Interchange fees explained

What are interchange fees?

Interchange fees are transaction fees that merchants are charged when accepting card payments, whether online or in-store. These are sometimes referred to as “swipe fees” for in-person card use.

While commonly thought of as a single fee per transaction, interchange actually refers to the portion of the transaction cost paid by the merchant’s payment provider (or acquirer) to the cardholder’s issuing bank. The fee is set by the card networks (e.g., Visa, Mastercard) and compensates the issuing bank for transaction handling, fraud risk, and cardholder services.

The card networks (like Visa, Mastercard, Discover, and Amex) provide the infrastructure and set the interchange rates. They also charge separate assessment or scheme fees. The acquirer (merchant’s bank or payment provider) facilitates the transaction and passes the cost of interchange and other fees on to the merchant.

Interchange fees vary based on factors such as:

• The type of card used (credit, debit, rewards)

• The region of card issuance

• Whether the transaction is in-person or online

• Merchant category and risk level

Interchange is a key part of card acceptance costs and plays a significant role in overall processing fees. In the sections below, we’ll explain how interchange works, how it's priced, and what you can do to manage these costs more effectively.

How interchange works

Let's take a look at what happens when a customer pays by debit or credit card during an in-store purchase:

• The acquirer sends the transaction data to the customer's card network.

• The card network forwards the transaction data to the card issuer.

• The card issuer will perform a number of checks (mainly to confirm that the customer has sufficient funds) before telling the card network whether the transaction is approved or declined.

• The card network passes this information to the acquirer.

• The acquirer processes the transaction.

• The card issuer deposits funds into the acquiring account.

Note: Acquirer refers to the acquiring bank that processes card payments for the merchant. It's connected to a card-issuing bank by a card network.

The acquirer incurs an interchange fee during this process. Each time a transaction is processed, the acquirer pays a fee to both the card issuer and the card network. The merchant will then have to pay this interchange fee to the acquirer, plus a markup to cover the handling cost.

The bulk of this payment processing fee is allocated to the card issuer to cover credit and fraud risks. A portion of the fees also goes to the card network. Interchange fees are generally charged as a percentage of the transaction value plus a fixed fee.

How much are interchange fees?

In Canada, merchants pay interchange fees that typically range from 1.3% to 3.5% of the transaction value, plus a small fixed fee, usually around $0.27 per transaction. These card processing fees vary depending on several factors, including transaction method (in-store or online), credit card type, card network (such as Visa and Mastercard), merchant category, and average transaction size.

For example, a customer makes a $202.50 credit card purchase at a local electronics store. The merchant’s acquiring bank sends the transaction details to the card issuer through the card network for authorization. Once approved, the transaction is processed, and the merchant pays an interchange fee. At a 1.5% rate, that fee would total about $3.04.

That $3.04 is split between the acquiring bank (e.g., $0.41), the card network (e.g., $0.27), and the card issuer (e.g., $2.36). These fees are part of the broader card processing fees businesses incur when accepting card payments.

Interchange fees can add up, especially for merchants with high volumes or a large average transaction size. In addition to interchange, other fees may apply, including assessment and network service charges. Visa and Mastercard set their own interchange schedules, which vary by region, card type, and transaction method. Most customers don’t notice these fees, as they’re included in the price at checkout.

How are interchange fees determined?

Interchange fees are determined by numerous factors set by card networks and payment brands, making the calculation complex and variable for each transaction.

The amount charged for each card transaction varies based on several factors:

Card-present (CP) versus card-not-present (CNP)

In-person credit or debit card transactions (card-present) usually have lower interchange fees than transactions made online, over the phone, or via mail (card-not-present). Over-the-phone payments are a common example of card-not-present transactions. This difference is due to the higher risk of card fraud in CNP transactions, prompting card networks to assign higher fees to these transactions. The risk involved in CNP transactions is a key reason for the higher fees.

Card Present versus Card Not Present transactions

Card Present (CP) refers to a transaction where the cardholder physically presents their payment card to the merchant. In contrast, Card Not Present (CNP) refers to a transaction where the cardholder doesn’t physically present their card. These transactions typically occur online or through alternative channels, including phone, email, or fax.

CP transactions usually have lower interchange fees than CNP transactions. That’s because CNP transactions generally carry a higher fraud risk, so card networks may apply higher interchange fees to compensate for this increased risk.

Merchant Category Code (MCC)

Every merchant is assigned a four-digit Merchant Category Code (MCC) identifying their business type. A merchant’s MCC can affect the interchange fees they pay. For example, card networks often charge lower interchange fees to charities, compared to categories like airlines or travel, which are deemed ‌higher risk. High interchange fees can significantly impact the operating costs of businesses in these sectors.

Card scheme

Interchange rates differ across card networks. The fee for a transaction made with a Visa card won’t be the same as one made with an American Express card. Visa and Mastercard are the two largest card networks that set interchange fee structures. Other card networks, such as American Express and Discover, also set and collect these fees. The infrastructure maintained by these card networks is essential for secure and efficient payment processing, and its costs are factored into interchange fees.

Card type: credit versus debit

Credit card transactions typically incur higher fees than debit card transactions because credit card issuers use interchange fees to offset the risk associated with offering credit. Debit card payments carry less risk because they draw funds directly from the customer’s bank account. A typical debit card transaction involves the cardholder’s bank (the issuing bank), the acquirer, and the card scheme, with interchange fees determined based on the transaction type and associated risk.

Debit card interchange fees are subject to regulatory oversight in many regions. For example, in the US, the Durbin Amendment, part of the Dodd-Frank Act, empowers the Federal Reserve to regulate debit card interchange fees, with the issuing bank's asset size determining whether the cap applies. In Canada, debit card transactions are often processed through the Interac network, which charges a low, flat fee per transaction (typically $0.10 to $0.15)—a cost-effective alternative for merchants.

Rewards cards and incentives

Credit card companies that offer customers rewards, such as air miles and cashback, may use interchange fees to offset these costs. Rewards cards often have higher interchange fees, as these fees fund rewards programs. While reward card payments may come with higher interchange fees than standard card payments, some merchants find paying these fees worthwhile, as customers tend to spend more when using rewards cards.

Place of card issuance

If a customer’s card was issued in a different country from the merchant’s bank, the interchange fees are usually higher due to the added complexities of cross-border transactions and currency conversion risks.

Security

Merchants implementing security measures (e.g., network tokenization and card security codes) to reduce fraud risk may qualify for lower interchange rates under specific card network programs.

Consumer cards versus commercial cards

Commercial cards (issued to businesses) typically come with higher interchange fees than consumer cards. These cards are often used for higher-value transactions and may include additional data fields for expense tracking, increasing processing complexity.

Transaction location

Unlike some regions, Canada doesn't have a government-imposed cap on interchange fees. However, certain measures and voluntary agreements between the Canadian government and card networks have helped stabilize costs:

• Voluntary fee reductions by card networks: In 2015, Visa and Mastercard agreed to a voluntary average interchange rate of around 1.5% for most credit card transactions. This agreement was renewed in 2020 and remains in effect for a wide range of credit card types, benefiting Canadian merchants.

• Debit card transactions and Interac: In Canada, debit transactions are often processed through the Interac network. Interac charges a flat fee per transaction – typically $0.10 to $0.15 – significantly less than the percentage-based interchange fees applied to credit cards. In other regions, such as the US or EU, debit interchange fees may also be capped by regulation.

Transaction volume and business policies

Businesses may set a minimum transaction amount for card payments to help offset interchange fees, particularly for small-value purchases. Transaction volume also plays a role – higher volumes and larger average transaction sizes mean more interchange fees paid over time, which can substantially impact overall costs.

Interchange pricing models

Payment processors use different models to calculate card processing fees, which include interchange fees. Merchants pay interchange fees as a standard part of accepting card payments, and these fees are set by card networks like Visa and Mastercard, not by payment processors. Understanding these models is crucial, as they directly impact the cost of accepting credit or debit card payments.

Interchange plus pricing (also known as interchange++)

This pricing model is deemed highly transparent, as businesses know exactly how much they’re charged because they can see a breakdown of the fees from the card network (interchange and assessment fees) and the payment processor's markup. To understand how interchange fees work, it’s important to note that when a customer makes a purchase, the transaction is authorized by the issuing bank, routed through the card network, and settled by the acquiring bank. The network sets the interchange fee, which is paid to the issuer; it isn't split among all three parties.

Tiered pricing

In this model, transactions are categorized into tiers based on factors such as card type and transaction method. Different transactions are classified as qualified, mid-qualified, or non-qualified, each with other costs. While this simplifies statements, it’s less transparent – merchants can’t see the actual interchange fees being passed through, and rates can vary significantly within each tier.

Flat-rate pricing (also known as blended pricing)

A fixed rate is charged per transaction, regardless of the card type or payment method used. This fee typically includes the interchange fee, assessments, and the processor's markup bundled together. This model simplifies budgeting for businesses, as they can more easily predict their monthly card processing fees.

While fixed fees can result in potential savings on transactions where interchange is higher, businesses may overpay on lower-cost transactions because the rate doesn’t adjust dynamically. This model is typically used by platforms serving smaller companies or those with low volume.

Subscription

Under this model, businesses pay a monthly subscription fee in return for lower per-transaction costs. The processor still passes through the standard interchange fees, but charges a flat, low markup (e.g., a few cents per transaction) instead of a percentage. This model can be cost-effective for businesses with high volumes and consistent average transaction sizes.

How interchange fees affect businesses

Interchange fees can impact various aspects of your business, particularly if you process a high volume of card transactions. These areas include:

• Operating costs: For businesses with numerous transactions or low margins, interchange fees can ‌account for a significant portion of operating costs and directly impact profitability.

• Pricing strategy: Businesses may need to modify their pricing to manage the costs associated with interchange fees. This could involve increasing product or service prices or implementing minimum charges for card payments, which could influence customer satisfaction.

• Cash flow: Interchange fees are typically deducted from transactions before the funds are deposited into your business’s bank account. This can affect cash flow management and make financial forecasting more challenging.

• Business model: Businesses may encourage customers to use cash or debit cards, which generally incur lower fees than credit cards.

• Payment processor: Businesses may choose a payment processor based on the interchange fee pricing model. The availability of payment methods can significantly influence a customer’s decision to make a purchase.

Besides interchange fees, businesses operating internationally should be aware of additional foreign exchange charges for cross-border transactions. Some payment processors charge upwards of 2% per transaction for currency conversion.

How businesses can reduce interchange fees

Here are some tips on how to reduce interchange fees:

Choose the right payment processor

Different payment processors use different pricing models (e.g., interchange-plus, tiered, flat-rate), and selecting one that aligns with your transaction volume and business model can help reduce overall card processing fees. For small and medium-sized businesses, it’s important to compare providers based on transparency, markup, and additional fees (like foreign exchange or platform fees).

Optimize card processing

Card networks may offer lower interchange rates for businesses that follow best practices in processing. This includes settling transactions promptly (usually within 24 hours), utilizing secure technologies such as EMV chip readers and tokenization, and providing detailed data with each transaction (including customer and tax information). These steps may help qualify transactions for lower-rate categories.

Encourage lower-cost payment methods

Encouraging the use of debit cards – especially through low-cost networks like Interac in Canada – can help reduce overall interchange fees, as debit transactions typically cost less than credit card payments. While cash payments don’t incur processing fees, they may increase administrative effort and risk.

Consider surcharges (where permitted)

Some businesses add a surcharge to credit card payments to offset interchange fees. However, surcharging is subject to regional regulations. For example, surcharges are permitted in most US states (with disclosure requirements), but not permitted on Visa and Mastercard credit card transactions in Canada. Always verify local laws and card network rules before implementing a surcharge policy.

Bottom line: Managing interchange fee costs effectively is crucial to maximizing profitability, especially for businesses with high average transaction size or high card volume.