What Are Interchange Fees?

Interchange fees are a part of the cost of doing business. Not the answer you were expecting, is it? But that’s what it boils down to, and as a business owner it’s important to keep this answer in mind as you read further.

Basically an interchange fee is the portion of a credit card sale transaction that’s paid by the merchant’s acquiring bank to the card issuer’s bank for their services. To understand what this means to you, you need to understand how a credit card transaction works.

1. The customer uses a credit card to purchase your product or service.
2. Once the card is input, the process of moving money to your account begins with a request for an authorization code. To get that code, you transmit the sale information to your merchant processing company and they send it to the bank that issued the card. If the card holder’s account is in good standing, you get the okay to finish the transaction and your customer is happy. He has paid for his merchandise or service and is, for now, out of the payment loop.
So how do you get your money?
3. The bank that issued the card sends the sale amount to your credit card processing company less an interchange fee.
4. Your processing company takes their discount rate fees and sends the balance of the transaction to you.

Of course, this is a very basic description of how credit card processing works. But it shows you how many steps are involved to handle a purchase made by that simple swipe of a credit card. And it gives you a frame of reference for where the issuing bank fits in and why they take an interchange fee.

What do my interchange fees cover?

Interchange fees are set by the credit card brands (Mastercard, Visa, etc.). As the merchant, you do not pay these fees directly; they are included in the fee structure you negotiated with your credit card processing company.


Are you beginning to see a pattern here? Interchange fees are based on the risk factors to the issuing bank involved in the sale. The issuing bank transfers funds to the merchant’s account before receiving payment from the card holder. Issuing banks assume this risk many thousands of times a day. The numbers in dollars are staggering, and each time they authorize a credit card purchase they assume the risk they might not get paid, while also covering the cost of operations such as data processing, billing, and other customer services along the way. Interchange revenue is what they use to cover some of these costs.

How can you help keep your interchange rates down?

There are things you can do to help reduce your interchange fees.

1. Whenever possible, manually swipe the customer’s credit card and verify the identity of the person using the card. This is called a “card-present” transaction. For obvious security and risk-reducing reasons, card-present transactions have lower interchange fees.
2. If you’re an on-line merchant, your credit card sales are referred to as “card-not-present” transactions. These transactions carry a higher interchange fee, but you can contain these fees by following the policies set by the issuing bank. Find out what information is required to be submitted with each authorization and train your employees to get all that information with each sale, or review your on-line shopping form to be sure there are spaces to capture these details.
3. Make sure that your merchant processor categorizes your business with the correct Merchant Category Code (MCC). Otherwise, additional fees can be tacked on for not meeting qualification standards.
4. Different card brands carry different interchange rates. It’s up to you which card brands you choose to accept.
5. Make sure that your batches are automatically closed on a daily basis, or if you manually batch your transactions to the bank make sure to do it by the cut off time required by your bank.

And these are the factors you can’t change.

1. Your merchant category code. Different businesses fall under different interchange fee categories. What you sell is what you sell and there’s no changing that!
2. As we discussed above, different card types carry different interchange rates, but while you can refuse to accept a whole brand of credit cards, it’s much harder to refuse a certain type of card. For example, you wouldn’t want to tell a customer you can only accept a basic Mastercard simply because it has a lower interchange fee than a Mastercard rewards card. It would seriously limit your customer base, as well as alienate many of your customers who prefer to pay with their rewards card in order to collect the points.

Controversies and Myths Surround Interchange Fees

If you keep up with business news, you’re aware there’s been a lot of controversy about interchange fees. In the US and other countries around the world, merchant organizations have been fighting to cap interchange rates, while issuing banks and card brand networks have been working hard to debunk some of the more harmful myths surrounding their interchange charges.

While it’s true that interchange fees make up a portion of your credit card processing fees, they only take away a small percentage of your profit from each purchase. As an example from a respected on-line source, an average $100 credit card (not debit) sale nets the merchant approximately $97.50. The other $2.50 gets divided up: approximately $1.75 pays to the bank that issued the card; $0.18 goes to the card brand network; and the rest, $0.57, goes to your credit card processing company.

Given the number of times each day a credit card is used to pay for a purchase, this amounts to a lot of money for the issuing bank. So what do you, as the business owner, gain from this $2.50 investment. Study after study points to the fact that offering your customers the option to pay for their purchases by credit card increases the number of sales, and often increases the total of each sale. When you look at the overall picture, that actually makes interchange fees a small — and a smart — cost of doing business.