The answer is Interchange Optimization (ICO). Before we can discuss ICO, we need to have a good understanding of what the interchange is.
Interchange fees are collected by the card-issuing banks that provide Visa, Mastercard, Discover and American Express cards. These fees are based on the “risk” associated with the transaction (card present versus card not present) and the “rewards” (how rich is the rewards program) since someone (i.e. the merchant) has to pay for all the “free” stuff. In addition, they are reviewed twice each year (in April and October) and then adjusted accordingly. In some cases, the interchange can represent more than 90% of a merchant’s bill in a given month.
Some of you may have heard that in early 2020, Visa announced its largest rate increase in a decade. The increase was scheduled to go into effect in April but has since been moved to 2021 because of the COVID-19 pandemic. This particular increase was predominately going to impact “card not present” transactions and, in some cases, the new rates represented a 65% increase. The good news is if your company is using the right technology, you might be able to avoid these increases altogether.
It’s important to note that each card brand has its own interchange rates. In total, there are hundreds of interchange categories. We always tell businesses, the one piece that is out of everyone’s control is what types of cards your customers use to pay. At the end of the day, they are either approved or declined and you move on.
How much will your company pay for those transactions? It depends on how much information you send with the trans-action. Are you using technology that only sends minimal data that gives you Level 1 rates (the highest rates possible) or are you using a platform that will self-populate additional fields for Level 2/3 data? The Level 2/3 data can represent a 40% decrease on certain transactions; as of this article.
The following chart provides details on the data required to qualify for these different levels.
| Data Type |
Level I |
Level II |
Level III |
| Merchant Name |
Y |
Y |
Y |
| Transaction Amount (Total) |
Y |
Y |
Y |
| Date |
Y |
Y |
Y |
| Tax Amount |
|
Y |
Y |
| Customer Code |
|
Y |
Y |
| Merchant Postal Code |
|
Y |
Y |
| Tax Identification |
|
Y |
Y |
| Merchant Minority Code |
|
Y |
Y |
| Merchant State Code |
|
Y |
Y |
| Ship from Postal Code |
|
|
Y |
| Destination Postal Code |
|
|
Y |
| Invoice |
|
|
Y |
| Order Number |
|
|
Y |
| Item Product Code |
|
|
Y |
| Item Commodity Code |
|
|
Y |
| Item Description |
|
|
Y |
| Item Quantity |
|
|
Y |
| Item Unity of Measure |
|
|
Y |
| Item Extended Amount |
|
|
Y |
| Freight Amount |
|
|
Y |
| Duty Amount |
|
|
Y |
So, the million-dollar question is how can you easily achieve Level 2/3 rates on all applicable transactions?
To clarify, data levels (Level 2 and 3) refer to the specific transaction information the merchant is required to provide with a commercial card transaction in order to receive the most favorable rate. A common misconception is that the card presented is a Level 2 card or a Level 3 card. There is no such thing as a Level 2 or a Level 3 card.
Whether a commercial card transaction is eligible to clear at a Level 2 or Level 3 interchange plan, is determined by 1) the type of commercial card and 2) the information captured by the merchant and transmitted, via point-of-sale (POS) device, for processing.
As you might imagine, no one is going to manually enter all the additional fi elds required to secure these lower rates. This is where technology comes in to play to ensure companies are maximizing their margins on the interchange portion of their bill.
Within the 16-digit credit card number, there is a nine-digit Bank Identifier Number (BIN) that identifies all types of credit cards. If your company is using the right technology platform, the technology can identify the transactions that will benefit from ICO. The platform will self-populate the additional information, saving companies thousands of dollars, if not tens of thousands of dollars, in annual processing fees.
And the best part of this scenario, is that Mastercard and Visa get less of your money! In my 23+ year career in the merchant services space, I have never found a business that had an issue with that.
When this happens, you have achieved ICO and your company has maximized its margins on the interchange portion of your bill. To reiterate, this is very important because the interchange fees will represent 80%+ of your overall bill (assuming you are on a true interchange and pricing program).
Sadly, there are few platforms in the industries that can provide companies ICO on all applicable transactions.
The good news is, everyone who is reading this article can obtain ICO if they utilize our proprietary platform called CardPointe. Not only does this platform provide businesses ICO, it also protects your customers’ sensitive data with the highest level of security possible on a credit card transaction. This is referred to as point-to-point encryption (P2PE).
As an approved member service provider for the IMARK Group, we are here to help every member lower their cost to accept credit cards. We are pro-merchant and have been since the inception of CardConnect AIP (July 2008). We have the expertise and access to some of the best technology in the industry to help our clients lower their overall cost by 25% to 40% when accepting credit cards.
To summarize, implementing ICO should be considered as a best practice to fi nd the ideal interchange rates for your company. This will maximize your business’ credit card processing savings and has proven to be the best way to keep more money in your operating account and less in Mastercard’s and Visa’s.
Whether you decide to use our technology or another processor’s, the key is obtaining ICO if you want to maximize your margins when accepting credit cards as a form of payment.
