Everything Independent ATM Operators and Deployers Need to Know about Interchange Fees

Interchange fees are kind of an ATM industry mystery for most independent ATM operators. Some first hear about it from Facebook groups or other online sources. However, it is important to know what they are, where they come from, and where they go. 

ATM interchange fees, also known as interbank or network fees, are complex transactional fees. They are part of the financial exchange that occurs when a debit or credit card is used at an ATM machine. These fees compensate the ATM owner for providing users with access to their bank account. 

But, who actually benefits from interchange fees? Here is everything independent ATM deployers (IADs) need to know:

Where Do Interchange Fees Come From?

First, there are a couple of important terms you need to be familiar with: acquiring bank and issuing bank. 

The acquiring bank is the bank where the ATM transaction is conducted. The acquiring bank, also known as the acquiring institution or acquirer, is the bank or financial institution that establishes and maintains the merchant accounts for businesses that accept card payments. In the context of ATM transactions, the acquiring bank is the bank that owns the ATM or has a partnership with the ATM owner to process transactions.

The issuing bank is the bank that issued the card used in the transaction. The interchange fee, therefore, covers the costs associated with conducting the transaction, like network fees, processing, and maintenance.

As an IAD, you do not have access to ATM networks. You cannot simply purchase an ATM machine, connect it to power, and start dispensing money and collecting surcharge fee revenue. This is because you still need some way for your ATM to offer a line of communication between the acquiring bank and the issuing bank. That is why you must work with an ATM processing company or ISO.

Independent Sales Organizations (ISOs) are third-party agents who contract with banks and merchants to provide services such as card processing and network connectivity. This is how your ATM verifies that a user has the available balance necessary to facilitate a particular withdrawal.

In short, interchange fees are charged by the card-issuing bank and paid to the network the issuing bank belongs to as a fee for routing and processing the transaction. Some of the fees are shared with the ATM processing company as compensation. 

How Does It Work?

When a cardholder uses their debit or credit card at an ATM to withdraw cash or perform a transaction, it involves multiple parties:

Communicating with the Network 

First, the ATM communicates with the processing company, which routes the transaction to the designated network based on the cardholder’s bank (the issuing bank) to verify the transaction and obtain authorization. 

The issuing bank authorizes the transaction, which tells the network that the ATM user has the funds in their account to cover the amount requested. If approved, the ATM dispenses the funds. Once daily, the ATM settles all the transactions. This means the funds are transferred (settled) from the cardholder’s account to the ATM owner’s account the next business day.

Settlement

The cardholder’s bank pays the ATM network an interchange fee as part of the settlement process. This fee compensates the ATM providers (the processor, the networks, and any other party involved in the transaction) for providing access to their ATM network and infrastructure. The interchange fee is also debited from the ATM user’s account unless their bank waives some of them. (Many internet banks and accounts with high balances offer this benefit). 

Networks and ATM processors typically deduct interchange fees and other associated costs if you’re an ISO, sub-ISO, or an IAD on a flat buy rate. The remaining funds are transferred to the ATM owner’s bank account (e.g. a retailer, an ISO, sub-ISO, or an IAD). The interchange fee represents a portion of the revenue earned by the ATM owner for facilitating the transaction.

Who Charges and Who Pays

Card networks such as Cirrus, NYCE, Plus, Pulse, and STAR facilitate these transactions and set the rules and fee structures governing interchange fees. The interchange fee is ultimately paid by the cardholder, and the card networks play a significant role in regulating and standardizing these fees across their networks.

This is why it is typically cheaper for cardholders to use in-network ATMs. Their banks already have access to their account information and do not need to pay to route transactions through a third party. As an IAD, however, your ATM machine will always be out-of-network for its users. 

Basically, the user pays the fee their bank is charged by the network and the ATM processing company to enable them to perform the withdrawal or any other transaction on an out-of-network ATM.

What Are the Networks Involved?

Cirrus, NYCE, Plus, Pulse, and STAR are ATM and payment networks that facilitate the electronic movement of money and information. Each has its own fee structure and method for managing transactions:

Cirrus is a global ATM network owned by MasterCard that allows cash withdrawals and other banking services. Cirrus charges interchange fees, including network fees, which are distributed based on the agreements MasterCard has with its member banks.

New York Currency Exchange (NYCE) is an electronic funds transfer (EFT) network in the United States that facilitates ATM transactions and point-of-sale (POS) debit card payments. It is owned by Fidelity National Information Services (FIS), a global provider of financial services technology. NYCE is a prominent player in the electronic payments industry, particularly in the realm of ATM transactions because of the convenience of its extensive network and connectivity. 

Plus is a global ATM network operated by Visa. It functions similarly to Cirrus, facilitating ATM transactions worldwide with fees structured around interchange and network operation costs.

PULSE, an interbank EFT network, is owned by Discover Financial Services and is one of the U.S.’s leading debit/ATM networks. PULSE is a leader in debit payments, global cash access, and account transfers.

The STAR network is the largest interbank network in the United States. STAR provides services like debit card processing and ATM functionality. STAR was acquired by First Data Corporation in 2003. Today, the network is owned and operated by STAR Networks, a subsidiary company of First Data.

Everything IADs Need to Know About Interchange Fees

ATM Processing

ATM processors are large companies that typically prefer working with a few large organizations rather than new ATM operators or IADs. IADs need more help and support which requires a lot of time, attention, and service. And, they just don’t process enough transactions on their own to justify the effort. 

So, processors will work with local or national ISOs or sub-ISOs who have economies of scale. Economies of scale means that the more IADs they work with, the more transactions they process. Since they send substantial business to the processors (like CDS, Core, DNS, PAI, and Switch), they can offer IADs similar deals to those of processors. 

Many ISOs offer free processing as part of this deal. But what this really means is that the IAD gets the full surcharge revenue rather than the ISO taking a share to cover the cost of their service and support. Instead, they rely on interchange fees for their compensation. However, with MasterCard’s recent interchange fee changes, we expect continued erosion of the interchange, and eventually IADs will not get free processing.

ATM Operator Roles

Interchange from the ATM operator’s perspective varies depending upon whether they’re an ISO, a processor, a sub-ISO, or an IAD. The way it works is that the cardholder who uses the ATM typically pays or is charged by their bank for an out-of-network ATM transaction. This is how their bank pays the network interchange fee they are charged as a card issuer.

If you’ve ever used a debit card at an ATM not owned by your bank, you were probably charged a fee from your bank as well as the surcharge fee imposed by that particular machine. So, in addition to the surcharge, some cardholders will end up paying that out-of-network fee to use your machine. Of course, this varies from bank to bank. Some banks might even waive a certain number of these charges a month. In this case, they absorb the interchange fees as a cost of doing business.

So, the issuing bank pays the network (Cirrus, NYCE, Plus, PULSE, STAR, etc.) the interchange fee for the transaction. The networks share some of that interchange with the processing provider (CDS, Core, FIS, Switch, etc.). The processing provider decides how much they charge for each transaction. This decision is based on processing volume and whether or not it includes bank sponsorship or any other fees. Then, the processing provider forwards the interchange balance to the ATM vendor. This is typically the ISO.

When Can ATM Operators Get a Share of the Interchange Fees?

When starting an ATM business, it is important to work with a reputable ATM processing company that is transparent about its fee structure and distribution. As an IAD with only one or two machines, your ISO will likely keep all of the interchange as compensation for onboarding, managing, support and ensuring funds settlement for your ATM business.

However, if you grow your business and start processing thousands of transactions monthly, you could negotiate with your ISO to either participate in a share of the interchange and generate additional revenue or go on a flat buy rate. This opportunity will come with increased volume and experience. The total number of transactions should outweigh the costs associated with managing your account. 

Extra Revenue Opportunity

ISOs often have several larger sub-ISOs and sometimes work with IADs directly that have larger volumes and know the business. Keep in mind that it’s rare for a new IAD or new ATM operator to work directly with a processor and get any interchange. 

Processors and ISOs typically have a rate schedule that determines how much they charge for transaction processing and other services. This is typically based on transaction processing volume and other needed services. They deduct that amount from each transaction and pass the rest of the interchange to the sub-ISO. This is how everyone down the line makes money.  

If you are just starting, need a lot of help and support, and have no or few transactions, you probably won’t receive any interchange.  

Interchange fees are paid to processors for all transactions, including cash withdrawals, balance inquiries, and transfers. When you, as an IAD, receive 100% of your surcharge and don’t incur any costs, you need to understand that the interchange you don’t receive compensates all the infrastructure that supports you. This is how you are able to receive “free processing.”

However, the more transactions you process and the fewer services you need, the better your rate. 

Once an IAD processes several thousand transactions (3,000-5,000 or more), there is sometimes an opportunity to get pass-through pricing, also known as flat-rate, buy-rate, or net-rate pricing. In this situation, the entire surcharge and all the interchange is passed on to you, the IAD. But, then, you are charged one flat driving fee (e.g. ATM processing charges) for every transaction, including cash withdrawals, denials, inquiries, balance transfers, admin functions, etc. 

Before accepting buy-rate pricing, a thorough cost analysis should be completed. You should also ensure full disclosure and thorough knowledge of every charge.

What’s on the Horizon

Networks have started deducting some of the interchange and dramatically reducing the amount they share for surcharge transactions. This is an attempt to help offset banks that complain about losing money due to the proliferation of free-standing ATMs and all of the independent operators. 

Financial institutions spend a lot of money on their ATM networks. But, their transaction volumes have been decreasing, which is therefore increasing their costs. The networks are increasing their profits by sharing less of the interchange and sometimes also helping the issuing banks by reducing the interchange fee. This in turn affects the ATM processors’, ISOs’, and sub-ISOs’ income streams.

It’s possible that, as interchange decreases, more processing companies, ISOs, and sub-ISOs will start charging a flat rate for transaction processing. As the interchange fees decrease, the funds for compensating the infrastructure will come from somewhere else. 

New IADs might start getting charged a small fee per transaction based on the cardholder’s network if other networks reduce interchange, as MasterCard recently has. MasterCard now charges $0.28 of the interchange on surcharged transactions. They’ve also reduced balance inquiry and transfer interchange to $0.15, which in some cases could be more than the cost of a flat-rate pass-through buy-rate for low-volume IADs. 

Breakdown of Fee Distribution

In short, this is the breakdown of how fees are distributed in an ATM transaction:

Interchange Fee (aka Network Fee)

The interchange fee is typically paid by the card issuing bank (usually charged to cardholder) to the networks. 

Network Fee (aka Interchange Fee)

The network fee is paid to the network (Cirrus, NYCE, Plus, Pulse, STAR) for using their infrastructure.

ISO Fee

Some ISOs charge a flat-rate or buy-rate fee plus additional fees if they are paying out 100% of the surcharge plus all of the interchange. This is especially true if they manage services related to the transaction like network connectivity or machine maintenance. There are many ways ISOs might bundle fees.

ATM Surcharge Fee

The surcharge fee is also known as a convenience fee or operator fee. It is a direct fee charged to the cardholder by the ATM owner—a bank or non-bank ATM operator. This fee is separate from the interchange fee and is retained entirely by the ATM operator.

Who Gets What?

Issuing banks receive the interchange fee minus any network and ISO fees. 

Acquiring banks pay the interchange fee and charge the cardholder any applicable ATM operator fee.

The ISO receives a portion of the interchange fee for services provided. This could include transaction processing, network services, and machine maintenance.

Networks receive network fees embedded within the interchange fee for facilitating the transaction and maintaining the network infrastructure.

The ATM operator, or IAD, collects the ATM surcharge fee directly from cardholders. He or she may also share in some or all of the interchange based on their agreement with the ISO.

Conclusion

Overall, interchange fees are a fundamental aspect of card-based transactions. They enable the smooth functioning of the payment ecosystem while providing revenue streams for various stakeholders. It’s complex. But this fee structure ensures that each entity involved in facilitating ATM transactions is compensated for its role in the process.

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