Interchange fees: What they are and how they work

What is interchange fee

Interchange fees are transaction fees that merchants are charged when accepting card payments from customers. Whether payments are taken online by an eCommerce business or in person at a physical store, the merchant will be charged a payment processing fee. 

Although interchange is often thought of as a single per-transaction fee, it is actually an amalgamation of charges from:

• The card issuer: the customer’s bank or credit card company

• The card network: e.g. Visa, Mastercard, Discover, American Express

• The acquirer: the merchant’s bank or payment facilitator 

Interchange fees are dependent on several factors, including the type of card the customer uses, the country where the card was issued, whether the transaction occurred online or in person and more. In this article, we’ll go into detail about how interchange works and the processing fees you can expect to pay when accepting card payments from customers globally. We’ll also explain the difference between Interchange++ and Blended pricing models, and help you decide which option is right for your business. 

How interchange works

First, let’s take a look at what happens when a customer pays for something by debit or credit card. Let’s say a customer buys a pair of sunglasses from a store with their debit card, here’s what happens:

1. The acquirer relays the transaction data to the customer’s card network.

2. The card network relays the transaction data to the card issuer.

3. The card issuer will perform several checks (mainly to confirm that the customer has funds available in their account) before telling the card network if the transaction is approved or declined.

4. The card network will submit this information to the acquirer. 

5. The acquirer will process the transaction. 

6. Funds will be deposited from the card-issuing bank into the acquiring account.

During this process, interchange fees are incurred. Each time a transaction is processed, the acquirer pays a fee to both the card issuer and the card network. The merchant is then required to pay this interchange fee back to the acquirer, plus a markup to cover the handling cost.

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

Example of how interchange fees work

Say you use a credit card to purchase a pair of wireless earbuds for $150 at a local electronics store. The transaction details are sent to the store’s bank. The store incurs a processing fee for this transaction, which includes the interchange fee. If the interchange rate is 1.5% of the transaction amount, the merchant would pay $2.25.

Out of that fee, $0.30 might go to the store’s bank, $0.20 to the credit card network, and $1.75 to the card issuer. After these deductions, the store retains $147.75 from the $150 sale. As a customer, you typically wouldn't notice these charges, as you just pay the listed price for the wireless earbuds plus any applicable sales tax.

How are interchange fees calculated?

The amount that is charged for each card transaction varies depending on several factors:

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

In-person credit or debit card transactions (card-present) generally incur lower interchange fees than transactions that are made online, over the phone or via mail (card-not-present). That’s because the risk of card fraud is higher for card-not-present transactions, and card issuers compensate for this risk by increasing their prices. 

Merchant category code (MCC)

Every merchant is assigned a four digit merchant category code (MCC) that identifies the type of business they are. A merchant’s MCC can affect the interchange fees they pay. For example, charities are usually charged lower interchange fees by card networks, whilst airlines are charged higher fees because they are considered a high-risk industry by card networks. 

The card scheme

Different card networks have varying interchange rates, so the fee for a purchase made with a Visa card will differ from the fee for a purchase made with an American Express card. The majority of the world’s interchange fees are collected by the two largest card networks: Visa and Mastercard. Interchange fees are also collected by smaller debit and credit card networks, such as American Express, Discover, JCB and UnionPay. 

The type of card

Credit card transactions typically incur higher fees than debit card transactions. That’s because credit card issuers use interchange fees to offset the risk they take on when providing customers with credit. Debit card payments do not come with the same level of risk because funds come directly from the customer’s bank account. Additionally, some credit card companies offer their cardholders rewards such as air miles and cashback when they make credit card payments. These companies use interchange fees to offset the cost of these rewards. Whilst reward card payments tend to cost merchants more than standard card payments, data suggests that customers are likely to spend more when using cards that offer rewards, so there is value in accepting these card payments at your checkout.

Where the card was issued

If a customer’s card was issued in a different country to the merchant’s bank, the interchange fees will be higher to offset the additional complications involved with cross-border transactions. 

Security

Merchants that reduce the risk of card fraud by using security protocols such as network tokenization and card security codes are rewarded with lower interchange fees. 

Consumer cards versus commercial cards

Commercial cards (cards issued to businesses) tend to incur higher interchange fees than cards issued to individuals. 

Transaction location

Some regions have introduced legislation to cap the cost of interchange. 

In the European Economic Area (EEA), interchange fees are capped at 0.3% of the transaction amount for consumer credit cards and 0.2% of the transaction amount for consumer debit cards. Interregional card transactions have been capped at 1.15% for debit cards and 1.5% for credit cards. There is no cap on commercial cards. In Australia, interchange fees are capped at 0.8% for credit cards and 0.2% for debit cards. In the US, interchange rates on credit cards are not capped, and fees average 2% of the transaction value. However, following The Durbin Amendment in 2010, debit card and prepaid card fees were capped at US$0.22 and five basis points multiplied by the value of the transaction.

How much are interchange fees?

Interchange rates vary depending on a number of factors, but generally speaking, you can expect to pay an average rate of 1.3% - 3.5% of the transaction value plus a small fixed fee (usually US$0.2 per transaction).

Interchange pricing models

Payment processors employ different models to calculate interchange rates. Understanding these models is crucial for businesses as it directly impacts the cost of accepting credit or debit card payments. 

Tiered Pricing: In this model, transactions are categorised into tiers based on risk and reward factors, such as qualified, mid-qualified, and non-qualified. Different types of credit or debit cards are assigned to different interchange rates and fees. Due to this, it can be challenging for businesses to predict costs due to the varying rates assigned to different tiers.

Flat-Rate Pricing: This simple model charges a fixed rate per transaction, regardless of the card type or transaction method, making it predictable and especially suitable for small businesses with low sales volumes.

Subscription: In this model, businesses pay a monthly subscription fee in exchange for lower transaction costs. Similar to interchange plus, the interchange fees are still passed onto the business at preferential rates, but the processor’s markup stays as a flat per-transaction fee.

Interchange++ versus Blended pricing 

In addition to the models discussed above, there are two main pricing models for interchange fees that merchants can choose from, Blended and Interchange++. Each model has its own benefits:

Interchange++

• Transparency: If you choose the Interchange++ pricing model, you will see a breakdown of the fees you have been charged from the card issuer, card network and acquirer for each transaction.

• Variable rates: You will be charged the “real” card network fee, so the amount you pay for each transaction will vary depending on the factors listed above. This means you will pay less for consumer card payments, for example, than you would for commercial card payments.

Blended

• Consistency: If you choose the Blended pricing model, you will be charged a flat rate for each transaction. These fees will typically be a percentage of the transaction value plus a fixed cost. Your acquirer may charge varying rates depending on a handful of factors, such as whether a card transaction is domestic or international. The Blended model makes it easier for merchants to forecast how much they will pay in interchange fees each month. 

• Potential savings: This benefit works both ways. As fees are fixed, you may save money on transactions where the card network and issuer rates are higher. The flip side is that you may pay more for transactions where these rates are lower. Blended fees are designed to offer merchants a fair average rate per transaction, so the amount you pay should balance out. 

Additional fees that global merchants should be aware of 

Businesses that operate internationally should be aware of additional foreign exchange charges when collecting payments from overseas customers. Some payment processors charge upwards of 2% per transaction for currency conversion. 

Airwallex was designed to help merchants eliminate these fees. Plug Airwallex into your eCommerce store and enjoy a more cost-effective multi-currency checkout. With an Airwallex global account, you can collect multiple currencies directly into your multi-currency account without being subject to currency conversions, and save a significant amount on each international transaction.

How interchange fees affect businesses

Interchange fees can affect all aspects of your business, especially if you conduct a lot of card transactions. These areas include:

Operating Costs: When conducted in high volumes, or if your business is operating on tight margins, interchange fees can add up to be a significant portion of operating costs, affecting your bottom line. 

Pricing Strategy: You may need to adjust the pricing of your products or services to offset the cost of interchange fees. This can mean raising prices to cover the fees or having minimum charges for card payments, which can affect consumer satisfaction.

Cash Flow: Interchange fees are typically dedicated to the transaction before the money is deposited into the business’s bank account. This affects cash flow management and forecasting. 

Business Model: Interchange fees may prompt businesses to adjust their business model. Some businesses may choose to push customers towards cash or debit card payments to take advantage of lower fees compared to credit card interchange rates.

Payment Processor: Businesses may choose to include or omit certain payment processors based on the pricing models for interchange fees. This availability of multiple payment options can affect whether a customer decides to shop with a business or not.

How businesses can reduce interchange fees

Unless you are a multinational business with a large amount of transactions, it is rare for card networks to provide companies with preferential interchange rates. However, there are a few strategies small and medium-sized businesses can use to reduce fees:

Choose the Right Processor: Different processors offer varied pricing models. Choosing one that matches your transaction pattern can minimise costs. Small and medium-sized businesses can find a rate that’s right for them by shopping around for a cost-effective payment processor. Check out Airwallex’s Blended pricing options here to see if you could make a saving on your domestic and international card transactions. 

Optimise Your Card Processing: Most card networks will qualify businesses for lower interchange rates if they show a track record of following best practices for card processing. This includes quick settlement of transactions, implementing secure processing technology like tokenisation, and the ability to provide detailed transaction data. 

Encourage Lower-Cost Payments: Small businesses can consider promoting debit over credit cards and encouraging cash payments for their products or services to decrease interchange fees. 

Consider Surcharges: Consider adding a surcharge to credit card transactions to offset interchange fees. However, keep in mind that this may not be well-received amongst customers.

Build the checkout you want, fast

Airwallex has been designed with global eCommerce businesses in mind. Plug the Airwallex payment gateway into Shopify, WooCommerce, or Magento, and enjoy cost-effective global payment processing. Choose from our Blended or Interchange++ pricing models, and eliminate FX fees when collecting international payments. Plus, offer 160+ global payment methods at your checkout, including PayPal, Klarna and WeChat Pay. 

Sign up for a free account today to learn more.