What are interchange fees?

At their core, interchange fees are determined based on the cost and risk involved in transaction processing. However, the fees charged for credit and debit cards are different and calculated differently. This article will examine how interchange fees are calculated and what factors affect them.

Interchange fees are charges incurred every time a transaction is made through a card scheme like Visa or Mastercard. The acquirer pays these fees to the cardholder’s bank, and then the business pays the interchange fee as part of their card processing fees.

Payment card processing comes with three fees:

• Acquirer markup: Charged by the acquirer for acquiring the funds from your shopper
• Card scheme fees: Charged by the card scheme for using its network
• Interchange fee: Charged by the cardholder’s bank

Interchange fees are the most significant portion of card processing fees.

How much are interchange fees?

In Europe, interchange fees typically range from 0.3% to 0.4% of the transaction amount, while in the US, they are around 2%.

The card schemes set interchange fees and cannot be negotiated. They are also subject to periodic adjustments. For instance, Visa and Mastercard update their rates in April and October annually.

The most accurate and up-to-date way to find the current rates is to check the card scheme’s website. For example, below you can find the interchange rates for Visa and Mastercard in different regions:

Visa interchange rates: EU, US, SG, AU, IN

Mastercard interchange rates: EU, US, AU

Some card networks, including American Express and Discover, work slightly differently to Visa and Mastercard and don’t publish their rates online.

Credit Card Interchange Fees

Credit card interchange fees are charged by the card issuing banks to merchants for processing a credit card transaction. The fees vary depending on the type of card used and the merchant’s industry. The interchange fees for credit cards are calculated as a percentage of the transaction amount, typically between 1.5% to 3%.

The card issuing bank considers several factors when determining the interchange fee, including the type of card used, the merchant’s industry, and the transaction’s risk level. For example, cards with premium rewards programs often have higher interchange fees than standard cards, as the cost of offering rewards is factored into the fee.

The merchant industry also plays a significant role in determining the interchange fee. For example, merchants that operate in high-risk industries, such as online gambling or adult entertainment, may face higher interchange fees due to the higher risk involved in processing transactions in those industries.

Finally, the transaction’s risk level is another factor that can affect the interchange fee. Transactions considered high risk, such as those with a high chargeback rate or a large transaction amount, may result in higher interchange fees to offset the added risk to the card issuing bank.

Debit Card Interchange Fees

Debit card interchange fees are calculated differently than credit card interchange fees. Debit card interchange fees are charged by the card issuing banks to the merchant’s acquiring bank, which then passes the cost onto the merchant. The fees are based on a flat fee per transaction and a percentage of the transaction amount.

The flat fee per transaction varies depending on the card network used, while the percentage of the transaction amount typically ranges between 0.05% to 1.15%. The percentage rate is based on the transaction amount and the type of merchant, with higher rates applied to merchants that process larger transaction amounts.

Several factors, like credit card interchange fees, can affect the debit card interchange fee. For example, the card network used, the type of merchant, and the transaction amount are all considered when determining the fee.

Interchange fees are a critical component of the payment card industry, affecting merchants, acquirers, issuers, and consumers. Understanding how these fees are calculated is essential for merchants looking to reduce their costs and increase their profits.

Credit card interchange fees are calculated as a percentage of the transaction amount and are based on several factors, including the type of card used, the merchant’s industry, and the transaction’s risk level. Debit card interchange fees are based on a flat fee per transaction and a percentage of the transaction amount and are affected by factors like the card network used, the type of merchant, and the transaction amount.

Overall, merchants can reduce their interchange fees by choosing the right payment processing solutions, negotiating with their payment processors, and working to minimise chargebacks and other high-risk transactions.