The Complete Guide To Credit Card Interchange Rates & Transactional Factors Affecting Them

If you’re new to the world of credit and debit card processing, you may be wondering what interchange fees are and how they impact the cost of processing transactions and maintaining a merchant account for your business. The truth is that interchange fees (or, more accurately, interchange reimbursement fees) are, in most cases, the single largest expense you’ll have to pay when accepting a customer’s credit or debit card.

Interchange reimbursement fees vary widely based on many factors, and you’ll usually have little or no control over them. Separating your interchange costs from the markup your merchant services provider is charging you can also be tricky, depending on what type of processing rate plan you’re using.

In this article, we’ll explain what interchange reimbursement fees are, where they come from, and the factors that go into deciding 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.

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.

Who Makes Money On Credit Card Interchange Fees?

You’re probably already well aware that you, the merchant, are usually going to be the one paying the costs for letting your customers pay with credit or debit cards (unless, of course, you implement a surcharging program — more on that later). But where does the money go? Merchants often mistakenly believe that the credit card interchange fees they have to pay will go to their merchant account provider, but that’s only partially correct. While your provider collects the interchange fees from you, it doesn’t get to keep them. Interchange fees are ultimately paid to the bank or other business entity that issued the customer’s card. For each transaction, there will also be a small network fee that goes to the credit card association as well as your provider’s markup.

Interchange Fees Paid To Issuing Banks

Visa and Mastercard both publish their own interchange fee schedules that cover every possible type of transaction you could encounter. Discover and American Express also have their own interchange fee schedules. The main difference here is that Discover and American Express function as both the issuing banks and the sponsoring credit card associations. On the other hand, Visa and Mastercard merely slap their logo on cards that are actually issued by a bank. The issuing bank is the entity that’s advancing credit to consumers and taking on the risk associated with doing so. They end up collecting almost all of the interchange fees charged on a transaction.

Now, you might think that the card-issuing banks make most of their money from collecting late payment fees and charging interest to consumers who have let their credit card debt pile up over time. Although this is certainly a lucrative source of income (and consumer credit card debt is a huge national problem), the fact is that interchange fees account for most of a bank’s profits when its credit cards are used, even when the cards are used by responsible consumers who pay their full credit card balance on time, every month.

Interchange Fees Paid To Credit Card Networks

Visa and Mastercard do not serve as issuing banks, as mentioned above. But they do charge a separate network fee for each transaction, which also comes out of your total cost for processing. Network fees are very small (typically around 0.05% per transaction), and they aren’t considered part of the interchange. For example, the network fee on a hypothetical $100 transaction would only be $0.05. While this doesn’t sound like very much money, remember that billions of Visa and Mastercard transactions are processed around the world every year. Those small fees add up quickly. In 2019, Mastercard alone racked up a little over $8.1 billion in net revenue.

Here’s the important thing that you, the merchant, need to understand: Although you’ll have to pay the interchange on every credit/debit card transaction, it’s only part of your total cost for processing. Your merchant services provider needs to get their cut, too. However, the interchange is usually the largest single expense in processing a transaction. Depending on your processing rate plan, roughly 70% to 90% of the transaction processing costs go to paying the interchange reimbursement fees. Your processor and the credit card association get the remaining 10% to 30%.

How Credit Card Interchange Rates Are Calculated

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

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.

Transactional Factors Affecting Your Interchange Rates

The actual credit card interchange rates for specific transactions are based on various factors that generally correlate to the level of risk taken on by the issuing bank in approving it. Here’s an overview of the most important factors that influence your transaction’s interchange rate:

Debit Versus Credit Cards

Interchange rates for credit cards are usually around six times higher than they are for debit cards. Why? Debit card transactions are much easier (and safer) to approve. Because the funds come directly out of the customer’s linked bank account, transaction approval is a simple process of confirming that there are sufficient funds in the account to cover the cost of the transaction.

On the other hand, credit card transactions require the card-issuing bank to extend credit to the customer and then cover the cost of the transaction themselves. The customer is responsible for repaying the bank for the cost of the transaction at a later date. In most cases, credit card transactions will usually be approved as long as they don’t exceed the credit card account’s credit limit. However, with credit card fraud on the rise, many banks are now taking additional security measures to stop potentially fraudulent transactions, further complicating the approval process.

Card-Present Versus Card-Not-Present Transactions

As you might imagine, accepting a credit card for payment is inevitably going to be riskier if the merchant never sees the actual card. eCommerce, mail order, and telephone order transactions will always be card-not-present, imposing greater risks to the issuing bank. You might also encounter a card-not-present transaction in a retail setting if your terminal can’t read a customer’s card, and you have to key in the card information manually. This was a frequent problem with older magstripe cards, where the magstripe wore down over time and eventually couldn’t be read by a credit card machine.

Today, the use of EMV cards, which contain embedded chips, significantly decreases the likelihood of encountering this problem. Interchange rates for card-not-present transactions are substantially higher than those for card-present transactions. In most cases, the total processing rate that your merchant services provider charges you will directly reflect the additional cost to process these types of transactions.

Transaction Category

Credit card associations further break down their interchange fees according to business categories (i.e., restaurants, gas stations, general merchandise, etc.). It’s a good idea to familiarize yourself with the underlying interchange fees associated with your business category. Unfortunately, this is one factor affecting interchange rates that you have little or no ability to control.

Rewards Cards

In recent years, issuing banks have been offering rewards cards that come with perks, such as frequent flier miles or cash back on purchases. Guess who ultimately gets to pay for these perks? That’s right, you do!

Interchange fees are inevitably going to be higher if your customer chooses to pay with a rewards card. The use of rewards cards particularly impacts your processing costs if you’re on a tiered pricing plan. Tiered plans often downgrade these transactions to nonqualified, and the rates for these types of transactions are frequently two or even three times higher than they are for qualified transactions.

Credit Card Brand

Each credit card association sets its own interchange fees, so accepting one card brand might cost you more than another. In particular, American Express has often been singled out for criticism for charging higher fees than either Mastercard or Visa. However, the company’s OptBlue program now makes it much more affordable for small businesses to accept American Express cards. Note that American Express charges a “discount rate” rather than an interchange fee, but it’s essentially the same thing. For more information on accepting American Express cards in your business, please see our article, The Complete Guide To American Express Interchange Rates & Merchant Fees.

Card Owner

Credit card associations also have separate rate categories that vary depending on whether the card owner is an individual consumer, a business or corporation, or a government agency. Variations in these rates are mostly based on the card owner’s ability to pay back the cost of the purchase. As you might imagine, purchases made by a government agency or private business are inherently less risky than those made by ordinary consumers and, thus, will have the lowest interchange fees.

Use Of Address Verification Service (AVS)

Whenever you accept a card-not-present transaction, your processor will have to query the Address Verification Service (AVS) to confirm that the customer’s address and the billing address on file with the issuing bank match. Depending on your processor, you might be charged an AVS fee for using this service (usually $0.05 to $0.25 per transaction). However, using AVS to confirm this information will also qualify you for a much lower interchange fee. In general, the savings from the reduced interchange rate will outweigh the cost of the AVS fee. eCommerce, mail order, and telephone order merchants should confirm how AVS fees are charged and the impact they’ll have on their processing costs when setting up a merchant account.

Note that these are only the most significant factors affecting interchange rates. Many other minor factors can influence your interchange costs. For a deeper dive into rate specifics, we highly recommend that you take a look at the Visa USA Interchange Reimbursement Fees and the Mastercard 2019–2020 U.S. Region Interchange Programs and Rates. These documents break down every possible interchange fee to which your transactions might be subject. Visa and Mastercard update their interchange rates twice a year (usually in April and October), so if the link above doesn’t work, do a Google search instead. You can also find the rates for Discover and American Express online with a little searching.

Interchange fees also vary by country, with rates in the United States usually being the highest. The main reason for this is that there are currently no legal limits on how much the banks can charge for interchange fees in the US. While competition between the various credit card associations has helped keep US interchange rates from getting too high, the general trend has been upward. Average interchange rates have more than doubled within the last ten years. This steep increase in interchange fees led the European Union to impose strict limits in 2015. Since then, interchange rates are limited to a maximum of 0.2% for debit cards and 0.3% for credit cards in EU countries. Unfortunately, the chances of such a consumer-friendly law being passed in the United States in the foreseeable future are quite low.

What’s The Average Interchange Fee?

In trying to come up with a reasonably accurate estimate of your processing costs, it’s very helpful to have an idea of what your average interchange fee will be. As we’ve noted above, the average interchange fee is 1.8% for credit cards and 0.3% for debit cards in the United States. That was easy, right?

Well, no. Those simple numbers don’t even come close to telling the whole story. They merely reflect the average of all possible interchange rates charged by all of the major credit card associations. It’s extremely unlikely that every single one of those rates will apply to your business, let alone that they’ll be evenly distributed among all of your transactions. For a more accurate analysis, you’ll have to look at the interchange rates that apply to your business and analyze your actual interchange costs over time. If you’re on an interchange-plus or membership pricing plan, this won’t be too hard to do, as your interchange costs should be broken out right on your monthly processing statement.

However, if you’re on a tiered or flat-rate pricing plan, it will be nearly impossible to come up with an accurate estimate of your average interchange fee. That’s because these pricing plans lump the interchange fees and your provider’s markup together into a single rate, making it extremely difficult to separate the two costs. You would have to go into each credit card association’s interchange fee schedule and manually determine which rate applied to each transaction — something most business owners won’t have time to attempt.

Assuming that you’re on a pricing plan that discloses the provider’s markup, you can calculate a reasonably accurate estimate of the average interchange rate for your business by simply averaging the actual rates you paid over a month or more of processing. The numbers you come up with will probably be different from the ones listed above. For example, if your business is eCommerce-only, your average interchange rate will be quite a bit higher than 1.8%, as all of your transactions will be card-not-present. For a more in-depth discussion of interchange fees and other processing costs, take a look at our article, The Complete Guide To Merchant Account & Credit Card Transaction Fees.

How Processors Handle Credit Card Interchange Fees (& What That Means For You)

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 is taking 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.

Common Processing Rates Plans

Here’s some more detail on how the various processing rate plans treat interchange and markup costs:

1) Flat-Rate Pricing

Flat-rate pricing plans make your rate structure as simple as possible by only charging one of a very small number of possible rates. Your processing costs are predictable and easy to understand. However, this type of pricing also blends the interchange fee and the processor’s markup into a single rate, so you’ll never know exactly how much you’re paying in markup.

Popular payment services providers (PSPs), such as Square and PayPal, use flat-rate pricing. Our biggest gripe with this kind of pricing plan is that most providers who use it charge the same rate for both debit and credit cards. Under this approach, you’ll be paying far more to process debit card transactions than you would under an interchange-plus or membership pricing plan.

At the same time, PSPs usually don’t charge any additional fees to maintain your account, so it’s reasonable to expect them to recoup those expenses through your processing costs. Flat-rate processing is a good deal for businesses with a low monthly processing volume, but it can quickly become costly once your monthly volume grows above a certain amount (typically around $5,000 per month).

2) Tiered Pricing

With tiered pricing, you’ll get the worst of both worlds. Like flat-rate pricing, processing rates are simplified and somewhat predictable. Rather than pay a single flat rate every time, however, your transactions will be rated as either qualified or nonqualified. Some processors also use a mid-qualified tier. These tiers are structured to guarantee that the processor makes a profit regardless of the underlying interchange rate, so you’ll often be paying an unusually high markup.

To make matters worse, it will be nearly impossible for you to determine how much you’re paying in markup, as it’s blended in with the interchange fee. You’ll also have to pay all those account fees, gateway fees, PCI compliance fees, and other fees that merchants on a flat-rate plan don’t have to pay. Tiered pricing plans ensure maximum profit for your processor — at your expense. We don’t recommend them.

3) Interchange-Plus Pricing

For most merchants processing at least $5,000 per month, interchange-plus pricing plans are usually the most transparent and affordable plans you can get. Interchange fees are passed through at cost, and your processor’s markup is fully disclosed in your rate quote. Yes, you’ll still have to pay all those pesky monthly and annual fees. However, the savings in processing costs will more than offset them as long as your processing volume is high enough. You’ll also save money on debit card transactions, as your cost will be based directly on the applicable interchange rate.

4) Membership Pricing

Also called subscription pricing, membership pricing is similar to interchange-plus in that it separates the processor’s markup from the interchange. The main difference is that your processor will charge you a single monthly membership fee instead of a multitude of separate account fees.

Some providers, such as Fattmerchant, also eliminate the per-transaction percentage and just charge a flat per-transaction fee in addition to the interchange costs. However, the high monthly subscription fee means that this type of pricing will work best for established businesses with significant monthly processing volumes. You’ll want to analyze your potential costs very carefully before signing up for this type of pricing plan.

Here’s a quick overview of how the various processing rate plans treat interchange fees:

Pricing Model Overview

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

How Interchange Fees Are Changing In 2021

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. Visa was scheduled to introduce the most sweeping changes to its interchange fees in October 2020. However, due to the ongoing COVID-19 pandemic, the company has postponed these changes until April 2021. Likewise, Mastercard has pushed back any fee schedule updates until next year.

Why were these changes postponed? By all accounts, the proposed changes to the fee schedule would have lowered several retail interchange rates but also would have significantly raised rates for most eCommerce transactions. Online credit card fraud has become a growing problem in recent years, and the proposed higher rates reflected the increased level of risk taken on by the issuing banks. Also, Visa and Mastercard are trying to nudge merchants into using tokenization measures to combat this type of fraud. The proposed rates would have included lower rates for transactions that used tokenization to encourage the adoption of this type of security technology.

However, it’s not hard to imagine the outcry that would have ensued had the credit card associations raised their rates in the middle of the worst global pandemic in over 100 years. This would have been particularly problematic since eCommerce is currently surging, while many retail businesses are desperately struggling to stay open. We’re pretty certain that Visa and Mastercard have held off on rate increases not out of compassion but rather to avoid the inevitable public relations disaster that would have ensued had the rate increases been adopted as scheduled.

This decision is, of course, good news — particularly for eCommerce and omnichannel businesses. However, it merely delays the inevitable — and only for six months. In all likelihood, the changes will take effect next April, just as the pandemic is finally starting to ease. Between now and then, we highly recommend that you find a way to integrate tokenization features into your business if you haven’t done so already.

FAQs About Interchange Fees & Credit Card Processing

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. We’d love to conclude by offering you some great insider tips on how you can lower or even eliminate interchange fees. Unless your business is a mega-retailer, though (such as Amazon or Walmart), it’s just not going to happen. Be very wary of any sales representative from a merchant services provider who offers to get you a discount on the standard, published interchange rates. They either don’t know what they’re talking about, or they’re deliberately trying to mislead you.

The only way to reduce or eliminate your interchange costs is to pass them on to your customers. This involves surcharging, where your customers pay a higher price for using credit or debit cards to cover your processing costs. Alternatively, you can implement a cash discount program, which gives a discount at checkout to customers who pay with cash or a paper check. Cash discounting is allowed everywhere in the United States, whereas there are still a few states that do not allow surcharging. As you might expect, customers don’t like having to pay extra just because they used a credit card. At the same time, they’re much happier to receive a small discount if they leave the card in their wallet and pay with cash. As processing costs continue to rise, surcharging is becoming more and more common, even in industries that have previously avoided the practice. You’ll want to balance the potential cost savings against any likely decrease in sales before implementing either of these two programs.

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 our roundup of the Best Small Business Credit Card Payment Processing Companies for some of our top recommendations. You can also check out our Merchant Account Comparison Chart for side-by-side comparisons of our top-rated providers.