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Street SmartsSM:
Interchange Insights - Part 1

By Michael Nardy

On GS Online's MLS Forum, NAOPP asked merchant level salespeople (MLSs) to pose questions they had about interchange. Forum members inquired about interchange issues such as qualifying Level-II Data, tracking down paperwork for the card Associations' special programs and clarifying Emerging Market interchange categories, all of which this article will address.

Qualifying All Transactions?

Visa U.S.A. and MasterCard International set up a series of interchange reimbursement categories that "pay back" to card issuers every time a card is swiped. To better understand these categories, think of them as qualified transactions. There are no mids, nons, downgrades or other billing schemes; rather, there is only each category and its rules and interchange rate.

What does this mean? Simply put, on every transaction qualification rules will dictate at which rate and category that card will qualify. For example, when a cardholder swipes a Visa-branded check card at the POS, the magnetic stripe data are sent, and the merchant obtains a signature. That transaction may qualify at the CPS/Retail Check interchange category and rate (1.03% + $0.15).

What happens if that card is, for example, a Visa Business card? It won't qualify at the CPS/Retail Check interchange category. Instead, it will qualify at a Commercial Standard or Commercial Electronic category. Does this mean that the transaction is inferior to the check card sale described earlier? No. However, because that card is a business card the qualification rules will place it in a different category.

On the processor's side of the business, when reconciling interchange and setting mid and non buckets, a typical statement using three- , four- or five-tier pricing is generated for the merchant. Imagine a statement that removes all processor-defined buckets. This leaves you with an interchange pass-through program, which "passes through" each qualified interchange category and corresponding pricing directly to merchants.

Level-II Data

MLS Forum user Imsrick inquired about Level-II Data. Imsrick wanted to know how collecting these data affects the qualification of these transactions. I illustrated how processors define the qualification buckets. My way of explaining interchange is that all transactions qualify; however, they may qualify in different interchange categories based on data transmitted through the authorization record.

Because Level-II Data is not widely used this is an oft-misunderstood part of the interchange guidelines.We know that all transactions qualify into a certain interchange category. A certain transaction may qualify at an interchange category with a lower rate if additional data are sent through with the authorization record.

If four items (magnetic stripe data, card present indicator, one unique authorization and a signature) are required to qualify a transaction into the Commercial Standard category, for example, then adding additional data in the authorization record will cause that same transaction to qualify in a different category, a category with more stringent data transfer requirements. This is essentially Level-II Data.

Adding Level-II Data to a merchant's processing solution enables that merchant to process business card transactions that otherwise would have qualified at Commercial Standard or Commercial Electronic in an interchange category of Business Level II, Corporate Level II or Corporate Data Rate II, for example.

What is required for Level-II Data to be effective? Instead of transmitting only the four items of transaction data shown above in the authorization record, a merchant would also transmit the tax amount and customer code. The processor would transfer the tax ID number and merchant type through the authorization record.

The result would be a corporate/business card sale qualifying at a different (ideally lower) interchange category. Imagine interchange as a system of increasingly better pricing. As the amount of data transferred increase, the more data exported with an authorization record result in a better (and more accurate) interchange category at which a transaction will qualify.

Special Programs - Where to Get the Paperwork

MLS Forum member Ccguy inquired about where to obtain paperwork required for several special card Association programs, including supermarket applications, hotel programs and quick service chargeback addendums. Some of these programs include:

  • Supermarket Registration
  • MasterCard Service Industries Incentive Program (SIIP)
  • MasterCard Travel Industries Premier Service Program (TIPP)
  • Visa ExpressPay and MasterCard QuickPay
  • Utility and Emerging Markets Registration (based on merchant category code (MCC)/standard industry code)
  • MasterCard Repeat Pay Program

When requesting paperwork for these programs from ISO partners, many MLSs have expressed similar complaints: ISOs cannot find the paperwork or they don't have it or don't know about it. Many of the largest ISOs either don't have this information or know little about the various Visa and MasterCard programs and their standard interchange structure. ISOs should provide the paperwork.

Supermarket registration involves two different programs. One is MasterCard's Supermarket Acceptance Development Program; the other is Visa's Supermarket Incentive Program Merchant Certification.

Both require completing a form. Each form must be sent to the acquirer for review and approval of each program. If the ISO does not have paperwork for these programs, MLSs can obtain it by contacting the acquirer. Or, they can search for it on Visa's or MasterCard's Web site.

Emerging Markets

"Visa's Emerging Markets and MasterCard's Public Sector categories seem to be a virtual unknown that could use a lot of explanation," MLS Forum member SCStevens wrote. "Which industries qualify for these programs and how? Are they permitted to surcharge? Under what specific conditions are they permitted to surcharge or charge a convenience fee? How are MO/TO transactions treated in these categories?" Emerging Markets is certainly a confusing sector of the interchange categories. To qualify as an Emerging Market transaction, the MCC must be one of the following:

  • 4899 - Cable
  • 4900 - Utilities
  • 5960 - Direct marketing/Insurance
  • 6300 - Direct marketing/Insurance
  • 9211 - Court Costs
  • 9222 - Fines
  • 9223 - Bail and Bond Payments
  • 9311 - Tax Payments
  • 9399 - Government Services
  • 8211 - Schools/Colleges
  • 8220 - Schools/Colleges
  • 8299 - Schools/Colleges

Under the Visa interchange rate structure, the Emerging Market interchange rate falls under the CPS/Retail 2 and CPS/Retail 2 Debit categories. MasterCard will only qualify these transactions for check cards under the Debit Emerging Market category. MasterCard has several credit categories but breaks them down as Service Industries for MCCs 4812, 4814, 4899, 4900, 5960 and 6300 (1.15% + $0.05). It also breaks them down as Public Sector for MCCs 9211, 9222, 9223, 9311 or 9399 (1.55% + $0.10).

Under MasterCard's Service Industries emerging market category, the following rules apply:

  • The transaction must occur in a non-face-to-face environment, and the magnetic stripe must not be present. In the authorization request, the POS data indicator must be "4 - Cardholder Not Present/Recurring Transaction."

  • The card acceptor and acquirer must participate in the MasterCard Repeat Pay program, and the card acceptor must qualify and register with MasterCard to participate in the Service Industries Program.

MasterCard's Public Sector interchange rate category applies to credit transactions; otherwise, the Debit Emerging Market would be hit. Additionally, there is a 10% allowance for these transactions under the MasterCard interchange categories, and the transactions must be settled within three days.

Michael Nardy is Chief Executive Officer of Electronic Payments Inc. (EPI), a private transaction and payment processing company. He is also a founding sponsor of NAOPP. For more information, e-mail him at or visit .

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