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What is interchange optimization?

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Interchange optimization is the process of lowing payment processing costs by reviewing how your business collects payments and incorporating an analysis of the countries that your customers are located in. This will enable a business to route transactions in an intelligent way to significantly reduce payment processing costs, primarily via reductions in interchange fees and the elimination of cross border fees.

A quick note on interchange and cross border fees.

In order to understand the content in this discussion you must understand what interchange is, and what cross border fees are. If you do not have a basic understanding of these concepts you should review the relevant content before proceeding.

Is FX optimization a part of an interchange optimization strategy?

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Some merchants incur significant FX fees when processing transactions in foreign currencies. This is always part of a multi-currency processing cost analysis.

Interchange optimization can and should include any and all ways to improve or optimize your processing costs. This includes an analysis of settlement currencies, and any exchange rate or FX costs that are incurred.

Most North American payment processors offer a limited number of settlement currencies. It's beyond the intended scope of this discussion to dig into FX and settlement currency analysis, but yes, this should be a part of any interchange optimization analysis.

To find out more about FX fees and settlement currencies visit our multi-currency processing whitepaper.

Does interchange optimization always lead to lower costs?

Interchange optimization is guaranteed to lead to lower costs but only if your business is incurring significant cross border fees or FX fees upon settlement. In many cases a payment processor could be treating you very well, but you'd still have relatively high fees if a lot of your customers are location in a foreign country.

To reiterate the point, the underlying interchange cost structure is not controlled by the processor.

The vast majority of the cost incurred for every transaction are the interchange fees, and are not controlled by the processor. If the interchange fees incurred are high then there is a cost savings opportunity. This is why you need to review and route transactions in an efficient way if you do a large number of international sales.

How much money can I expect to save?

This question is obviously unique to each business. However, it is reasonable to target a reduction in processing costs of 1%. Additionally, you will see an uptick in sales due to fewer declines from foreign card issuing banks. Last but not least, you will probably get fewer customer complaints from cross border processing issues.

Sometimes the cost savings can be far greater than 1%, depending on processing currencies, FX costs, location of customers and other criteria.

Why don't more businesses take advantage of interchange optimization?

There are three main reasons why more businesses don't optimize interchange costs.

  1. First, interchange optimization is a little-known strategy that few businesses are aware of.
  2. The second reason requires a technical understanding of acquiring (processing) rules. We will explore this in further detail below. For now, we can summarize by stating that not many credit card processors are able to provide this service. It takes a significant degree of expertise, and the processor itself must have the necessary licenses in order to support your business. Interchange optimization is simply not an option at many payment processors.
  3. The last reason involves the regulatory complexity. Many businesses won't meet the business presence requirements in order to establish domestic processing in a foreign territory. As described above, the payment processor is required to have acquiring licenses in all the regions that your business needs. However, your business must also have a footprint in those regions. In short, you must incorporate your business or have some sort of footprint in each region (country) in which you target a significant number of customers. Without this, you won't be able to contract with the processor to get a domestic merchant account in that region.

Interchange optimization is not impossibly complicated, but it's also not simple. Unless you have expertise in cross-border payments it's best to have an expert guide you through it, especially because the situation and the requirements will change for every business.

The basics of interchange optimization: acquiring regions, licenses & customer location

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In order to understand interchange optimization we must first explain that payment processors cannot just work with any merchant. They can only work with merchants in their home country.

Payment processors receive "acquiring licenses" from Visa and Mastercard. These licenses provide the ability for acquiring banks (which we'll call payment processors for simplicity) to issue merchant accounts to businesses in a particular region. Acquiring licenses are usually issued at a country level, for example for Canada or the USA, although in some regions it's a group of countries within a territory (such as European acquiring license).

For example, a processor with a US acquiring license can only work with businesses that have a business presence in the USA. ("Business presence" usually means some sort of form business entity like a corporation). If a company were to be based in the UK, it could not work with that US based processor. (Unless the merchant also had a US business presence). There are a few narrow exceptions to this rule, which are beyond the scope of this discussion. For the most part, you need to have a business presence in the same country that your payment processor is located in. If you want to work with a foreign payment processor in another country, you need to incorporate in that country to work with the foreign processor.

Can any payment processor provide interchange optimization services?

No, most processors and merchant account providers cannot provide interchange optimization services. The fact that acquiring licenses are limited to a specific country or region makes it immediately obvious that the vast majority of payment processors do not have an acquiring license in every different country around the world. No singular processor on earth can support every scenario that a merchant might require.

In fact, it's often the case that it's detrimental for a processor to even discuss or talk about interchange optimization, because it would encourage a merchant to seek an alternate payment processor for a portion of their sales. It would ultimately encourage merchants to seek local processing in the foreign country that the existing payment processor does not have an acquiring license for. This is contrary to the best interests of the processor, who will of course want to retain all of your business.

This is where working with Merchant-Accounts.ca is both unique and tremendously beneficial. We maintain a global network of bank partnerships specifically for this reason. This enables us to leverage different processing platforms in different regions to significantly reduce processing costs.

Is interchange optimization allowed?

Yes! Interchange optimization is not just allowed, it's encouraged because it leads to a better customer experience for the cardholder. It ensures that those customers will not be charged international transaction fees from their card issuing bank, and there will also be less declines from the issuer. It's a better experience for both the merchant and the cardholder.

What are the complications or downsides?

Some businesses will have virtually zero downsides because they already have a business presence in the necessary foreign countries.

If a business is only headquartered in a single country, and it doesn't have an existing business footprint in the region that it wants to establish domestic processing, then there is some work involved. There will be the initial cost of incorporating (usually not a big deal), but also the cost and effort involved to maintain that business entity, submit filings, possibly maintain an office space, etc. All of which are important considerations.

Tax considerations.

It's highly likely that there will be tax and filing requirements in each region where you establish a business presence in order to get domestic payment processing. If you wanted to process in GBP or EUR you'll need to have a business presence in Europe, and this will likely mean incorporating and filing tax returns in Europe. If you already have a business presence there anyway it's simple. If not, you must register a business there and maintain the entity (one that you might not otherwise need).

That's not to imply that it's not worth it. The savings, depending on trading volumes, can be tremendous. However, you also may affect your tax and regulatory requirements, which is something to keep in mind. Which takes us to the question of, is it worth it...

How much money do I need to process interchange optimization is worth doing?

It doesn't makes sense to undertake interchange optimization unless you are processing a significant volume of transactions in a foreign region. The answer to "when does it become worth it" will be different for each business, but it most often won't start to make sense at until you are processing at least $100,000 per month in sales in a foreign region.

Technical considerations.

Much of this discussion has explored the concepts and administrative requirements. However, there is a technical component as well. Even after expert analysis, foreign incorporation and establishing domestic processing in different countries, you still have to actually route the transactions properly. It doesn't just happen by magic.

Your website will need to identify the location of the customer (usually by the billing address entered on the payment page), and should then route according to the logic that your website has configured. For example:

  ->   If customer is American then route payment to processor A

  ->   If customer is Canadian then route payment to processor B

  ->   If customer is European then route payment to processor C

  ->   Otherwise route payment to processor D.

This may sound technically complicated to implement, but for most merchants it's not actually that hard. It depends on the shopping cart software platform that you are running, and your ability to customize it. If you have technical concerns reach out to our customer service team.

Summary

Interchange optimization is one of the more complicated topics in the world of payment processing. Merchant-Accounts.ca provides exceptional expertise in this area, with over 20 years of expertise in cross border payments.

It's most often only utilized by large merchants that already have a corporate presence in different countries around the world. However, any mid-sized and even some smaller businesses can benefit. In some cases the cost savings can be to the tune of hundreds of thousands of dollars.

If your business targets overseas customers it is an effort well worth taking a look at. Certainly, it's worth at least a discussion if your business is processing more than $100,000 per month in foreign sales.

Don't be shy about asking questions. Feel free to contact us to discuss your project.