What Are Interchange Fees?

Interchange fees are charges imposed on merchants for processing card transactions, specifically paid by the merchant’s bank (the acquiring bank) to the customer’s bank (the issuing bank). These fees, which are set by major payment networks like Visa, Mastercard, and American Express, compensate the issuing bank for the costs related to fraud prevention, transaction security, and maintaining the payment infrastructure. The exact amount varies depending on factors such as the card type, transaction method, and industry classification of the merchant. The examples of interchange fees include:

• Credit card payments.
  As a rule, merchants pay interchange fees in cases when customers use credit cards to make purchases. For instance, on average, a Visa-branded rewards credit card may carry an interchange rate of 1.88% plus $0.10 per transaction, meaning a $100 purchase would incur a $1.98 fee for the merchant.
• Debit card purchases.
  Unlike credit card transactions, debit payments usually have lower interchange rates. For instance, in the United States, regulated debit cards (those issued by banks with assets exceeding $10 billion) are subject to a fee cap, often set at around 0.05% of the transaction amount plus a fixed charge of $0.22. This means that for a $50 purchase, the merchant would pay approximately $0.24 in interchange fees.
• Online vs. in-person transactions.
  Digital transactions, particularly those where a card is not physically present (such as e-commerce purchases), often involve higher interchange fees due to increased fraud risk. For example, across Europe, a Mastercard online transaction might have an interchange rate of 1.90%, while an in-person chip or contactless payment at the same merchant could have a rate of 1.50%.

Since interchange fees are a major expense for businesses, many merchants factor these costs into their pricing strategies. Some even impose surcharges or offer cash discounts to offset these expenses. Meanwhile, banks and payment networks rely on these fees as a significant source of revenue, helping to fund rewards programs and fraud prevention initiatives.

How Interchange Fees Work

The workflow of interchange fees is easier than most people think. For instance, when a customer initiates a card payment, the transaction follows a structured process involving multiple entities:

1. Transaction initiation.
   The customer presents their card for payment, either by swiping, inserting a chip, tapping, or entering details online.
2. Authorization request.
   The transaction data is sent to the payment processor by the merchant, and the payment processor forwards the request to the card network.
3. Issuing bank verification.
   The bank that issued the customer’s card verifies account details, checking for sufficient funds or available credit before either approving or declining the transaction.
4. Transaction approval and settlement.
   If approved, the issuing bank transfers the payment amount to the acquiring bank, deducting the interchange fee before the funds reach the merchant.

As a rule, this process doesn’t take long since everything is automated; thus, in most cases, it’s mere seconds.

Key Factors Influencing Interchange Fees

Certainly, interchange fees are not the same. In fact, several variables determine the exact interchange rate applied to a given transaction, and they include the following:

• Card type.
  Premium credit cards that offer rewards programs generally have higher interchange fees compared to standard debit cards.
• Transaction method.
  Payments made in person using chip-enabled or contactless technology typically have lower fees than online transactions, which carry a higher risk of fraud.
• Merchant category.
  Different industries are subject to varying interchange fee rates, with some sectors, such as fuel stations and supermarkets, often receiving preferential rates.

To have a clearer picture of how interchange fees might differ depending on various factors, let’s take a brief look at the Visa credit and debit card interchange fees.

Visa Debit and Prepaid Card Fees in the US

Visa Credit Card Fees in the US

How Interchange Fees Affect Merchants

Interchange fees represent a significant cost for merchants, as they are charged each time a customer makes a payment using a credit or debit card. These fees, set by card networks and paid to the issuing bank, reduce the net revenue that businesses receive from card transactions. To manage these costs, merchants may adjust their pricing strategies by incorporating fees into product prices, imposing surcharges on card payments, or offering discounts for cash transactions. Interchange fees also influence the payment methods that merchants accept. Some may encourage alternative, lower-cost payment options to minimize expenses. Ultimately, these fees impact both business profitability and consumer pricing, shaping how merchants operate in a competitive market. This is why a well-thought-out payment orchestration system is so important for any business, so you might want to consider using Germius. This solution will help you arrange the best payment options for your online business and, therefore, reduce processing costs and maximize your profits.