It’s almost impossible for businesses to operate without accepting credit or debit cards, or both. Banks offer credit and debit cards to make it easier for consumers to make payments and faster for businesses to get paid. With each transaction, businesses pay a small fee—an interchange fee—in exchange for this value.
What is Interchange?
Interchange fees, also called “swipe fees”, play an important role in the payment ecosystem. Processing credit and debit card transactions is a complex process that involves multiple steps and many different organizations: the credit card issuer, acquiring bank, and card processing network, to name a few.
Interchange refers to the fees paid to the credit card issuer from the merchant’s bank for credit and debit card transactions. The interchange fee is a small percentage of the transaction amount plus a flat fee, for instance 1.19% + $0.05. The fee amount is set by the payment network, i.e. Visa, Mastercard, Discover, and American Express, and apply to almost all card transactions.
Interchange fees are just one of the fees that make up the overall cost that merchants pay for accepting credit cards. The overall cost is reflected in the merchant discount rate, or MDR, which includes:
- Interchange fee
- Payment processor markup, paid to the payment processor or acquiring bank
- Assessments, charged by the payment network
- Other fees charged by the merchant’s bank or payment service provider.
What Affects Interchange?
The exact interchange fee amount can vary depending on several factors.
- Card brand: Visa, Mastercard, Discover, American Express
- Card type: rewards card, corporate card
- Transaction type: in-person, online, contactless
- Business size and industry
- Credit card program type, airline rewards, cash back rewards
Example of How Interchange Fees Work
Let’s say a customer makes a $100 credit card purchase a retail store and the interchange fee for the card is 2% of the transaction plus $0.15. The interchange fee for this transaction would be:
Interchange Fee = (Transaction Amount x 2%) + $0.15 Interchange Fee = ($100 x 0.02) + $0.15 Interchange Fee = $2 + $0.15 Interchange Fee = $2.15
The merchant’s bank processes the transaction. Before the merchant is paid, the $2.15 interchange fee is deducted from the transaction and paid to the customers card issuer. The merchant will receive $97.85.
Are Interchange Fees Beneficial?
Interchange fees are often subject to debate and scrutiny, criticized for lack of transparency, unfair, and expensive for businesses. Like other business costs, interchange fees do provide a number of benefits for the payment ecosystem.
- Maintaining payment infrastructure, including secure data transmission, fraud prevention measures, and technological advancements.
- Incentive for card issuers to issue credit and debit cards to consumers and businesses. Interchange helps offset the costs associated with card issuance and customer service.
- Cardholder rewards programs which incentivize card usage and attract customers to use credit and debit cards for their transactions.
- Mitigating the risk of providing credit to cardholders and offsetting potential losses and non-payment.
- Enabling credit and debit card acceptance for merchants of all sizes.
- Funding innovation within the payments industry.
Common Misconceptions About Interchange Fees
There are a number of aspects of interchange fees that are misunderstood.
- Interchange fees are negotiable. Interchange fees are standardized and apply to all merchants for a specific type of card transaction. They’re not negotiable on an individual basis.
- Payment networks make more profits on higher interchange fees. It’s a common misconception that interchange fees mean more profit for payment networks, but the fees are actually paid to card issuers.
- There’s just one interchange rate for all transactions. Interchange rates vary depending on several factors including card type, transaction method, and payment network.
- Interchange represents the full payment processing cost for businesses. Interchange is part of the overall cost of accepting card payments. The merchant discount rate includes payment processor fees, assessments, and other transaction related expenses.
- Interchange fees are unreasonably high. While these fees can seem high, they do cover various costs and risks associated with transaction processing.
- Only credit card transactions are charged interchange fees. Debit card transactions may also have interchange fees.
Interchange fees are part of the cost of accepting debit and credit cards, a payment option that allows businesses to get paid faster. As you review your payment processing costs. it’s important to remember that interchange is only part of the overall cost. If you’re wondering how you can save money on card processing, talk with your payment processor about your options.