Understanding Interchange Fees

Apr 14th, 2021

Interchange

You hear so much about these fees. But what are they really and how do they affect you? 

Interchange Fees are paid by merchants for the ability to accept credit and debit cards payments from their consumers. 

These interchange fees are the largest of the various fees that merchants must pay for accepting credit and debit cards. Every merchant who accepts credit and debit card payments pays interchange fees in one form or another. 

Interchange fees are set by the card brands (Visa, Mastercard, Discover, American Express) and are paid to the card issuing bank (the consumers card) by the acquiring bank (the bank the merchant uses to settle and fund payments from credit and debit cards). But who pays the acquiring bank? Who ultimately pays? You do: the merchant. 

The major card brands generally update their interchange rates at least once a year but sometimes twice.

How large an interchange fee a merchant will pay for a particular transaction is based on a complicated structure that is based many factors: 

• Card brand
  • Visa? MasterCard?
• Card type 
  • credit card or debit card? 
  • Rewards card? International card? Corporate or business card?
• Processing method 
  • face-to-face, over the phone, or online
• Size of the transaction
• Type of merchant (defined by Merchant Category Code or MCC)
  • Restaurant? Hotel? Retail?
• Data passed electronically with transaction
  • Hotel MCC’s are expected to send hotel data
  • E-commerce indicator expected for online transactions
• Size of Issuing Bank

Interchange rates tend to be higher for credit cards than debit cards. 

They are higher for credit cards that offer rewards to their cardholder, for corporate cards, and for international cards, than for standard credit cards. 

Card Not Present transactions (CNP), when the transaction is processed over the phone or online, are more expensive than Card Present transactions (in person or face-to-face where the card is swiped, or the chip is dipped). 

Interchange rates for debit cards issued by smaller banks are more expensive than if the card is issued by a "regulated", larger issuing bank.
 
Larger ticket or transaction sizes can have higher interchange rates than smaller tickets. (this is especially true of American Express on certain programs)

Interchange rates are higher when the transaction configuration doesn’t adhere to the expectations and requirements of the card brands. Internal processing best practices and choosing a good gateway and processing partner can reduce your interchange rates in some cases.  

Interchange fees are generally structured as a rate/percentage and a flat “per item” amount. The rate is multiplied by the amount or volume of the transaction, and the “per item” fee is multiplied by the number of transactions settled in that category. For example, for a $1,000 transaction that qualifies for an interchange category set at 2.40% and $0.10 per item, the merchant is assessed $24.10 in interchange fees alone. 

Other fees that merchants pay for processing cards include the following. Check back with us for details and definitions of these fees in future publications!

• Card Association Fees
• Authorization Fees
• Discount Fees

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Thank you!
The Ascent Client Success Team