What you need to know about debit card interchange rates

6 minutes
What you need to know about debit card interchange rates
In this article

Debit card interchange rates are the fees businesses pay to the cardholder's bank for each transaction a customer makes with them. These rates can have a big business impact when it comes to financial operations, driving payment processing costs and profitability when accepting online card payments. 

Understanding and managing debit card interchange rates is crucial for savvy businesses wanting to navigate cost implications effectively, optimise their merchant strategies, and give their business the best chance of continuing financial viability within the industry they operate in.

Understanding interchange rates

Debit card interchange rates are charges that merchants pay to the bank that issued the debit card their customers are using during each transaction. These rates serve as compensation for the bank that issued the card, and cover various costs including transaction processing, fraud prevention, and maintaining the payment network infrastructure. Functionally, interchange rates ensure the smooth operation of the banking and financial system by facilitating the flow of funds between merchants, cardholders, and issuing banks during debit card transactions.

Within the banking and financial ecosystem, these rates hold up the infrastructure supporting debit card transactions, enabling customers to conveniently purchase the things they need while also ensuring businesses get paid promptly. Interchange rates also encourage banks to issue debit cards by providing a revenue stream, contributing to the overall stability and functionality of the financial system. 

Understanding these rates is so important for businesses, as they can have a big impact on ongoing transaction costs, as well as playing an important role in maintaining the speed and reliability of the electronic payment systems made available to them.

Debit card vs credit card interchange rates

Debit card interchange rates typically run lower than credit card rates, often featuring flat fees or lower percentages per transaction. For merchants, this means reduced card processing costs when customers use debit cards. 

In contrast, credit card interchange rates tend to be higher, usually consisting of percentages of transaction values as well as flat fees. Premium credit cards with added perks and benefits often carry even higher rates. 

Encouraging debit card usage can be a good move for merchants, as it generally means lower transaction fees compared to credit cards, offering your business the opportunity to better manage financial operations and decrease negative business impact. 

Factors influencing interchange rates

Major card networks like Visa and Mastercard play a pivotal role in establishing interchange rates, setting the fees that merchants pay for processing transactions. These companies set guidelines and fee structures, determining the interchange rates paid by acquiring banks (merchants' banks) to issuing banks (customers' banks) for each transaction. 

While the specifics of interchange rates can vary majorly based on factors like card type, transaction type, and the level of transaction-associated risk, credit card networks still have significant influence in shaping the cost structure of card transactions. Their fee schedules directly impact your business’s card processing expenses, as well as shaping the overall financial ecosystem and market shifts of payment processing costs.

Interchange rates for in-person vs online transactions

Interchange fees vary depending on if the transaction is being made in-person or online. In-person transactions typically carry lower interchange rates due to the lower risk of fraud, as the card-issuing bank can be more certain it’s the cardholder making the transaction. 

On the other hand, online transactions are considered higher risk due to the absence of physical card verification, and often incur higher interchange fees. Factors such as increased vulnerability to fraud and the added security measures and risk assessment required for online transactions contribute to these differences. 

The impact of Merchant Category Codes

Merchant Category Codes (MCCs) are another factor when it comes to interchange rates, with rates often varying based on business sectors. Different MCCs classify merchants into specific categories, and interchange rates can differ based on these classifications. 

For instance, retail businesses might have lower interchange rates compared to sectors like travel or luxury goods, due to the varying levels of perceived risk by the issuing bank. Higher-risk sectors often attract higher interchange fees due to increased potential for fraud or chargebacks. MCCs categorise businesses and therefore the interchange rates they’re subject to, making it essential for merchants to understand how these codes impact their transaction costs based on their industry classification.

Debit interchange rates dynamics

Card popularity continues to climb, while rates remain steady

In May 2023, the Electronic Payments Coalition (EPC) released its 2023 Q1 Data Dashboard highlighting the emerging trends within the credit and debit markets. Their data showed that as a share of purchase volume, interchange rates and merchant discount rates (MDRs) have remained stable for the past seven years. An MDR refers to the fee charged by a payment processor or acquirer to a merchant for processing credit or debit card transactions. In 2022, the weighted average MDR for credit cards was 2.19%.

Across all demographics, consumer reliance on card payments and digital transactions has continued to grow. In 2021, card spending made up 75.6% of transactions, and current trends indicate it could grow to 80.4% in the next five years.

The historical evolution of interchange rates

The historical evolution of interchange rates has been mainly influenced by different market shifts and regulatory changes over the past seven decades. In the 1950s, the introduction of credit cards marked the start of interchange fees. Over time, these fees evolved, and by the 2000s, they had become a significant revenue source for banks. 

The Dodd-Frank Act's Durbin Amendment in 2010 introduced caps on debit card interchange rates for larger financial institutions in the United States, aiming to enhance competition and put an end to excessive fees. However, these regulations led to a complex financial ecosystem, with varying rates between larger and smaller banks.

Economic shifts, including technological advancements in banking systems and credit card networks (such as biometrics, artificial intelligence, digital identities and quantum computing), as well as changes in consumer spending habits, continually influence interchange fee structures. The rise of digital payments and the world of ecommerce has prompted ongoing adjustments to accommodate evolving payment trends, such as people making smaller purchases online more frequently. 

How businesses can best manage debit card interchange fees

So, with all this in mind, let’s explore some fee reduction strategies your business could potentially use when it comes to debit card interchange rates. 

Optimise your payment processes

Optimising your financial operations when it comes to payment processing costs can reduce the amount you’ll have to pay for each transaction made with your business. One way to do this is to make sure you’ve chosen the most effective merchant service provider for your business’s individual needs, which will depend on your industry, transaction volume, your customers’ needs, the types of transactions being made with your business and the average size of your transactions. 

If you sell overseas, using a multi-currency payment processor, such as Airwallex, enables you to receive like-for-like settlements in multiple currencies, reducing the cost of foreign exchange fees and further improving your bottom line. Airwallex’s API gateway also boosts your global acceptance rates by integrating payment acceptance capabilities seamlessly into your platform, allowing your customers to pay in their preferred currency and payment method. 

Use secure transaction methods

Using a fraud protection tool like 3-D Secure (or 3DS) can help to protect you from criminal fraud and minimise chargebacks to your business. The 3DS system is used to authenticate buyers when they checkout with your business, creating an additional layer of security. 

Pre-chargeback programs are another way to minimise high-fee chargebacks being claimed against your business. These programs automatically refund disputed transactions at a much lower cost than a traditional chargeback, helping you to resolve these disputes quickly and cost-effectively. Examples of these programs include Visa Rapid Dispute Solution and Mastercard Collaboration. 

Surcharge programs

Putting a surcharge program in place offers you the option to pass on the cost of debit card processing fees to your consumers, by adding an amount to the transactions that covers this cost. This can reduce the financial burden on your business and also give you more control over your transaction costs. However, you’ll need to make sure you’re adhering to all the legal regulations and card network guidelines, as well as being prepared for the impact this may have on customer attitude towards your business. 

Sound financial management starts with staying informed

Factoring in debit card interchange rates into your business’s financial operations checklist is another way to set your organisation up for financial success, no matter what industry you’re in. 

Be sure to stay on top of rate dynamics and interchange regulations to ensure you’re always choosing the right merchant strategy for you when it comes to debit card interchange rates. 

For personalised advice and solutions when it comes to managing interchange rates for your business, explore Airwallex’s range of services, from domestic and foreign currency accounts to expense management tools, borderless company cards and payment gateways that let you easily sell to customers around the world.

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