Interchange fees: How they work and ways to reduce costs

Key takeaways:

• When you accept card payments, you pay interchange fees (usually between 1.5% and 3% per transaction¹).

• Online payments usually cost more than in-person payments because they carry higher fraud risk, and different pricing models can also change what you end up paying.

• Modern fintech solutions like Airwallex help you reduce interchange fees through transparent pricing, local payment rails, and optimised processing.

If you accept card payments, interchange fees are one of those costs that quietly add up in the background. You don’t see them on your invoices, but they’re automatically deducted from every transaction.

In this guide, you’ll learn what interchange fees are, how they’re calculated, and why some transactions cost more than others. We’ll also walk through the different pricing models and share practical ways to reduce what you’re paying in interchange fees.

What are interchange fees?

Interchange fees are the fees your business pays (through your payment processor) to your customer’s bank every time you accept a debit or credit card payment.

Card networks like Visa, Mastercard and American Express set standard interchange rates. For each transaction, your payment processor pays the relevant interchange fee to the customer’s bank, then passes that cost on to you.

On your statements, you only see a single card processing fee (sometimes called the Merchant Discount Rate or MDR). That total fee is made up of three parts, each going to a different party:

How much are interchange fees?

Interchange fees usually range from about 1.5% to 3% of each transaction, plus a small fixed fee¹. The exact amount depends on things like the card type, where the card was issued, and whether the payment happens online or in person.

To make this more concrete, here’s a simple example.

Example: A S$150 card payment

Let’s say a customer makes a S$150 purchase from your store using a credit card, and your total card processing fee (MDR) is 1.5%. Here’s how that breaks down:

• Sale amount: S$150

• Total card fees (1.5%): S$2.25

That S$2.25 then gets split between different parties:

• Card issuer (customer’s bank): ~S$1.75 (this is the interchange fee)

• Card network (e.g. Visa or Mastercard): ~S$0.20

• Acquirer / payment processor: ~S$0.30

So after fees, you receive:

• Net amount deposited to your account: S$147.75

Your customer doesn’t see any of this: The fees come out of the transaction before the money reaches your business account.

How interchange fees work

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

Step 1: Transaction initiation

Your payment processor (the acquirer) receives the payment details from your checkout and sends them to the card network.

Step 2: The network checks with the issuer

The card network forwards the details to your customer’s bank (the issuer) to make sure the funds are available.

Step 3: Approval or decline 

The issuer approves or declines the payment and sends the response back through the network to your processor.

Step 4: Funds are settled

If approved, the issuer deposits the money into your acquiring account, minus the interchange and processing fees.

Here’s a visual representation:

How are interchange fees determined?

Interchange fees aren’t fixed – they depend on a mix of factors tied to the transaction and your business. Here are eight factors to keep in mind. 

Transaction-related factors

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

Card-present (CP) transactions happen when your customer pays with their card in person. Card-not-present (CNP) transactions are when you accept payments online, without seeing the physical card. 

Because online payments carry a higher risk of fraud, you’ll usually pay lower interchange fees for in-person transactions than for CNP ones.

2. Credit vs debit cards

You'll typically pay higher fees for credit card transactions than debit card transactions. 

This is because credit card issuers take on more risk: if a customer defaults or exceeds their credit limit, the bank still has to cover the payment. On the flip side, debit card payments are lower risk, because the funds come directly from your customer's account.

3. Consumer cards vs corporate cards

Interchange fees are usually lower for consumer cards issued to individuals, while corporate cards or business cards tend to cost more. This is because issuing banks take on higher risk with corporate cards and often provide additional perks like expense management features, which are partly funded through higher fees.

4. Card origin

If your customer's card was issued in a different country from your bank, this usually results in higher fees, due to cross-border processing and currency conversions.

5. Security

Card networks reward reduced risk. If your payment gateway uses fraud-prevention tools like tokenisation, CVV checks, or address verification, this may translate into lower interchange fees. 

Business-related factors

6. Card network

Visa, Mastercard, AMEX, and other networks each set their own rates based on how they manage risk and reward programs.

7. Merchant category 

Your business type, identified by a Merchant Category Code (MCC), affects your fees. Higher-risk industries (like airlines) pay more, while low-risk sectors (like charities) often pay less.

8. Transaction location

Fees can vary depending on where your business operates. Some regions set legal caps on interchange rates (like the European Economic Area and Australia), while others leave it to the card networks and processors to decide. 

In Singapore, there aren’t government‑mandated caps on interchange fees, so rates are set solely by the card networks.

Interchange pricing models

Payment processors use different ways to charge interchange fees, and understanding these models can help you know exactly what you’re paying. Here’s a breakdown of the four main types:

1. Interchange plus pricing (also known as interchange++)

This is the most transparent pricing model: You know exactly what you're paying because you can see a breakdown of the fees from the card issuer, card network, and acquirer for each transaction. This model makes it easy for you to understand your costs and track them over time.

2. Tiered pricing

With this model, transactions are grouped into “tiers” based on factors like card type and perceived risk. Each tier has its own fee, which can make costs unpredictable. It’s simple for the processor to manage, but harder for you to forecast your expenses.

3. Flat-rate pricing (also known as blended pricing)

With this model, you pay a single fixed rate per transaction, no matter the card type or how the payment is made. 

It’s easier to budget, because the fee averages out costs across all transactions. You don’t get the benefit of paying less for low-risk payments, but you also don’t get penalised for high-risk ones.

4. Subscription

Under this model, you pay a monthly fee for a set of services, which usually includes lower or fixed transaction fees, access to multiple payment methods, reporting tools, and support. This can be useful if you process a consistent volume of transactions each month, but may not be ideal if your sales fluctuate.

How interchange fees affect businesses

Interchange fees add up quickly, especially if you process a lot of card transactions. They can affect your business in several ways:

• Operating costs: High interchange fees increase your costs and eat into your profits.

• Cashflow complexity: Fees are deducted automatically before the money hits your account. For businesses that rely on timely payments to cover expenses, this can create short-term cash gaps and make it harder to manage day-to-day operations.

• Forecasting challenges: Interchange fees vary depending on factors like card type, transaction method, and region. This variability makes it harder to predict how much revenue will actually arrive, which can complicate budgeting, planning, and financial projections.

How to reduce your interchange fees

While you can’t eliminate interchange fees, there are smart ways to keep them under control.

1. Choose the right payment processor

Different payment processors have different pricing models. Choose one with transparent pricing and a model that fits your business – this alone can save you a significant amount.

2. Optimise how you process cards

Using secure, verified payment methods can reduce fees. For example, if your payment gateway supports fraud-prevention tools like tokenisation, CVV checks, or address verification, card networks may reward you with lower interchange rates because the transaction is less risky.

3. Offer lower-fee payment options to customers

Debit cards usually have lower fees than credit cards. Encouraging customers to pay with debit cards or other low-cost methods can reduce the fees you pay without making it harder for them to check out.

4. Add credit card fees when needed 

In some countries (including Singapore), you can add a surcharge to credit card transactions to help offset interchange and processing fees. 

However, there are two key caveats. First, surcharges can hurt customer satisfaction and may reduce conversions if customers feel they’re being penalised for using cards. Second, surcharging is restricted or even banned in some markets, such as certain parts of the EU and US.

Simplify your global payments with Airwallex

Interchange fees might seem complex, but they’re manageable when you have the right payment partner. Airwallex helps you reduce the total cost of accepting card payments with transparent pricing, local payment collection, and optimised FX, so you’re not guessing what each transaction really costs.

With Airwallex, you can:

• Accept online payments via Payment Links and Plugins, without building a custom checkout from scratch.

• Get paid in 130+ currencies and settle in 20+ currencies in your multi-currency wallet, helping you reduce unnecessary conversions and double FX mark-ups.

• Route payments and payouts through local payment rails in 120+ countries, so can bypass SWIFT fees and keep your costs low.

Frequently asked questions (FAQs)

What is the difference between interchange fees and payment processing fees?

Interchange fees make up part of your total payment processing fees (the Merchant Discount Rate or MDR). This total includes the interchange fee to the card issuer, assessment fees to the card network, and your payment processor's mark-up.

Can customers see or avoid interchange fees?

No, customers cannot see or avoid interchange fees. These fees are charged to the merchant by the card issuer and payment networks, and they’re deducted automatically from each transaction before the funds reach your account. While you could choose to pass on part of the cost through a surcharge, the fee itself is invisible to the customer.

Why do interchange rates vary so much between transactions?

Interchange rates vary because card networks price different transactions according to their risk and characteristics. Higher‑risk payments (like online, cross‑border, or rewards credit cards) are charged more, while lower‑risk payments (like domestic, in‑person debit card purchases) usually attract lower rates.

How can I calculate my interchange fees in advance?

It's difficult to calculate exact interchange fees in advance due to multiple variables, but you can estimate costs by reviewing your payment processor's pricing model or requesting a rate card that shows historical effective rates.

Are interchange fees negotiable?

Interchange fees are set by card networks and aren’t negotiable. However, the mark-up your payment processor adds on top of these fees can be negotiated, especially if your business processes a high volume of transactions.

Source:

1. https://www.britannica.com/money/credit-card-interchange-fees

This publication does not constitute legal, tax, or professional advice from Airwallex, nor does it substitute seeking such advice, and makes no express or implied representations / warranties / guarantees regarding content accuracy, completeness, or currency. If you would like to request an update, feel free to contact us at [[email protected]]. Airwallex (Singapore) Pte. Ltd. (201626561Z) is licensed as a Major Payment Institution and regulated by the Monetary Authority of Singapore.