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Interchange is one thing. The much bigger deal is net interchange. Here's why.

posted by Dan Heimann on Wednesday, September 8, 2021 in SHAZAM Blog

Interchange is one thing. Net interchange is the much bigger deal. Here's why.

When you’re a card issuer, net interchange is the true measure of the non-interest income earned on your debit card transactions. As a debit card network, we work to make sure the banks and credit unions we serve earn the highest possible level of net interchange.

Networks giveth, networks taketh away

As a card issuer, you earn interchange on each debit transaction your cardholders initiate. That’s good news. But you also pay network fees on each of those transactions. Each network, SHAZAM included, sets their own fee schedule that includes both the interchange you’ll get paid and the network fees you’ll pay on transactions routed by the merchant across that network.

Usually these global (Mastercard® or Visa®) and national (like SHAZAM) debit network fees are listed as pass-throughs on your monthly processor billing statement or they may be reported directly to you by the network. Truth is, you may not even see the fees because they’ve already been subtracted from the gross interchange, and you just see the net amount.

Interchange rates and network fees vary

Again, each network affiliated with your debit cards has its own set of interchange rates and fees. When your cardholder swipes, inserts or taps their card to buy something, the merchant (and its acquirer processor) chooses which network the transaction will travel over, typically based on lowest merchant cost. By the way, if you’ve chosen to affiliate your cards with more than two networks, you’ve just given merchants more choices which may lower your own interchange, but that’s for another day.

The rest of the story

Then, the next piece of the story is what network fees you’ll be charged on that transaction. Once we know this, we can figure out your net interchange.

An example

Transactions routed through network 1 earn higher gross interchange (A). Network 2 charges lower network fees (B). So, the net interchange earned from network 2 is higher (C).

$50 PURCHASE	NETWORK 1	NETWORK 2
Interchange rate	$0.15 + 1.05%	$0.15 + 1.00%
Gross interchange paid	(A) $0.675	$0.650
Payment network issuer switch fees	($0.060)	($0.015) (B)
Net interchange income to issuer	$0.615	(C) $0.635

Information presented in this table is for illustration purposes only and is not intended to reflect any network’s interchange or fees.

Don’t be fooled

Network 1 provides the better interchange rate, but with high network switch fees, you’ll lose out on this transaction. However, network 2 has a slightly smaller interchange rate, but with significantly less switch fees, the net interchange you’d be awarded is better with network 2.

You must understand both parts of the interchange equation. Next month, pull out your statement and do the math to get an accurate picture of the net interchange you’re earning.

Want to learn more about how your debit program impacts your bottom line?

If you’re a client, contact your SHAZAM regional director or client executive.

If you’re not yet affiliated with the SHAZAM Network and interested in knowing more about how SHAZAM optimizes interchange, contact a SHAZAM specialist.

About the Author

Dan Heimann is a leader in the payments industry responsible for the strategy and direction of the SHAZAM Payment Network. He has worked with financial institutions, merchants, processors, industry groups, payment innovators and debit networks around the globe to promote and implement innovative ... read entire bio

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