed onto consumers.
Card networks set the interchange fee, typically a percentage of the transaction value, plus a fixed amount (around 30 cents). These interchange fees are small on their own, but cumulatively, they add up to billions of dollars that help cover the enormous costs of the vast infrastructure that makes card payments possible.
By charging for the services they provide, businesses have been able to unlock a massive source of funds - aka interchange revenue - which allows them to maintain and improve their services and tap into a wider customer base. A better card payment network means more card spend and, because they only need to carry a slim piece of plastic instead of wads of notes, credit card users tend to spend a lot more than cash-only customers. Additionally, the range of other financial services that are incorporated into the global card payments network system, including merchant services and payment processing solutions, help businesses save time and money.
As we explained earlier, the interchange rate is generally between about 1% and 3% of the value of the transaction. It’s hard to say exactly how to calculate interchange revenue, because it can change so much depending on your circumstances.
The factors that dictate interchange rate include:
As explained above, many factors influence the interchange rate, and most are outside your control. However, there are steps you can take to maximize your interchange revenue, including:
Read next: What is an issuer processor?
Want to start a card program and start earning interchange revenue? Checkout.com can help with that. Our new Issuing product allows you to unlock new revenue by optimizing your physical or virtual card payment experience.
This flexible, end-to-end solution gives you full control of your card program and, as it’s highly scalable, can grow alongside your business. We offer a complete stack of issuing, processing and card management capabilities so you can supercharge your new card product and start earning quickly.
Check out our issuing product or contact us to learn more.