How the Interchange Fee Assessed by Banks Affects Merchants
Interchange fees—often called “swipe fees”—are a cost that merchants pay for the privilege of accepting credit card payments. The amounts are set and by card brands like Visa and Mastercard and assessed by issuing banks as a fee for maintaining the network used to conduct payments. In theory, the fees exist to cover a service provided to merchants.
Not everyone believes the system is fair, however. According to an article in the PaymentsJournal,, interchange fees are a source of ongoing tension between merchants, banks, and card networks. So, what is this fee? Why does it really exist? And is there anything merchants can do to ease the burden?
What is an Interchange Fee?
- 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 is used to cover the costs associated with processing payment card transactions.
Today’s retailers—particularly eCommerce merchants—rely heavily on their ability to accept payment cards from customers. That ability comes with a few drawbacks, though. Each credit card transaction is accompanied by various fees, payable to different entities involved in the payment chain. The responsibility for paying these falls mostly to the merchant.
The interchange reimbursement fee, commonly referred to as simply the interchange fee, is one of the most significant of these charges. For every card transaction, merchants typically remit 1-3% of the purchase price to the bank that issued the card to the cardholder.
The path the funds take is a bit more convoluted than it seems at first glance. The acquirer actually pays the fee to the issuer first, then turns around and bills the merchant to recoup the fees paid. The issuer may then pass a portion of this money along to the cardholder, in the form of rewards (points, frequent flyer miles or even cash back).
Regardless of the parties involved, though, it all boils down to this: one more cost imposed on merchants.
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How is the Interchange Fee Calculated?
Each card network maintains its own interchange rates, traditionally updated twice a year (April and October). Detailed information regarding the current interchange rates and fees for Visa and Mastercard are available online; here is more information about the Visa and Mastercard interchange fees.
Interchange fees are usually calculated as a percentage of the sale plus a fixed fee (for example, 1.80% + $0.10). This ensures the issuer receives the optimal payment, even if the original transaction was for a high or low dollar amount.
The exact percentage and formula will vary. The process of categorizing a transaction to determine the applicable rate is called interchange qualification. Qualification calculations happen on a per-transaction basis, and the applicable interchange rate will depend on a range of factors, such as:
Card-present transactions may have a lower rate than card-not-present.
Data Submitted with the Transaction
The more secure the transaction, the lower the rate. Therefore, data regarding AVS results or card security codes may qualify the transaction for a lower rate.
Specific interchange categories exist for certain merchant category codes (MCCs).
Interchange fees will be higher for premium credit cards, but lower for PIN debit cards. Other types of cards can fall anywhere in between.
Cards issued by banks offering rewards have higher interchange rates.
The interchange rate is influenced by the card owner, whether that is an individual, business, corporation, or municipal agency.
Visa announced it will offer lower rates to merchants who opt to tokenize transactions using a Visa smart-payment token, starting in October 2021.
How is the Interchange Fee Paid?
As noted earlier, merchants indirectly pay the interchange fees on transactions. In most cases, the fees are bundled into the merchant’s payment processing costs. Different processors offer different pricing structures, allowing merchants 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, but merchants lose the ability to evaluate optimization efforts and determine the real cost of a transaction.
This raises the question: are interchange fees necessary?
Mastercard claims interchange fees ensure that 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, however, feel differently. Some even claim that the interchange fee is essentially a financial perk given to issuing banks as a “thank you” for issuing payment cards and managing the cardholders’ accounts. Some merchants would like to see fees capped, as technology has made credit card processing measurably easier over the last decade, while interchange rates have more than doubled. Others even 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, for sectors where margins are tight, such as restaurants and gas stations, even that small amount can add up.
Changes Are Coming
The situation is likely to get more contentious before it’s resolved.
Prior to the COVID-19 pandemic, Visa announced sweeping changes to their interchange rate structure. According to a Bloomberg report, Visa’s plan—now deferred until April 2021—was necessary to adjust its default US interchange rate structure. The goal is to, as they put it, “optimize acceptance and usage and reflect the current value of Visa products.”
Visa is referring to the company’s efforts to become more of a force in areas not traditionally given to credit card usage, such as rent, real estate, healthcare, and education. The company plans to lower the interchange rate here to encourage wider card usage.
On the flip side, “reflecting the current value” involves raising the interchange fee rate in areas where credit card use is the norm…particularly eCommerce.
Visa knows that online retailers are dependent on the ability to accept credit cards. However, those concerns need to be weighed against the company’s other goals and aspirations. Merchants may balk against a fee increase, but in the end, they will have to pay it or simply stop accepting Visa cards. Given those options, most will go with the former, rather than the latter.
Is There Anything Merchants Can Do?
It’s impossible to totally avoid interchange fees under the current scheme. However, merchants can reduce expenses by optimizing transactions when possible.
The card networks determine interchange rates, and fees are fixed across the board…at least in theory. In reality, mega-retailers who process tens of millions of transactions every year, like Walmart and Amazon, can exert some influence over their interchange rate. Smaller merchants must rely on other methods to optimize the interchange rate, such as:
- Using Address Verification Service
- 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
Interchange fees are also tangentially related to chargebacks. Too many chargebacks can push a merchant into the “high risk” category, which can also up interchange rates. Escalating risk can even lead to account termination in some instances.
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