Two of the things that confuse merchants the most are:

1. Why they are charged different amounts when different kinds of cards are used
2. Who gets to keep the 1.5% - 3.0% of their hard-earned sales that are siphoned away as "discounts" and "fees"

A big part of the answer to both of those questions is: "Interchange". 

What is interchange

Interchange is the set of rules that define how much of a cut the issuing bank (the bank that issued the customers' credit card, big issuing banks include Capital One and MBNA) gets to keep from the credit card transaction.

 The part of the transaction that you see:

 The back-end of the transaction (where the money flows):

How big is interchange?

Interchage is the largest piece of the transaction. Basically,  the card issuing bank captures most of the economics of the transaction.

• Morgan Stanley estimates that interchange is, on average, 1.75%, or 81% of the total fees charged to the merchant on the transaction.
• The Kansas City Fed estimates that interchange is, on average, 1.60%.  However, their data was from 2003 and earlier, which may account for the difference in the estimates, since Interchange tends to rise every year.
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Why does it matter to me?

When negotiating a deal with your credit card processor it helps to know how much of a cut they are getting for two reasons:

• It lets you know how much they are making off or you and therefore how much room they have to negotiate
• The main rate that a processor will quote is on a standard credit card transaction.  With the rise of rewards cards and debit cards, these "standard" cards make up the minority of transactions.  If you focus your energy on negotiating a good "standard" rate, with a fair markup for your processor, they probably will sneak in a much larger markup on the rewards and debit cards. An example of that can be found in "Reading a Merchant Processing Statement "

So what are these Interchange rates?

Until recently they were secret, but now you can get a full description of them at the Visa and Mastercard websites: Visa interchange rates , Mastercard interchange rates. 

 Visa Debit Cards

This is the table of rates for Visa Debit cards as of the end of 2006.  The rates will change periodically, but the difference between the rates will always be about the same, i.e. supermarkets will always get a better deal than ecommerce sites.  

 Note, these are the rates for debit cards when they are processed with a signature.  Those where you type in the PIN go through a seperate network and are even cheaper, which is why stores generally encourage you to type in your PIN. 

Visa Credit Card

VISA has two kinds of rewards cards: Visa Signature and Visa Traditional Rewards .  Visa Signature cards are marked with the Visa Signature brand mark, have no pre-set spending limit and typically have more extensive cardholder rewards and services (like concierge services) than the traditional rewards cards.  All other refers to visa cards that do not have rewards.  An increasing number of the cards do have rewards, so it is important to be aware of the different prices.

Visa Corporate Cards

VISA and Mastercard try to get big companies to issue VISA and Mastercard cards to their employees by offerring the employer the ability to track in a more detailed fashion what their employees are spending money on.  Therefore, a merchant that accepts corporate cards is rewarded with a lower rate for sending detailed data about what was purchased (could be as detailed as an item-by-item list).  Level III is the highest amount of data, Level II is some extra data and anything below Level II is just the basic amount of data.

Mastercard

Mastercard World is the standard points card (similar to Visa Traditional Rewards) and Mastercard World Elite is the fancier version (similar to VISA Signature).