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 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.
Table of Contents
- What Are Interchange Fees? The Definition
- What’s The Average Interchange Fee?
- Transactional Factors Affecting Your Credit Card Interchange Rates
- How Interchange Fees Are Changing In 2022
- Who Pays Credit Card Interchange Fees?
- How Credit Card Interchange Fees Are Calculated
- How To Use Interchange Rates To Get The Best Rates On Credit Card Processing
- FAQs About Interchange Fees & Credit Card Processing
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 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. For a more accurate estimate, you’ll have to analyze your actual interchange costs over time. 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 article, The Complete Guide To Merchant Account & Credit Card Processing Fees.
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 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:
How Interchange Fees Are Changing In 2022
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.
Due to the COVID-19 pandemic, both Visa and Mastercard delayed making any changes to their fee schedules until very recently. While interchange rates have remained frozen for nearly two years, both card associations finally implemented updated fee schedules in April 2022.
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 occurred as a result of 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.
Here’s a brief summary of the main changes in the latest Visa/Mastercard interchange fee schedules:
- Some rates for retail (i.e., card-present) transactions have decreased slightly
- Rates for eCommerce (i.e., card-not-present) transactions without tokenization have increased significantly
- Rates for eCommerce transactions with tokenization have stayed about the same or decreased slightly
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 to process 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 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.
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 |
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 our roundup of The Best Credit Card Processing Companies For Small Business 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.
Just to confuse the situation, Visa is now using the terminology “Non Qualified” on interchange rates.
You should do an article on Payfac pricing. As software devlopers/franchisors are now fully in the payments business using this model. Many business owners are unaware of the pitfalls of locking their credit card activity to a single provider
This comment refers to an earlier version of this post and may be outdated.
On average, what is the portion of the Interchange fee that is then paid to the Issuer Bank?
If Visa makes 1.5%, how much is going to the bank that has “issued” the card with VISA?
This comment refers to an earlier version of this post and may be outdated.
Hi Raffaele,
Visa and other card networks charge a network fee on each transaction, typically around 0.05% (not 1.5%). This is essentially a licensing fee for the use of their logo on the credit card. The issuing bank – which is extending credit to the customer and assuming all of the risks in doing so – gets the interchange fees. This can be confusing because the interchange rates are published by Visa, not the individual banks. As we discuss in the article, roughly 70-90% of the processing costs for any transaction will go to interchange fees, with the bulk of the remaining costs going to your processor as a markup.
This comment refers to an earlier version of this post and may be outdated.
Although there are many factors that impact interchange (cp, cnp, amount) can you share the calculation of those two averages debit .3 and credit 1.8 so I can understand if we are calculating ours consistently. Also, can you share or lead me to information that would help identify areas of opportunity to improve credit interchange? I understand that the networks have different fees and processors as well, but on the credit side, what factors have a significant impact to the interchange rate?
Thank you!
This comment refers to an earlier version of this post and may be outdated.
Hi Stephanie,
The 0.3% and 1.8% figures are not calculated averages. They’re merely rough estimates based upon all of the possible interchange rates from each of the major credit card brands. To calculate the average for your business, you would have to look at which specific interchange rates apply to your business. For example, interchange rates for auto fuel sales won’t apply unless you’re running a gas station.
If you’re on an interchange-plus or membership pricing plan, you can look at the data from your monthly processing statements and figure out what you’re actually paying in interchange fees. Unfortunately, you won’t be able to do this with a tiered or flat-rate pricing plan.
Also, there isn’t much you can do to lower your interchange costs. Submitting your batches promptly at the end of the day will help to avoid paying a higher rate, but that’s about it.
This comment refers to an earlier version of this post and may be outdated.
Great post. Interchange-plus is absolutely the way to go. That is why we only allow interchange-plus pricing in the credit card processing comparison shopping engine we built at TransFS.com. Here are two posts we have written about interchange-plus pricing that might be helpful to Merchant Maverick readers:
What is interchange-plus: http://bit.ly/iXUZE
Why you should want interchange-plus pricing: http://bit.ly/3emtIZ
Enjoy!
Cheers,
Eric Olson
Co-founder: TransFS.com
This comment refers to an earlier version of this post and may be outdated.
Eric thanks for the kind words, and the awesome articles. I can imagine that your services are much needed in this day and age. I still haven’t had a chance to take a look at TransFS in detail…work’s been extremely busy. But, I’ll definitely take some time in the very near future. 🙂
Have a great weekend!
This comment refers to an earlier version of this post and may be outdated.