Interchange Fees Explained: Who Sets the Rate & How Do They Determine It?
Interchange fees—sometimes informally called “swipe fees”—are a cost that you pay for the privilege of accepting credit card payments. These interchange rates are set and managed by card brands like Visa and Mastercard for maintaining the network used to conduct payments, and are collected by issuing banks.
In theory, the fees exist to cover a service provided to you. However, some sellers believe interchange fees are unfair, or are at least too exorbitant relative to the service provided. Costs will keep rising over time, though, which has led to increased tensions throughout the financial ecosystem.
What are interchange fees? Who pays interchange fees and what do they actually pay for? Most importantly, how can you, as a merchant, mitigate the added expense?
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What are Interchange Fees?
- Interchange Fee
An interchange fee is a fee assessed by card networks and paid by merchants who accept credit card or debit card payments. This per-transaction fee covers the costs associated with processing payment card transactions using the card network’s payment infrastructure.
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Contemporary retailers—eCommerce merchants in particular—rely heavily on their ability to accept customer payment cards. That ability comes with a few drawbacks, though. Each credit card transaction is accompanied by fees payable to different entities involved in the payment chain.
The responsibility for covering these costs will fall mainly to you, the merchant. The interchange reimbursement fee, commonly referred to as simply the interchange fee, is one of the most significant of these.
For every card transaction, you typically remit 1-3% of the purchase price to the bank that issued the card. The path the funds take is a bit more convoluted than it seems at first glance, though.
The acquirer pays the fee to the issuer first, then turns around and bills you to recoup the amount paid. The issuer keeps a portion, which they may choose to pass to the cardholder through rewards (points, frequent flier miles, or cash back). The remainder then goes to the card network to cover the cost of maintaining their payment infrastructure.
Factors that Influence Interchange Fees
Each card network maintains its own interchange rates. These are traditionally updated twice a year (April and October). Detailed information regarding the current interchange rates and fees for Visa and Mastercard are available online.
Interchange fees are usually calculated as a percentage of the sale, plus a fixed fee. For example, 1.80% + $0.10. This ensures the relevant parties receive the optimal payment, even if the original transaction was for a high or low dollar amount.
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The exact percentage and formula will vary. The process of categorizing a transaction to determine the applicable rate is called interchange qualification. This calculation happens on a per-transaction basis, and the applicable interchange rate will depend on various factors, such as:
How Are Interchange Fees Calculated?
Card networks set the fee schedules. These schedules are then passed on to issuers, acquirers and processors.
Processors refer to these charges as their “wholesale rate.” The cost is then passed on to you, plus the processor’s fee, as an interchange fee. Processors generally break these fees down via two approaches:
This fee scale is found in flat-rate and tiered pricing plans. It combines interchange and processor’s markup into one charge. While this approach can make fees predictable, amounts will fluctuate between issuers and processors. You may not know how much you are paying specifically for interchange.
This fee scale details how much your processor will take for each transaction, and factors into the interchange-plus and subscription pricing plans. It separates interchange from markup fees and clarifies how fees are calculated and apportioned by the processor (think ‘transparent’ price scaling).
Utilizing the above approaches, the interchange pricing tiers break down as follows:
This pricing method includes the interchange rate, plus a markup assessed by the processor, which can either be fixed or percentage-based. This markup then offsets the costs that would otherwise be incurred by you for processing services.
This method can be less costly than the others, especially for businesses that process many transactions.
Interchange rates can vary from transaction to transaction, making it challenging to predict monthly costs.
This pricing method ensures a single rate for all transactions through a given method, regardless of interchange rates and fees. This would mean you pay a set percentage on top of the transaction rate; for example, 3% of the transaction total, plus $0.25 for every transaction.
Flat rates aren’t subject to fluctuation. You know what you’re getting into.
It could be more expensive than the other tiers if a company processes many transactions annually.
This pricing method combines interchange-plus and flat-rate pricing by sorting rates into categories. To illustrate, let’s say that you might pay 2% + $0.15 for debit transactions, and 3% + $0.10 for credit card transactions. These rates and fees are variable, following a predetermined ruleset.
Tiered pricing offers predictability combined with competitive pricing.
If you are a high-risk merchant, or process a large number of payments overall, the costs associated with a tiered pricing scale could be very high.
Also called membership pricing. This method is similar to interchange-plus because it separates the markup from the interchange. However, the difference is that your processor will charge you a monthly subscription fee instead of tacking on fees per transaction.
Cost-effective for enterprise-level businesses.
Expensive monthly subscription fee.
So, which pricing model is best? In short: it depends.
One of the main factors to consider is the scale of the business. A pricing model which works for a small business may not be cost efficient for enterprise businesses. So, to better illustrate interchange price scaling, let’s look at a hypothetical pricing scenario.
General Interchange Pricing: at a Glance
As we’ve learned, credit card interchange rates encompass a spectrum of factors and pricing models that could apply to a business. Aside from these, depending on industry and vertical, you may only use payment processors specializing in high-risk accounts, with limited fee scaling.
Regardless, the typical processing rate plans include interchange fees as follows:
Interchange Scale Overview
|Pricing Scale||Interchange Fees||Approach||Best For|
|Interchange-Plus||Separate from markup||Pass-through||General business|
|Subscription||Separate from markup||Pass-through||High volume business|
|Tiered||Blended with markup||Blended||*Inadvisable|
|Flat-Rate||Blended with markup||Blended||Low volume business|
To put this information into perspective, here are a few examples of processing rates you might be quoted for, and how they might be communicated to you:
|Interchange Example||Pricing Model||Wholesale Disclosure|
|INT + 0.15% + $0.10||Interchange-Plus||N/A|
|INT + $0.15 + $99/Month (Subscription)||Subscription||N/A|
|Qualified: 1.50% + $0.15
(Mid-Qualified: 2.00% + $0.15)
(Non-Qualified: 3.00% + $0.20)
|2.75% + $0.35 Online:2.25% In-Person:||Flat-Rate||Included|
Keep in mind that these are very broad examples of possible interchange rates. Actual interchange rates vary between networks and processors and would be too numerous to include in this brief article.
If you aren’t sure what your processor charges, visit their website or take a peek at your statement to view your interchange rates.
How Are Interchange Fees Paid?
As noted earlier, you pay the interchange fees on transactions indirectly. The fees are usually bundled into your payment processing costs. Different processors offer different pricing structures, allowing you to pay a flat rate, pay by individual transaction, or perhaps use a tiered payment plan.
Bundled rates are often discounted, but bundles aren’t designed for transparent reporting and analytics. This can be problematic since payment processors often combine the network’s interchange fee with all the other various transaction fees paid to banks, gateways, and anyone else in the payment chain.
Lumping all the fees together into one single payment may seem convenient. However, it means you lose the ability to evaluate optimization efforts and determine the real cost of a transaction. This raises the question: are these fees necessary?
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Effect of Interchange Fees on Merchants
Mastercard claims interchange fees on credit cards ensure businesses pay their fair share of processing. Visa simply says the fee reimburses issuers for lost interest resulting from a cardholder’s debt repayment grace period.
A growing number of merchants feel differently, though.
Some see the interchange fee as a financial perk given to issuing banks by card networks as a “thank you” for issuing payment cards and managing cardholders’ accounts. Many would like to see fees capped. After all, technology has made credit card processing measurably easier over the last decade, while the cost of interchange more than doubled. Others go so far as to argue that card networks should pay these fees because the networks benefit when a bank issues a branded payment card.
Issuers and card networks respond that the interchange rate only subtracts a small percentage of merchant profit from each purchase. But, even that small amount can add up for sectors where margins are tight, such as restaurants and gas stations.
Interchange rates are also indirectly related to chargeback costs. If you get hit with a chargeback, you lose the interchange paid for the initial transaction. Plus, if you receive too many chargebacks, they may push you into the “high risk” category. You could end up paying a significantly higher interchange rate as a result. Escalating risk can even lead to account termination in some instances.
What are the Current Interchange Rates?
So, here's the big question: what exactly should merchants expect to pay in terms of interchange rates?
Like we referenced above, each card network sets their own rate. So, let's delve into the rates published by the two leading card networks: Visa and Mastercard.
Visa Interchange Rates
Visa’s interchange rates apply to all US-based merchant transactions. However, there are separate interchange rates that apply to transactions conducted on a US-issued card at a US-based merchant, and interregional interchange rates. There could be a different fee schedule for interchange rates applied to transactions conducted on a non-US-issued card.View the Visa Interchange Fee Schedule
Mastercard Interchange Rates
Like with Visa, the Mastercard interchange rates apply to all US-based merchant transactions. However, there are separate interchange rates that may apply regarding US-based merchants and interregional transactions. And, as with Visa transactions, you won't pay interchange reimbursement fees directly. Instead, you'll typically negotiate and pay a rate to your acquirer that is calculated as a percentage per transaction (called the “merchant discount”).View the Mastercard Interchange Fee Schedule
Interchange Fees are Subject to Change
Due to the pandemic, Visa and Mastercard delayed any updates to their interchange rates for 2 years. As a result, in April 2022, the networks’ most recent interchange updates significantly increased interchange rates for card-not-present transactions.
Both Visa and Mastercard explained that these price increases reflect a real uptick in online fraud. However, high inflation and other complications leftover from the pandemic have only exacerbated general merchant displeasure at the entire process. To a lot of merchants, the new fees feel like an untimely addition to an already complex and difficult financial situation.
All that being said, you can still try to lower your interchange fees by reducing transaction risk. For instance, you can take advantage of tokenization (above), which would secure your account and reduce risk. Including digital wallets and other contactless payment gateways could also prevent incidents of fraud, whether used online or in-person from a POS system.
- Some rates for card present transactions have decreased in price.
- eCommerce rates for transactions without tokenization have increased significantly.
- eCommerce rates for transactions with tokenization have decreased or remained the same.
We should expect another round of updates this October, which may either lower or raise interchange fees. Regardless, taking steps to reduce risk is the best move you can make to try and minimize costs.
Getting Ahead of Interchange Fees
To turn a profit in this increasingly digital economy, you have to take credit and debit card payments. To reach your fullest potential as a merchant or retailer, you will need to accept interchange fees as a cost of doing business. However, this isn’t to say that you don’t have options.
There are several strategies that you can implement to get the most out of your interchange rates and save money. These include:
- Using Address Verification Service and other fraud prevention tools
- Settling transactions within three days of the completed sale
- Shipping orders within seven days of authorization
- Including the authorization ID and order number with settlement
Unsure where to start? A detailed data analysis can provide clues for optimizing fee rates.
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What is an interchange fee?
Interchange fees are assessed by card networks and paid by merchants who accept credit card or debit card payments. This per-transaction fee covers the costs associated with processing payment card transactions.
Who pays an interchange fee?
The merchant is responsible for paying the interchange for a transaction. Interchange fees generally account for the majority of overall processing costs per transaction, aside from network assessment fees, which are payable to the applicable card network.
Why do banks assess interchange fees?
Interchange fees account for processing costs per credit or debit card transaction. Fees are set and assessed by card networks, then paid to issuers via your payment processor, sans a processing markup.
How much is an interchange fee?
Interchange fees vary among card brands. To illustrate, the average interchange rate for Visa card transactions is somewhere between 1.3% and 2.6%. For Mastercard, the average interchange is between 1.45% to 2.9%.
Who sets your interchange fee?
Banks and card networks set the fee schedules that are then passed on to processors. Processors refer to these charges as their “wholesale rate,” which is then passed on to the merchant, as an interchange fee.
How do processors calculate your interchange fee?
Processors break down their interchange rates into two approaches: blended and pass-through. They further delineate their fees into four main pricing scales: interchange-plus, flat-rate, tiered, or subscription.