A Guide for Associations and Nonprofits on Understanding Interchange Rate Changes
Interchange rate changes, which primarily involve the increase in processing fees for accepting credit card payments, have become a topic of concern for all types of organizations and retailers. To better understand the reasons behind these rate hikes, it is important to explore the key features, regulations, compliance requirements, and underlying factors that influence interchange rates. Notably, it is important to better understand how the interchange is operated so you can ask the right questions and make informed decisions about the best payment acceptance strategy for your organization.
Interchange Rate Overview
Interchange rates represent a portion of the transaction fees that organizations pay to card-issuing banks and payment networks when accepting credit card payments. These rates are intended to cover the costs associated with processing these transactions, managing risks, and providing benefits to both organizations and their supporters.
Key Features Influencing Interchange Rates
- Card Type: Different card types, such as credit, debit, or prepaid, have varying interchange rates based on factors like risk, rewards programs, and cardholder benefits. Key Takeaway – The card networks will override industry classification (i.e., charity rates) when higher cost cards are used to make a payment. Approximately 90% of credit cards issued today are tied to a Rewards program, which comes with higher rates to help pay for those customer rewards.
- Transaction Method: Interchange rates can differ depending on how a transaction is processed, whether it is done in person (card-present) or online (card-not-present), as well as the level of authentication (i.e., Debit PIN, CVV, Billing Zip, SMS)
- Industry Classification: Specific industries, including associations and nonprofits, may have unique interchange rates due to the nature of their operations. Nonprofits with the 501c3 IRS tax designation typically get access to lower processing rates, however, it largely depends on the card type.
Regulations and Compliance Requirements
- Card Network Rules: Payment card networks like Visa, Mastercard, and American Express establish interchange rate structures based on their rules and guidelines.
- Government Regulations: Regulatory bodies may impose regulations that affect interchange rates, such as caps or restrictions on certain transaction types.
- Data Security Standards: Compliance with Payment Card Industry Data Security Standard (PCI DSS) requirements is necessary to ensure the secure handling of cardholder data, which can influence interchange rates.
Factors Driving Interchange Rate Changes
- Operational Costs: Interchange rates account for the operational expenses incurred by card issuers, including customer support, fraud prevention, and technology investments.
- Risk Management: Card issuers consider the risk associated with different types of organizations, transaction volumes, and chargebacks when determining interchange rates.
- Rewards Programs: Interchange rates partly finance the rewards and loyalty programs offered by card issuers, providing benefits to cardholders.
Market Competition and Innovation
- Market Dynamics: Interchange rates may reflect the competition among payment networks and card issuers.
- Technological Advancements: Investments in innovative payment technologies and infrastructure can contribute to adjustments in interchange rates. The increasing number of alternative payment methods are slowly eroding profits of the card brands while giving customers and businesses more control of their processing costs.
Understanding the factors that influence interchange rate hikes empowers associations and nonprofits to navigate the payment processing landscape effectively. It is essential for these organizations to be aware of alternative payment options, such as ACH or digital wallets, that can help mitigate the costs associated with higher-priced credit cards. Moreover, the prevalence of rewards cards significantly impacts interchange rates, as they make up a large percentage of credit card usage. By staying informed about interchange rates and their underlying factors, organizations can make informed decisions, optimize their payment acceptance strategies, and ensure the financial sustainability of their mission-driven work.