What is Interchange Differential?
Since early 2011, nearly every payment processor in Canada has begun to utilize interchange differential as the primary pricing method. The story is similar for many payment processors in the US. Unfortunately for merchants, interchange differential pricing makes monthly statements hard to decipher and expensive. Below is a breakdown of how it works:
Above is an example of Interchange differential using a Visa Infinite "premium" credit card. The examples uses a common quote of "1.59% qualified" and "0.30% non-qualified". Unlike our competitors, we proudly offer Cost+ Pricing to all of our merchants. We charge a low, single markup on your total transaction, with no "qualified" or "non-qualified" rates.
First the processor will quote you a "qualified rate" such as 1.59%. However, this rate only applies to a very specific type of Visa and MasterCard (consumer cards) that have been used as part of a Chip and PIN transaction for card present transactions. All other credit card types including infinite cards, premium cards and corporate cards - as well as credit cards that are manually keyed or processed online do not "qualify" for this rate.
What many merchants find when they begin processing (and when the monthly statement comes in) is that the majority of processed cards do not fall under the qualified rate. This can quickly add up to significant, unpredictable monthly payment processing fees.
The Non-Qualified Rate
The processor will then quote you a "non-qualified rate" for all other credit cards such as 0.30%. When you receive your monthly statement, you'll often find that the majority of credit cards you process fall under this rate. Under the interchange differential model, this is only the first of two fees you'll pay for processing a card that isn't qualified.
The Card-Brand Fee
Every credit card transaction has a card-brand fee. This is the amount of funds paid to the credit card company for each transaction. The earlier qualified rate does not include Visa and MasterCard's card-brand fees. While the true current costs of these are 0.0904% and 0.0870% respectively, most processors will mark these up to 0.12%, so you are paying an average extra 0.03% per transaction.
The Interchange Differential Fee
On top of the "non-qualified rate" the processor will also make you pay the difference in cost between a consumer card and your non-qualified card. For example, a Visa consumer card costs 1.42%, while an infinite card will cost 1.61%. This means that you will also have to pay an interchange differential fee of 0.19%, even though you already paid a penalty through the "non-qualified rate".
This is the piece of the puzzle that makes interchange differential pricing so expensive, as merchants are getting double dipped on the transaction.