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What Is An Interchange Fee

What Is An Interchange Fee?

As a business owner, although it’s a pain, it’s important for you to understand the ins and outs of how transactions actually work and what all the different types of fees mean when you process a card payment.

When it comes to taking card payments, one of the most significant transaction fees is called an ‘interchange fee.’

But the truth is not that many merchants are aware of how this fee works, or indeed how much it costs them every time they take a payment.

We know how complicated all of these different transaction fees can be, but don’t worry! In this article, we’ll talk you through the basics of interchange fees, so you have a clearer picture of what they mean, and you can work on managing your costs better for your business.

What Exactly Is An Interchange Fee?

An interchange fee, in simple terms, is a transaction fee that is charged to the merchant’s account by the credit card networks (e.g. Visa or Mastercard) whenever a customer makes a purchase using their debit or credit card.

But the fee gets paid to the customer’s card issuing bank rather than the credit card network itself.

Now you know what the fee itself is, we’re going to try and explain the complex intricacies of what happens when a transaction gets processed, and then maybe we can better understand why the fee gets charged to you (the business owner) and your company.

Whenever a card payment takes place, the merchant’s bank uses a card network to request a payment from the customer’s bank.

Once this is done, the customer’s issuing bank carries out multiple checks in order to determine whether it should accept or deny the request – for example: does the customer have enough funds to carry out the request or is the card perhaps being used in a suspicious (fraudulent) manner?

If everything is in order, the customer’s bank deposits the money into the merchant’s bank and, et voilà, everything has been a success!

The thing is, this all takes place at lightning speed, so it misleads us into potentially thinking that the process is a simple one that doesn’t really require much work. But in reality, it’s an extremely complicated procedure.

So, essentially, an interchange fee is paid to the customer’s card issuing bank in order to cover the costs, risks, and possibility of fraud that the card issuer could potentially face after any given transaction.

How Much Are Interchange Fees?

How Much Are Interchange Fees

As mentioned before, it’s actually the credit card networks that charge you and your company the interchange fee, so they are the ones who set the rate – the four main card networks are Visa, Mastercard, American Express, and Discover.

Whilst there are other fees that merchant’s pay so that they can receive payments via debit and credit card, the interchange fee is the biggest one, and it represents around 70%-90% of their total payable fees to the banks.

On average, in Europe, interchange fees are about 0.3%-0.4% of the total amount of the customer’s transaction. But in the US they are much higher at around 2% of the total transaction.

There is no fixed rate for interchange fees, and they are regularly altered by the card networks.

Visa and Mastercard, for example, publish their new rates in April and October every year. If you ever want to know what their current rates are, the best way to do this is to check them out on their official websites.

How Are Interchange Fees Calculated?

Interchange fees vary and are actually calculated using a number of different factors, all of which are quite complicated in their own right. Below is a list of the most significant variables that affect the interchange fee.

Card Network

Considering all the four major card networks have their own interchange fee rates, how much you pay will depend on which type of card the customer pays with (e.g. a Visacard or a Mastercard).

Visa and Mastercard percentage rates might be lower than Discovery and American Express, so the interchange fee may be lower with them.

Card Type

The interchange fee can vary depending on whether the card used is a debit or credit card. Debit cards usually possess a lower interchange rate because they’re considered to be less risky than credit cards, particularly when it comes to fraud.

Card Present VS Card-Not-Present

Card present means the transaction took place face-to-face (so usually in-store) and card-not-present means it took place online or over the phone.

Card present transactions usually come with a lower interchange fee than card-not-present due to the fact the risk of fraud is considered to be lower.

Merchant Category Code

Whenever you open a business that sells things, you’re assigned a four-digit merchant category code (MCC) based on what type of business you have.

Your code affects the rate of your interchange fees. For example, in the US, card networks Visa and Mastercard give lower rates to businesses like travel agents and charities.


Unfortunately for businesses, interchange fees are a non-negotiable fact of life that you have no control over and, as long as you take card purchases, you have to accept that you’re going to have to pay the fees.

But trust us when we tell you that the net gain and the ease of taking credit and debit cards does generally outweigh the pain of paying the interchange fees!

They may add up and become expensive for your company, but hopefully you now understand a bit more about how they are calculated and where to find the card network rates for them.

Therefore, you can work your business and profit margins around them – remember, it’s good to be innovative when it comes to trying to save your company some money!

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