Interchange Optimization
Last Updated: 2025-12-18
Status: Complete
This document covers strategies for reducing interchange costs and optimizing transaction processing.
Level 2 and Level 3 Data
Passing additional transaction data qualifies for lower commercial card rates:
Data Levels Overview
| Data Level | Required Fields | Savings | Best For |
|---|---|---|---|
| Level 1 | Basic card data | Standard rates | Consumer transactions |
| Level 2 | + Tax amount, customer code, merchant postal code | 0.10-0.25% lower | B2B, government |
| Level 3 | + Line item detail, product codes, quantities | 0.30-0.50% lower | Large B2B, corporate |
Level 1 Data (Standard)
Basic transaction data required for all transactions:
┌───────────────────────────────────────────────────────────────── ───┐
│ LEVEL 1 DATA │
├────────────────────────────────────────────────────────────────────┤
│ │
│ • Merchant name and location │
│ • Transaction amount │
│ • Transaction date/time │
│ • Card number (PAN) │
│ • Card expiration date │
│ • Authorization code │
│ │
└────────────────────────────────────────────── ──────────────────────┘
Level 2 Data (Enhanced)
Additional data for B2B and government transactions:
┌────────────────────────────────────────────────────────────────────┐
│ LEVEL 2 DATA │
├────────────────────────────────────────────────────────────────────┤
│ │
│ Level 1 data PLUS: │
│ │
│ • Tax amount │
│ • Customer code / Purchase order number │
│ • Merchant postal/ZIP code │
│ • Merchant tax ID │
│ • Duty amount (if applicable) │
│ • Freight/shipping amount │
│ • Destination postal code │
│ │
└────────────────────────────────────────────────────────────────────┘
Typical savings: 0.10% - 0.25% on commercial cards
Level 3 Data (Full Line-Item Detail)
Comprehensive data for large corporate purchases:
┌────────────────────────────────────────────────────────────────────┐
│ LEVEL 3 DATA │
├────────────────────────────────────────────────────────────────────┤
│ │
│ Level 2 data PLUS (for each line item): │
│ │
│ • Item description │
│ • Product code / SKU │
│ • Quantity │
│ • Unit of measure │
│ • Unit price │
│ • Extended item amount │
│ • Item tax rate │
│ • Item tax amount │
│ • Discount amount (if applicable) │
│ • Commodity code │
│ │
└────────────────────────────────────────────────────────────────────┘
Typical savings: 0.30% - 0.50% on commercial cards
Example: Interchange Savings with Level 2/3 Data
Scenario: $10,000 corporate card transaction
| Data Level | Interchange Rate | Fee Amount | Annual Savings (100 txns) |
|---|---|---|---|
| Level 1 | 2.50% | $250 | $25,000 |
| Level 2 | 2.25% | $225 | $22,500 ($2,500 saved) |
| Level 3 | 2.00% | $200 | $20,000 ($5,000 saved) |
For B2B merchants processing significant corporate card volume, Level 3 data can save thousands annually.
Other Optimization Tactics
1. AVS/CVV Verification
Address Verification Service (AVS) and Card Verification Value (CVV) improve qualification:
| Verification | Impact | Savings |
|---|---|---|
| AVS match | Qualifies for better CNP rates | 0.05% - 0.15% |
| CVV match | Reduces fraud, improves rates | 0.05% - 0.10% |
| Both match | Best CNP qualification | 0.10% - 0.25% |
Example:
- Standard e-commerce: 1.95% + $0.10
- With AVS/CVV match: 1.80% + $0.10
2. Batch Timing
Close batches within 24 hours to avoid downgrades:
┌────────────────────────────────────────────────────────────────────┐
│ BATCH TIMING IMPACT │
├────────────────────────────────────────────────────────────────────┤
│ │
│ ✓ Settle within 24 hours: Qualified rate (1.43% + $0.05) │
│ │
│ ⚠ Settle 24-72 hours: Mid-qualified (1.95% + $0.10) │
│ │
│ ✗ Settle >72 hours: Non-qualified (2.30% + $0.10) │
│ │
└────────────────────────────────────────────────────────────────────┘
Best practice: Batch daily before cutoff time (typically 5-6 PM EST)
3. Correct Merchant Category Code (MCC)
Ensure your MCC matches your actual business:
| MCC | Category | Typical Interchange |
|---|---|---|
| 5411 | Grocery stores | 1.15% + $0.05 (lower) |
| 5541 | Service stations | 1.19% + $0.05 (lower) |
| 5812 | Restaurants | 1.43% + $0.05 |
| 5999 | Miscellaneous retail | 1.80% + $0.10 (higher) |
Impact: Using incorrect MCC can result in higher interchange or downgrade to standard rates.
4. Address Data for CNP Transactions
For card-not-present transactions, providing complete address data helps:
| Data Provided | Qualification |
|---|---|
| No AVS | Standard/non-qualified |
| Partial AVS | Mid-qualified |
| Full AVS match | Qualified for best CNP rate |
5. Settle Promptly After Authorization
Delayed settlement can cause downgrades:
Authorization → Capture → Settlement
Best practice timeline:
• Authorize at point of sale
• Capture within same day
• Batch before daily cutoff
• Settle T+1
Avoid:
• Authorizing days before capture (hotels: acceptable exception)
• Batching days after authorization
• Missing batch cutoff times
Cross-Border Transactions
International transactions involve additional fees:
Cross-Border Fee Structure
┌───────────────────────────────────── ────────────────────────────────────────┐
│ CROSS-BORDER TRANSACTION FEES │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ Standard domestic fees: ~2.5% │
│ │
│ PLUS: │
│ ┌────────────────────────────────────────────────────────────────────────┐ │
│ │ Currency conversion fee: 1.0% - 3.0% │ │
│ │ Cross-border assessment: 0.40% - 1.00% │ │
│ │ International service fee: 0.20% - 0.40% │ │
│ └────────────────────────────────────────────────────────────────────────┘ │
│ │
│ TOTAL for cross-border: 4.0% - 7.0% │
│ │
│ Note: Rates vary by network, card type, and currency pair │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Cross-Border Fee Components
| Fee Type | Rate | Description |
|---|---|---|
| Visa International Service Assessment | 0.40% - 1.00% | Varies by region and card type |
| Mastercard Cross-Border Assessment | 0.45% - 1.00% | Higher for intra-Europe transactions |
| Currency Conversion Fee | 1.0% - 3.0% | Processor's FX markup |
| International Acquirer Fee | 0.20% - 0.50% | Additional acquirer markup |
Cross-Border Optimization Strategies
- Multi-currency pricing: Present prices in customer's currency
- Local acquiring: Establish local merchant accounts in high-volume markets
- Dynamic currency conversion (DCC): Offer choice of currencies (but watch FX markups)
- Currency hedging: Lock in FX rates for predictable costs
Additional Cross-Border Considerations
Different interchange schedules by region:
- EU: Capped at 0.2% (debit) and 0.3% (credit) since 2015
- Australia: Similar caps implemented
- US: No caps (hence higher fees)
Regulatory differences:
- Strong Customer Authentication (SCA) in EU
- 3D Secure requirements
- Data localization laws (GDPR, etc.)
Settlement currency:
- Settlement in local currency vs USD
- FX exposure and timing
- Multi-currency accounting
Optimization Checklist
Use this checklist to maximize interchange qualification:
For All Merchants
- Close batches within 24 hours of authorization
- Use correct MCC for your business type
- Implement AVS/CVV verification for CNP transactions
- Capture transactions promptly after authorization
- Ensure all required transaction data is present
- Monitor downgrades and investigate causes
- Review interchange statements monthly
For B2B Merchants
- Implement Level 2 data capture (tax, PO number, etc.)
- Implement Level 3 data for large corporate sales
- Train staff on importance of collecting customer codes
- Validate Level 2/3 data submission in test environment
- Track savings from enhanced data vs standard processing
For International Merchants
- Compare local acquiring vs cross-border fees
- Evaluate multi-currency pricing options
- Understand regional interchange differences
- Comply with regional regulations (SCA, etc.)
- Monitor FX rates and conversion fees
For PayFacs
- Educate sub-merchants on optimization strategies
- Provide Level 2/3 data APIs in platform
- Monitor sub-merchant downgrades
- Consider interchange optimization as value-add service
- Track portfolio-wide qualification rates
Common Optimization Mistakes
Mistake 1: Not Passing Level 2/3 Data for B2B
Impact: Leaving 0.30% - 0.50% savings on the table
Solution: Implement Level 2/3 data capture for corporate customers
Mistake 2: Late Batching
Impact: Downgrades from 1.43% to 2.30% (0.87% penalty)
Solution: Automate batch closing before daily cutoff
Mistake 3: Incorrect MCC
Impact: Higher interchange or non-qualification
Solution: Verify MCC matches actual business activity
Mistake 4: Missing AVS/CVV for CNP
Impact: 0.10% - 0.25% higher rates, increased fraud
Solution: Require AVS/CVV for all card-not-present transactions
Mistake 5: Delayed Capture
Impact: Downgrades and possible authorization expiration
Solution: Capture within same business day when possible
Key Takeaways
-
Level 2/3 data saves money: B2B merchants can save 0.30% - 0.50% with full line-item data
-
Batch timing is critical: Late batching causes costly downgrades
-
AVS/CVV reduces costs: Verification improves CNP qualification and reduces fraud
-
Cross-border is expensive: International fees can reach 4% - 7% total
-
MCC matters: Correct category code ensures proper interchange
-
Prompt settlement helps: Delay between auth and settlement causes downgrades
-
Monitor downgrades: Regular review identifies optimization opportunities
Related Topics
Four-Party Model Series:
- Four-Party Model Overview - Core concepts and party roles
- Transaction Flows - Authorization, capture, settlement
- Fee Breakdown - Where fees go and why
- PayFac Position - How PayFacs fit into the model
- Self-Assessment Quiz - Test your understanding
Deep Dives:
- Debit Networks & Routing - Least-cost routing optimization
- Card Network Role - Network rules and compliance
References
Official Documentation
Continue reading: PayFac Position in the Model