The Complete Guide To Understanding Credit Card Interchange Rates & Fees
Interchange fees are the fees merchants pay to accept credit cards from their customers. The details can be confusing, so we've made a guide to help you.
Interchange fees (or, more accurately, interchange reimbursement fees), the fees merchants pay to accept credit cards, have been in the news lately — and not in a good way. Like nearly everything else these days, the cost of processing transactions and maintaining a merchant account for your business is going up.
In this article, we’ll explain what interchange reimbursement fees are, where they come from, and the factors determining what fees you’ll pay for a given transaction. We’ll also show you how these fees fit into each of the different processing rate plans that your merchant account might use.
If you’re looking for processors that offer the best interchange rates, be sure to see our list of the best credit card processing companies for small businesses.
Table of Contents
- What Are Interchange Fees? The Definition
- What’s The Average Interchange Fee?
- Transactional Factors Affecting Your Credit Card Interchange Rates
- Changes To Interchange Fees In 2023
- Who Pays Credit Card Interchange Fees?
- How Credit Card Interchange Fees Are Calculated
- What About Debit Card Interchange Fees?
- How To Use Interchange Rates To Get The Best Rates On Credit Card Processing
- FAQs About Interchange Fees & Credit Card Processing
- How are interchange fees calculated?
- Why are interchange fees so high?
- Who sets merchant interchange fees?
- Are interchange fees negotiable?
- Who decides the percentage of interchange fees?
- What is the highest interchange rate?
- How do you avoid interchange fees?
- How are interchange fees split?
- How do banks make money from interchange?
What Are Interchange Fees? The Definition
Interchange fees are fees paid to card-issuing banks whenever a customer makes a purchase with their credit/debit card. Interchange fees cover the risk of fraud for a transaction, plus handling costs for sending the payment to the acquiring bank and, ultimately, the merchant’s bank account.
What Do Interchange Fees Look Like?
Credit card interchange rates vary widely due to a number of factors, and there are hundreds of possible rates that you might have to pay. Here’s a very generic example of possible interchange rates:
Common Interchange Rate Examples
Swiped/Dipped | Keyed/eCommerce | |
---|---|---|
Basic Credit: | 1.51% + $0.10 | 1.80% + $0.10 |
Signature/Traditional Rewards Credit: | 1.65% + $0.10 | 1.95% + $0.10 |
Preferred Rewards Credit: | 2.10% + $0.10 | 2.10% + $0.10 / 2.40% + $0.10 |
Small Bank (Exempt) Debit: | 0.80% + $0.15 | 1.65% + $0.15 |
Big Bank (Regulated) Debit: | 0.05% + $0.22 | 0.05% + $0.22 |
The rates in the table above represent only the tip of the iceberg. In the United States, the average interchange rate is around 0.3% for debit cards and 1.8% for credit cards. However, we’d caution you that these numbers have very little value due to the enormous range of possible rates under which any given transaction might fall.
What’s The Average Interchange Fee?
The average credit card interchange fee varies among the different card brands that most consumers use. Average interchange rates for the four most common brands are as follows:
- Mastercard: 1.45% to 2.90%
- Visa: 1.30% to 2.60%
- American Express: 1.80% to 3.25%
- Discover: 1.55% to 2.45%
Note that these figures reflect the average of all possible interchange rates, not the actual averages that you’ll see in your business. You’ll have to analyze your actual interchange costs over time for a more accurate estimate. Your ability to break out your interchange costs will also depend on the type of processing rate plan you’re using.
For a more in-depth discussion of interchange fees and other processing costs, take a look at our guide on credit card processing fees and rates.
Transactional Factors Affecting Your Credit Card Interchange Rates
The actual credit card interchange rates for specific transactions are based on various factors that generally correlate to the level of risk the issuing bank takes in approving it. Here’s an overview of the most important factors that influence your transaction’s interchange rate:
Changes To Interchange Fees In 2023
Visa and Mastercard typically update their interchange fee schedules twice each year, in April and October. These fee schedule updates usually involve raising some rates while lowering others. In 2022, both Visa and Mastercard announced a new rate schedule in April after delaying making any changes to their fee schedules for nearly two years due to the COVID-19 pandemic.
The new fee schedules have been accompanied by a great deal of controversy, primarily because they bring significant increases to some fees for card-not-present transactions. These changes resulted from a massive uptick in online fraud during the pandemic when eCommerce activity soared to record levels. Coming at a time when rampant inflation has reappeared for the first time in forty years, these price increases have not been well-received by the business community.
However, it’s not all bad news. Merchants can avoid the worst of the rate increases by implementing tokenization to secure their accounts and encouraging the use of digital wallets. Note that using tokenization requires a payment gateway, regardless of whether the transaction occurs online or through a POS system.
2023 promises another update cycle to the credit card associations’ fee schedules, but no major changes are currently anticipated. One recent change that will affect businesses that accept debit cards is the Federal Reserve’s recent rule change requiring debit card issuers (and, by extension, payment processors) to enable at least two processing networks for all debit card payments, including card-not-present transactions. Proposed legislation in both the House and Senate would extend this policy to credit card transactions as well.
Who Pays Credit Card Interchange Fees?
Interchange fees are charged as part of your processing costs every time you accept a credit or debit card payment. The fees themselves are paid to the card-issuing bank, with your processor retaining any additional amount as its markup. These fees typically account for approximately 80% of the overall cost of processing a transaction.
Note that you will also have to pay an assessment fee to the appropriate credit card association. However, these fees are very small and only account for a very small portion of your overall cost.
How Credit Card Interchange Fees Are Calculated
Since processors have to pay the credit card interchange fees and still charge for their services, they’ve come up with numerous ways to pass those costs onto you. In discussing processing rate plans, note that processors often refer to the costs they have to pay as the wholesale rate. This is essentially the same thing as the interchange fee.
Processing rate plans generally follow one of two approaches in how they treat interchange fees. The pass-through approach, found in interchange-plus and membership pricing plans, separates the interchange and the markup. With one of these plans, you’ll always know exactly how much of a cut your processor takes from a transaction, even if you don’t know the interchange rate in advance. While your processing costs will vary quite a bit due to variations in the interchange rates, established businesses with a stable month-to-month processing volume will usually save money overall with this approach.
On the other hand, the blended approach, found in flat-rate and tiered pricing plans, combines the interchange and the processor’s markup into a single charge. This approach usually leaves you with no idea how much of your processing fee is going to the issuing bank and how much to your processor. While the blended approach may make your processing costs more predictable, you’ll often end up paying more overall for processing with this approach.
Flat-rate pricing, however, can be much cheaper for small or seasonal businesses, as the companies offering this type of pricing often don’t charge any monthly or annual fees to maintain your account.
Here’s a quick overview of how the various processing rate plans treat interchange fees:
Pricing Model Overview
Interchange Fees | Model Type | Generally Best For | |
---|---|---|---|
Interchange-Plus: | Separate from markup | Pass-through | Most businesses |
Membership: | Separate from markup | Pass-through | High volume/tickets |
Tiered: | Blended with markup | Blended | Not recommended |
Flat-Rate: | Blended with markup | Blended | Low volume/tickets |
Also, here’s a comparison of possible rate quotes you might receive, what type of pricing plan they represent, and whether the wholesale interchange rate is included in the rate quote:
Sample Quoted Processing Rates
Pricing Model | Wholesale Rate | |
---|---|---|
INT + 0.25% + $0.10: | Interchange-Plus (AKA Cost-Plus) | Not included |
INT + $0.10 (+ $99/Month Membership): | Membership (AKA Subscription) | Not included |
Qualified: 1.79% + $0.10 (Mid-Qualified: 2.19% + $0.15) (Non-Qualified: 2.99% + $0.20) | Tiered | Included |
2.90% + $0.30 Online: 2.75% In-Person: | Flat-Rate | Included |
What About Debit Card Interchange Fees?
As we’ve noted above, debit card processing fees are usually much lower than they are for credit cards. Part of the reason for this is that the risk associated with these transactions is much lower than it is with a credit card. As long as you can confirm the customer’s identity and they have sufficient funds in their bank account to cover the purchase, there’s very little financial risk to the card issuer.
Having the customer enter their PIN number at the point of sale is the safest way to verify a cardholder’s identity and, for this reason, PIN debit transactions have particularly low interchange fees.
The other major reason that debit cards cost less to accept is that they’re more closely regulated by the federal government. The 2010 Durbin Amendment places strict limits on how much issuing banks can charge for processing PIN debit transactions. Unfortunately, those caps only apply to the interchange fees paid to the issuing banks — not the total amount you have to pay to your processor for the transaction. Processor markup is unaffected, meaning you won’t see any savings if you’re on a flat-rate or tiered pricing plan that charges you the same amount regardless of whether a credit or debit card is used.
Another major impact of the Durbin Amendment is that it prohibits merchants from adding a surcharge to debit card transactions. Regardless of how much you ultimately pay to process a debit card, you cannot pass this cost onto your customers. Unfortunately, many merchants are unaware of this restriction, and we’ve seen numerous incidents of unscrupulous merchant services providers setting merchants up with flawed (and illegal) surcharging programs that add a surcharge to all card payments – regardless of whether a credit or debit card is used.
How To Use Interchange Rates To Get The Best Rates On Credit Card Processing
By now, we hope you have a clearer idea of what interchange fees are and how they affect your processing costs. While interchange fees are an inevitable cost of doing business, there are a few things you can do to mitigate those costs. Here are some strategies to consider that can save you money on interchange fees:
- Switch to an interchange-plus or membership pricing plan: Interchange-plus pricing plans clearly break out your processor’s markup fees and the interchange fees. They also offer some of the lowest processing rates you’ll find anywhere. Note that while interchange-plus pricing is available from most merchant account providers, there are only a few that offer membership pricing plans.
- Use a PIN pad for card-present transactions: PIN debit transactions have significantly lower interchange fees than credit cards, but you’ll need to have the customer enter their PIN to qualify for those rates. If your current processing hardware doesn’t include a PIN pad, you’ll want to buy a model that’s compatible with your credit card terminal. The savings in interchange fees will easily pay for the cost of the additional device.
- Implement tokenization on your processing platform: As we’ve discussed above, there’s no reason not to use tokenization at this point. As long as you have a payment gateway, you should be able to activate this feature without any additional cost.
- Implement a surcharging or cash discounting program: With the high cost of interchange fees, many providers are now offering surcharging programs, which promise to save you money by shifting the cost of credit card processing onto your customers. Surcharging is only allowed if your customer pays with a credit card, and carries the risk of lower sales if your customers object to the extra charge. As a more consumer-friendly alternative, we recommend cash discounting, in which the processing costs are built into your advertised prices. Customers who use a credit card pay full price, but those using a debit card or other payment method get a discount at checkout.
Despite the expense and headaches of maintaining a merchant account, the bottom line is that you’ll almost certainly make more money from increased sales by accepting cards than you’ll pay out in interchange fees. This will also hold true if you sign up with a top-notch merchant services provider that won’t charge you excessive processing rates and fees.
If you’re looking for a provider for your new business or are considering switching from your current one, take a look at some of our other payment resources, such as the best online credit card processors and the best payment processors for startups.