When it comes to starting and running your business, there are many complicated and challenging components, including raising capital, streamlining processes, leveraging technology, recruiting and managing staff, accounting, customer service and marketing. None of it amounts to anything if you can’t successfully collect payment from your customers. And in our modern world, the most common means of consumption and payment processing is via credit card.
Most likely, you are so focused on building and running your business that you don’t even think about the processing rate your business pays for every dollar you currently earn. The problem is that so few business owners truly understand how this works. The cornerstone of comprehending this complicated issue is a concept called interchange.
What is interchange?
When you look at your monthly merchant statement, you are looking at the cost of your payment processing, as your hard-earned money is taken out of your business’s profits. Let’s call a spade a spade; interchange is dizzyingly complex. It would be a mistake to try to comprehend interchange and all its byzantine rates and variations. You don’t have to understand the mechanics of a washing machine to know how to do your laundry. What’s more important is having a general understanding of what interchange is, why it’s there, and how it affects your credit card processing expenses and, in a greater sense, your business profits.
Interchange is the discount processing rates charged by Visa and MasterCard. Much like death and taxes, it is absolutely guaranteed. There’s no way around it. And worst of all, it goes up every year. A “discount” rate that goes up every year? Usually, when it comes to taking your money, big powerful companies like to use rosy-sounding euphemisms. The interchange rates apply to every type of card your business will ever accept, and in every conceivable way that they are used, including check, credit, debit, business cards, et cetera.
Why does it matter to you?
One of the best ways to instantly increase your profits is to keep more of the money you make selling your products or services. By overpaying for your credit card processing, you are leaving money on the table. The problem is that many merchant services companies overcomplicate their rates, leaving business owners scratching their heads. Let’s be honest, the merchant services industry is often hated for this reason.
Interchange is complicated, and all processors charge a markup over interchange. The difference is how they mark it up. Since all processors pay the same for interchange, and there are over 300 different categories of interchange, processors have a myriad of ways to collect their fees on top of interchange fees. Some of the most common ways are listed below.
Understanding this important concept is critical to your business. While a few percent here and there being taken from your profits doesn’t sound like much, it can add up to huge sums of money. Much like the Grim Reaper’s scythe and Uncle Sam’s rake, interchange fees cannot be avoided. You can, however, avoid merchant services companies taking advantage of your confusion to capture your hard-earned money, a few percentage points at a time, for the life of your business.
This article was originally published at Forbes.com.