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Part I of this two-part blog explained the role of participants in the processing of an electronic payment transaction and the importance of data integrity and network security throughout a series of transmissions. Recall, interchange fees are set by card networks and applied to each transaction, and paid to card issuers (cardholder’s bank) by acquirers (merchant’s bank). In addition, a percentage of the fee is passed onto the merchant, thereby adding a markup amount. Normally an interchange fee is based on a base percentage of the transaction value (e.g. 4%) or as a percentage of value plus a fixed fee (e.g. 2% + $.02). Merchants in recent years have complained that interchange rates have climbed too high and account for too great a portion of transaction expenses; NAMA will continue working with card networks in an effort to lower these rates.

Interchange Fees

An interchange fee is a term used in the payment card industry to describe a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept electronic payments using card networks such as Visa and MasterCard for purchases.

Interchange fees vary by the card brand (Visa, MC, Amex, and Discover) and card type (standard, specialty, reward, etc.). For example, a premium credit card that offers rewards generally will have a higher interchange rate than a standard card (no rewards program to support). Transactions made with credit cards generally have higher interchange rates than those associated with debit cards. A debit card transaction that allows a PIN code normally has the lowest interchange fees. Transactions that are conducted remotely (i.e. not in person) such as by phone, online, or via snail mail, generally are subject to higher interchange rates since the transactions are not conducted in person (card not present). For example, assume a consumer making a $10 purchase with a credit card that yields $8 to the merchant. The remaining $2 is divided among the issuing bank (about $1.75 interchange rate), and payment to the card network ($0.18 defined as an assessment), with the remainder, paid to the merchant’s account provider ($0.07). If a credit card displays a Visa or MC logo, Visa of MC will get the $0.18. It is important to note that in general Visa's typical assessment is fixed at 0.0925% of the transaction value while MasterCard's typical assessment is fixed at 0.0950% of the transaction value. 

In other words, about 13% of interchange costs go to processing, which was the fee’s original purpose, while about 44% goes to paying for reward programs, and 35% covers the cost of funds and profit margins. Interchange fees are set collectively by the financial institutions which are stakeholders in Visa and MasterCard (both public companies). Many of these banks issue both credit and debit cards. JPMorgan Chase is the largest issuer of both.

Fee Components

Interchange fees have a complex pricing structure, which is based on:

  • card brand
  • type of credit or debit card
  • type and size of the accepting merchant
  • type of transaction (online or offline)

To accept credit or debit cards, merchants are required to pay standard fees called discount rates and transaction fees. A merchant discount rate (MDR) is a percentage of each transaction while the transaction fee is charged on a per-sale basis.

MDR typically varies between 1 to 3 percent. Discount rates vary based on the type of card payment. The following list contains card types in order from comparatively lowest average discount rate to highest rate: 

  • Debit Card
  • Diner’s Club Card
  • Visa and MasterCard
  • Discover Card
  • American Express Card

It is important to note that a debit card will only offer a lower rate when accepted as a debit card transaction (PIN-coded); when no PIN is required, the debit card is processed through the credit card network, thereby incurring a higher discount rate. 

Additional Fees

Setup fee: an upfront cost to create a merchant account and configure payment network hardware.

Batching fee: a small fee that may be added to the end-of-the-day batch Processing of transactions leading to settlement by an acquiring bank. 

Chargeback fee: fee assessed anytime a transaction is reversed. This fee is charged whether or not the reversal is successful. 

Authorization fee: fee assessed each time a transaction is sent to the acquiring bank for approval (or rejection). 

Statement fee: fee to cover the monthly statement of transactions; may be $10-15 a month.

Gateway fee: monthly fee for use of a payment gateway; estimated around $25 per month. 

Minimum monthly fee: This is a makeup fee for slow business. The fee is charged if total transaction fees are below a predetermined minimum. This fee is levied only against merchants with low-volume accounts.

Ten Steps to Implementation

1. Selection of a cashless hardware supplier - there are several cashless payment devices available to refreshment services companies, including standalone readers (contact and contactless) as well as combination readers (currency and card acceptance). An important concern is to ensure that the hardware strictly adheres to data security measures of the Payment Card Industry (PCI-compliant). 

2. Selection of a communication network – a telemetry provider should support a reliable and secure data transmission of both operational (sales/alerts) data and transactional (payment) data. Note: cashless data will be delivered to a cashless gateway for subsequent settlement and reconciliation. 

3. Selection of a cashless gateway provider -- a cashless gateway may be provided by the remote machine monitor provider, NAMA VDI open standard provider, or as a standalone offering. 

4. Selection of a transaction processing provider – an effective cashless transaction acquirer service should be selected based on competitive rates. 

5. Select the right location for implementation – the most effective location for cashless payments is likely based on traffic flow, average price, product mix, and annual revenues. Be mindful that cashless acceptance can be a competitive advantage in site bidding and negotiations.

6. Test signal strength of service -- a cashless transaction communication signal must be sufficient to ensure reliable and secure network connectivity (note: test for both signal strength and secure protection of transactional data).

7. Promote cashless acceptance - a highly visible and incentive-based marketing campaign for cashless payment awareness and acceptance is critical to success. Consumers that are aware of cashless acceptance are more likely to select it. 

8. Reconcile transaction reports -- a seamless accounting and settlement of cashless transactions to a merchant account is an important consideration; so too are tools that enable tracking transactions back to the source machine, kiosk, and/or payment media. 

9. Review management reports –carefully audit data from both real-time and batch mode activities (printed, online, or other formats) to ensure proper adherence to sound business practices and accurate financial reconciliation.

10. Consider acceptance upgrades – the implementation of related technology applications (e.g. contactless transactions, EMV, Apple and Android Pay, dynamic scheduling, and dynamic routing) based on successful data management of operational and transactional data.

Key Takeaways for Picking a Payment Processor: Part Two

  • Understanding interchange fees and related expenses are important to controlling electronic payment systems.
  • Recognizing that there are additional fees that can be applied to cashless payments provides additional insight for payment processor selection.
  • There are ten steps to proper cashless payment system implementation with the most critical elements focusing on transaction transmission efficiency, data integrity, and network security.


Our Address:
8700 Brookpark Rd,
Cleveland, OH 44129
Hours of Operation:
Mon. to Fri. 8am to 5pm

Why Choose American Vending Machines

American Vending Machines provides vending machines, vending equipment and vending machine parts. With more than 100 years of combined experience in the vending industry, the AVM staff is well positioned to be your "go-to" resource for anything related to vending. AVM goes beyond selling our inventory. We strive to make your business profitable!

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