Interchange fees can add up to considerable costs for organizations that accept card payments. Understanding what interchange fees are and how they work is important to managing these costs effectively.

What are interchange fees?

Interchange fees are fees merchants pay to issuing banks to cover the costs of issuing cards and processing card transactions. Every time a customer makes a purchase with a credit or debit card, the organization’s acquiring bank is required to pay the interchange fee to the cardholder’s issuing bank. The organization pays back the interchange fee as part of its card processing fees.

Interchange fees are set by payment card brands and usually account for the largest portion of overall card fees. The pricing structure of interchange fees is determined by a number of factors, such as:

• The type of card (credit or debit)
• The card brand
• Regions or jurisdictions
• The type and size of the merchant
• The type of transaction (e.g., in-store, online, phone order)

Interchange fees compensate issuing banks for providing and maintaining payment cards and managing risks associated with processing payments. They also help pay for costs associated with network infrastructure and fraud prevention measures. Additionally, interchange fees often help fund customer rewards programs.

How much are interchange fees?

Because interchange fees are set by the card brand, the amount varies. Credit card fees are typically higher, and while there may be a fixed amount involved, the interchange fee is usually a percentage of the card transaction itself.

In the U.S., the average credit card interchange fee is close to 2% of the transaction value, according to WalletHub. In the EU, interchange fees are capped at 0.3%.

Following the 2011 passage of the Durbin Amendment, debit card interchange fees in the U.S. are capped at $0.21 plus 0.05% of the transaction value. In the EU, they are capped at 0.2%.

Interchange fees are regularly adjusted — typically twice a year, in April and October — so the most accurate way to find current rates is usually to check the card network’s website.

How are interchange fees calculated?

While there may be a fixed amount involved, the interchange fee is typically a percentage of the card transaction itself. The interchange fee amount varies depending on several factors, including:

• Type of card: Credit cards usually have higher interchange fees than debit cards. Furthermore, rewards cards typically have higher interchange fees than standard cards, as interchange fees are often used to fund rewards programs.
• Card-present vs. card-not-present: Card-present transactions, in which the cardholder presents the card at the point of sale, usually have lower interchange fees than card-not-present transactions, such as online or over-the-phone payments. This is because the latter has an increased risk of fraud and data errors.
• Merchant category code (MCC): Every merchant has an MCC that corresponds to its business type. Interchange fees vary based on the MCC, which reflects the level of risk and average transaction size of the business type.

How do interchange fees work?

Every time a purchase is made with a credit or debit card, interchange fees are involved. Below is a basic overview of how interchange fees work.

1. A cardholder makes a purchase using a credit or debit card.
2. The transaction information is sent from the merchant’s payment processor to the acquiring bank. From there, it’s sent to the card network, which passes on the information to the issuing bank.
3. The issuing bank evaluates the transaction based on the amount of funds in the cardholder’s account, the cardholder’s credit limit and fraud detection protocols.
4. If the issuing bank confirms that the cardholder has enough funds or credit available, it sends authorization for the transaction through the card network to the acquiring bank, which passes it on to the organization.
5. The acquiring bank sends the authorized transaction to the card networks for settlement. This typically occurs in batches at the end of the business day.
6. The card network routes the authorized transaction to the issuing bank and debits the transaction amount from the issuing bank’s account.
7. The card network transfers the transaction amount, minus the interchange fee, to the merchant’s payment processor.
8. The payment processor transfers the remaining amount, minus any additional fees for payment processing, to the acquiring bank.
9. The acquiring bank deposits the funds, minus an acquiring fee, into the merchant’s account.

How interchange fees impact businesses

Since businesses must pay interchange fees on every card transaction, the fees can add up quickly when a business has a high volume of card transactions. This affects the bottom line, as high interchange fees can chip away at thin profit margins.

To appeal to customers, some businesses may choose to absorb the cost of interchange fees rather than pass them on. Others, however, may adjust the prices of their goods or services. This could involve implementing a minimum transaction amount for card payments or increasing prices for all customers. Alternatively, where it’s legal, some may choose to surcharge for credit card transactions.

Whichever approach a business takes will impact customer satisfaction and competitiveness, so it’s important to weigh the pros and cons.

How businesses can reduce interchange fees

Since payment card brands set interchange fee rates based on numerous factors, reducing these fees can be a complex task. Following best practices for card processing can help a business qualify for lower interchange rates.

• Settle transactions promptly, ideally within 24 hours.
• Adopt technology that supports contactless and mobile payments, which have security measures that can sometimes result in lower interchange rates.
• Implement secure processing technologies, such as point-to-point encryption and tokenization, to lower risk.
• Minimize manually keyed-in transactions, which have a higher risk of fraud and data errors.

Interchange fee regulation in the U.S.

Credit card interchange fees

Some businesses may choose to apply credit card surcharges to offset costs in places where it’s legal. It’s important to note that the legal landscape of credit card surcharging remains in flux in the U.S., and in some states, such as Massachusetts and Connecticut, credit card surcharges are prohibited.

Debit card interchange fees

The Durbin Amendment, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, was introduced in 2010. It gives the Federal Reserve (the Fed) the authority to regulate debit interchange fees.

The Fed’s final rule, enacted in 2011, reduced debit interchange fees from $0.44 to $0.21 plus 5 basis points multiplied by the amount of the transaction. It applies to banks with $10 billion or more in assets; banks with less than $10 billion are exempt. Issuers can raise interchange fees by up to one cent if they implement certain fraud protections.

Critics of Durbin argue that retailers have not passed the savings on to consumers and that the rule exceeds Congress’ authority. While there have been some notable court challenges, the rule has remained intact.

In October 2023, the Fed proposed a rule lowering the debit interchange fee cap to 14.4 cents plus four basis points, with the fraud-prevention adjustment being 1.3 cents. The proposed rulemaking would also result in the cap being updated every other year going forward.